The October sell-off wiped out gains that began to accrue at the start of the past quarter, but portfolio manager Rob Morgan remains unfazed.
Many investors might have forgotten what stock market volatility feels like until recently. Indeed, those who started their investment journey within the past 10 years will not previously have experienced sustained (historically pretty normal) volatility. However, October 2018 brought the first notable sell-off in global stock markets for years, hitting investors’ portfolios and dragging down returns. Even the professionals were not immune to the damage.
At such times, the double-digit returns enjoyed over recent years start to feel like a distant memory, and capital preservation shoots to the top of investors’ priority lists. Twenty months since the inception of our Purposeful Portfolios, the Capital Conserver portfolio has done exactly what it says on the tin: it is flat.
Nevertheless, Rob Morgan at Charles Stanley, who manages the portfolio, is disappointed: “I feel I should have delivered an inflation-beating return. To be flat over this period is not great. But the fact that we are only down by 4.3% since the previous update despite Red October is proof to me that diversification works.”
Of course, a return of 0% since launch belies a number of ups and downs within the selection. Standard Life Equity Income Trust is down a painful 10.4% over the past four months, although it has returned 8.7% since launch. However, Morgan still rates the trust’s manager and its process, as well as its 4.5% yield. He says capital growth prospects for the trust are now “really quite exciting”.
A brutal few weeks have dragged Artemis Global Income down by 9.9% since the previous update. A bias towards value stocks, a significant weighting to Europe and an underweight position in the buoyant US market hurt its performance.
The portfolio as a whole is skewed towards funds with a value style of investing, and it has a high exposure to the UK, particularly domestic stocks. This has hampered performance, as each of these areas has been markedly out of favour for months – as demonstrated by the heavy outflows UK equity funds have suffered. Figures from the Investment Association show that £390 million was pulled out of UK all-companies funds in September alone.
However, Morgan is reluctant to abandon his holdings, despite their challenges. He says: “As I see it, stocks that were already cheap have become even cheaper. I think the UK and domestic stocks are where the opportunities lie. Admittedly, that depends on a Brexit deal being negotiated, but I do believe there has never been a better time to buy UK equities.”
There are no portfolio changes in this update. Now is “not the time” to be tinkering, says Morgan. However, a couple of holdings are candidates for ejection, particularly Perpetual Income & Growth. It is down 9.4% since the previous update, hurt by its defensive strategy at a time when investors sought growth.
Morgan says: “The timing of this update is unfortunate. We had been up quite healthily before a lot of gains were wiped out in October.” However, the portfolio’s performance has been broadly in line with the IA’s mixed investment 0-35% shares sector, which is reassuring.
Room for optimism
The October sell-off will have spooked many investors, but Morgan insists the market falls were “nothing” compared with the major moments of wealth destruction he has seen during his career, most notably the 2007/08 financial crisis and the bursting of the dotcom bubble. He says: “People have got used to there being no volatility in markets, but managers can really earn their stripes if they do well.”
The International Public Partnerships investment trust has been the standout performer in the group. Sentiment towards infrastructure seems to have picked up significantly since rival trust John Laing Infrastructure received a takeover bid, and it was further boosted by reassurance in the autumn Budget that the government will honour its existing PFI contracts. Morgan says: “With one trust disappearing from the sector, the opportunities in this space are diminishing, and that gives IPP a scarcity premium.” It has returned 11.1% since the portfolio’s inception and has a healthy yield of 4.4%.
But the absolute return holdings in the portfolio have not delivered. Standard Life GARS in particular disappointed, as Morgan believes it should thrive in volatile markets. Jupiter Absolute Return has had a “terrible time” because of its short bets on popular growth stocks such as Tesla. Morgan expected the Aviva Investors Strategic Bond fund to do better, as it takes a bottom-up approach, but it is down 2.4% since the previous update. Janus Henderson Strategic Bond has “held up quite nicely and dampened volatility, so it has served its purpose – but it has gone nowhere”
Nevertheless, Morgan is hopeful that some of his bets will soon start to pay off. If stock market volatility continues, assets such as gold and bonds should provide protection. Gold Bullion Securities returned 2.8% over the past four months.
Morgan still believes US stocks are overvalued and UK shares present a fantastic opportunity, so he is sticking to his guns for now.
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