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The Dynamic Planner Investment Committee (IC) met on Tuesday 23 January, coincidentally called ‘Super Tuesday’ in the US state of New Hampshire, where the race for the White House began with primary elections for the Republican party nomination. In fact, elections are expected to cover around 60% of world GDP over the course of 2024, so plenty for investors to ponder should there be promises of unfunded tax cuts, more protectionism or increased fiscal profligacy. But no doubt the ‘re-match’ in the US will be the centre of global attention.

As the impact of higher energy and food prices has subsided, and supply chains for globally traded goods have normalised, headline rates of inflation have fallen significantly over the course of 2023, but remain much higher than Central Bank targets.

The IC reflected on the still high embedded inflation expectations and the current market fixation about what the US Fed plans to do next with interest rates (following its pause announcement in November). Premature expectations of early and deeper cuts have propelled the S&P 500 to record highs, whilst earnings growth, retail sales and industrial production levels have remained flat at best.

The global economy looks set to slow in 2024, as fiscal policy starts to drag on growth and higher interest rates weigh on household and business activity, with excess savings built up during the pandemic largely spent. By stripping away the impact of the massive fiscal stimulus measures, the likelihood was that the US economy has been in intermittent periods of recession during 2023.

The US and Global government bond yield curves remain inverted, and interest rate normalization is required as high non-transitory inflation expectations persist. With slow growth, lower tax revenue, eye-wateringly high government debt and fiscal deficits, and Central Banks unwinding their balance sheets with QT, there will be a rising supply of bond issuance at a time of declining investor sentiment / demand. Hence the curve is expected to steepen at the longer end, resulting in negative real bond returns into the foreseeable future. The risk of greater economic volatility and a potential global government debt crisis persists, despite recent market optimism.

The IC discussed the potential of AI (particularly generative AI tech) on productivity and employment, with echoes of a potential ‘dot.AI’ bubble, given the 25% concentration of the US stock market in the ‘Magnificent 7’ tech stocks. As AI will help drive robotics and accelerate onshoring, the implications of a diminishing competitive advantage for China and emerging markets were noted.

There were no changes made to this quarter’s capital market assumptions, which follows a consistent process of long-term analysis. In preparation for the annual strategic allocation review later in the year, the IC reviewed ongoing analysis of additional asset classes / risk factors to be potentially included in the model. It continues to ensure that the markets and instruments being used by our asset management clients are accurately represented in Dynamic Planner.

Read the full Q1 2024 analysis from the Dynamic Planner Investment Committee.

It is that time of the year when we, as market watchers, pull out our crystal balls. Just as we dust ourselves off from the past year, we look to the one ahead, either with anticipation or trepidation.

Taking a moment to look back, it has been an extraordinary year – from the tremendous gains from a handful of stocks to a synchronous increase in interest rates from Central Banks to whiplash from the bond markets. Given that towards the beginning of the year recession was the only alternative, most investors have been surprised by the resilience of developed market economies, despite persistent inflation, but buoyed by better-than-expected unemployment numbers and wage growth.

Although the cost-of-living crisis continued apace, consumers, so far, have been surprisingly resilient in the face of sustained pressure on household finances from inflation and high interest rates. This has flowed through the developed market economies, especially in the US, leading to stellar growth, with the Eurozone and UK lagging behind. Though we near the end of the year with thoughts of a well-engineered ‘soft landing’ by central banks, the situation remains far from clear – with numerous alternatives to be considered.

From a macro-economic perspective, we now enter a period of change. Since 1980 till last year, we have been in a world where interest rates have declined. More so, since the Financial Crisis of 2008, we have been through a period of low economic volatility, low inflation and low rates but high realised returns. There now appears to be a change in the wind.

We are at levels of interest rates last seen before the financial crisis, but even more challenging has been the speed with which Central Banks have ratcheted up rates. Naturally, this has caused volatility in markets – but what has been unnatural has been the fact that while volatility in equity markets has dropped, fixed income volatility has remained elevated as can be seen in Figure 1. This has wreaked havoc with low-risk portfolios which have been, traditionally, heavy in fixed income. If there is one certainty that we can speak about, it is that volatility will be our constant companion for the coming year. Were it to be constant, volatility in and as of itself would not pose a problem – it is expected that the volatility of volatility will be high, creating peaks and troughs in volatility levels.

Although inflation has declined over the recent past, the effect of the change in monetary policy is yet to be fully understood. Milton Friedman said monetary policy acts with ‘long and variable lags’. The economic resilience of the past year can partially be attributed to savings of households from the different pandemic related stimuli, as well as widening government deficits. As the level of savings decline, faced with the real reduction in disposable income (Figure 2) from the cost-of-living issues, one can expect a deterioration in consumer demand, resulting in lower growth.

This can already be seen feeding into consumer and business confidence, which are considered lead indicators of economic activity. High interest rates also affect corporates. Taking advantage of the low interest rates, most corporates increased the amount and maturity of their borrowings. This can be observed from credit spreads, which have not followed their usual widening pattern, following interest rate increases. As a result, the corporate default environment has been very benign. However, when time comes for refinancing, these companies may be faced with an increased cost of capital, which may materially alter the corporate bond market. It has only been about three quarters where the high base rates have had an opportunity to reset and have impacted company cash flows. This has resulted in a reduction of free cash flows for numerous business which have borrowings which are not aligned to maturity structure of their assets, be it tangible or non-tangible. The need for refinancing capital may make some capital structures put in place inappropriate and unreliable.

One may look back at equity markets globally and would be hard pressed to complain. However, one takeaway has been that diversification did not pay – Figure 3 shows a wide disparity between Growth and Value stocks. An equally weighted holding in the ‘Magnificent Seven’ stocks doubled in value over the recent year, while the S&P 500 gained circa 20%. This has resulted in the weight of these stocks in the S&P Index to be around 29%.

In relative terms, while growth assets did very well, defensive assets like bonds lagged. While this is not abnormal in late cycle dynamics, the egregiousness of outperformance is. This is not expected to continue going forward as cyclical pains appear to have been delayed and not eliminated outright – a typical scenario where the can has been kicked firmly down the road. While valuations in Large Cap equities appear to be stretched, the same cannot be said for Mid or Small Cap stocks. These stocks are typically more influenced by local economies rather than the more global Large Cap stocks and as a result, seem to have factored in the recession probabilities to a larger extent. As a result, one could possibly expect a rotation into stocks lower down the capitalisation ladder – which may expose portfolios to greater drawdown risks as liquidity gradually dwindles in these markets, as fiscal tightening takes hold.

China, which has recently been the driver of global economic growth, has been impacted by structural issues stemming from the real estate sector. The sector has been a driver of growth in China, with it accounting for almost half the local government revenues. The recent well documented wobbles in the sector exposed the reliance of China’s financial and government sectors on real estate and its associated infrastructure development. The administration has ruled out blanket bailouts in favour of ‘remodelling’ the debt-stricken sector to further extend support to the ‘stronger’ developers whose bankruptcies could trigger wider financial contagion by encouraging bank lending, bond issuance and equity financing. The overall aim is to reduce the reliance on this sector, while maintaining a sizeable presence.

One must remember that China is a developing economy in transition from a primarily export and manufacturing oriented one to a consumer driven one. This transition is not easy given the trade restrictions in place from developed economies and the simmering tensions between itself and the developed world, primarily led by the US. If the transition is well managed and the market stabilizes, the economy will continue to grow and fuel global growth, but the path may be painful for all involved.

To cap it all, geopolitical risk is back on the horizon. While the Ukrainian war rumbles on, the Middle East is embroiled in further violence. While Europe has more or less weaned itself off Russian gas, uncertainty in the biggest oil producing region could risk creating stickier inflation through higher oil prices and potentially weighing on global asset prices. This would have a greater impact on Europe rather than US, given the latter has a larger domestic production base. Upcoming elections in the US, UK and India also creates an overhang of possibilities of global tension and uncertainty, already exacerbated in a polarised world.

To conclude, two words would define the outlook for the coming year – ‘cautious’ and ‘selective’. To give a twist to the old adage, if we manage to take care of the risks, the returns will take care of themselves. A successful navigation of the upcoming year will depend on how cautious we are in our approach and how selective we are of the risks we include within our allocations. It is clearly a case of keeping dry powder, which will be instrumental in taking advantage of material opportunities which will definitely arise once the markets readjust to the new regime.

Hear more from Abhi Chatterjee, on the Chief Investment Officer Panel, at March’s Dynamic Planner Conference.

The Dynamic Planner Investment Committee met on 23 October and reflected on the implications of the global stagflation environment, with negative earnings growth, persistently high inflation and Central Banks unlikely to pivot to significantly cutting interest rates anytime soon, for fear of inflation spiralling out of control again. Many developed economies, particularly in the case of the UK and US, are teetering on recession and may have already experienced periods of intermittent recession, without necessarily realising it.

The continued flatlining of the UK economy for such a long period was also a subject of discussion. Inflationary pressures (particularly from semi- and low-skilled wage growth) remains stubbornly high with interest rates, after 14 hikes so far, likely to remain high for longer. Rising fuel prices, as a result of the rising tensions in the Middle East, could also delay the more recent falling headline inflation numbers.

Quantitative tightening by Central Banks, to reduce their balance sheets and higher interest rates, means major concerns persist for the overvalued Global Government Bonds. Bond yields, having risen steeply at the shorter end, saw the curve flatten, but it remains inverted, which traditionally is a recessionary signal. Whilst interest rate normalization continues, negative real bond returns are to be expected for the foreseeable future, as high inflation persists and the US / global yield curves steepen.

With the prospect of further periods of volatility associated with the ongoing geo-political crises, and the inevitable run in to next year’s elections in the US and UK, the IC focused on the diversification benefits of the benchmark allocations and the stress testing of the Value at Risk metrics.

Read the full analysis and update from the Dynamic Planner Investment Committee.

The Dynamic Planner Investment Committee met on Thursday 27 April and reflected on the wider financial sector frailties following the fall-out of the Silicon Valley and First Republic Bank collapses in the US. In Europe, the dramatic loss of confidence in Credit Suisse led to a deposit run-off at digitally enabled speed and a wipe-out of its statutory capital reserves, held in specialist bonds called Contingent Convertibles or ‘Cocos’.

These events are symptomatic of the sharp increase in interest rates, shrinking central bank balance sheets and the receding tide of global liquidity that had flooded the financial system for much of the past decade. For those financial institutions that have relied too much on cheap liquidity, by taking on too much leverage and aggressively mismatching their balance sheets, times will be challenging given their magnified exposure to bond duration risk.

Should confidence in the banking system weaken further, this could result in contagion risks in other financial markets, particularly the leveraged pension funds. However, it was acknowledged that the major global banks are more robust than in the lead-up to the 2008 financial crisis, with global regulators requiring much greater capital and liquidity buffers. Despite the financial challenges faced from higher interest rates, growth has been more resilient than expected. Aided by a decline in energy prices, with a mild winter in the northern hemisphere helping reduce demand for natural gas, growth appears to have picked up in early 2023. Alongside the rapid reopening of the Chinese economy following the lifting of Covid restrictions, global growth has been more resilient than expected this year.

The IC also discussed the stickiness of underlying inflation being higher than expected at this stage of the economic cycle, indicating a broad-based ability for companies to both pass on higher input costs and maintain, or even expand, margins.

Read Q2 2023 analysis from Dynamic Planner’s Investment Committee.

By Tim Drayson , James Carrick, Legal and General Investment Management

Markets suggest the US has almost reached an inflection point, while the UK and Europe have further to go in their battles against inflation.

Prospects for the global economy are mixed, at best, this year: While the US should follow the UK and Europe into recession, we expect China to bounce back after scrapping its zero-COVID policy.

Over the past few years, the global economy overheated. Fiscal and monetary policy support were lavish during the pandemic, pushing up demand. But supply was reduced – both in labour markets (due to early retirement, reduced migration, school closures and self-isolation) and energy markets, particularly following Russia’s invasion of Ukraine.

This resulted in excessive inflation and, in turn, aggressive monetary tightening. With commercial banks beginning to tighten credit availability, we appear set for recession. Official US GDP data have been volatile, but the underlying details and survey data point to a loss of momentum. The housing market is dropping, consumers are burning through their excess savings and corporate fundamentals are deteriorating.

Given elevated job vacancies, there is considerable uncertainty as to how long it will take for unemployment to rise. However, we expect recession to begin in the spring and for output to fall throughout the rest of 2023. Unlike last year, market participants are close to pricing in enough additional hikes for the Fed; we also see the prospect for rate cuts towards the end of the year.

 

 

Sticky inflation

The situation is worse in Europe and the UK, where the energy supply shock is most acute and worse than similar crises experienced in the 1970s. Not only are real incomes being squeezed, but central banks are also tightening forcefully to limit second-round effects.

The UK has also suffered from policy blunders. These have resulted in market pressure forcing the government to deliver tighter fiscal policy than would have otherwise been necessary.

More positively, a mild winter has dampened the energy price shock, though the outlook remains uncertain. Another welcome development is that supply-chain disruptions – which led to a surge in goods price inflation in 2022 – are rapidly improving, aided by cooling demand.

Service-sector inflation will likely prove much stickier, in our view, but recession and rising unemployment should reduce wage pressures as the year unfolds. The extent of rate cuts by central banks later this year and into 2024 will likely hinge on whether core inflation can make it all the way back to target or if it settles at a still somewhat uncomfortable level.

Meanwhile, the outlook for China is much better following the abandonment of its zero-Covid policy. The economy suffered a significant setback in the last quarter of 2022, but we expect a rapid rebound this quarter as its Covid wave peaks. Recent policy initiatives for the property sector also seem to be a gamechanger. These should allow the property market to bounce back to health, without triggering another unsustainable boom.

Disclaimer: Views in this blog do not promote, and are not directly connected to any Legal & General Investment Management (LGIM) product or service. Views are from a range of LGIM investment professionals and do not necessarily reflect the views of LGIM. For investment professionals only.

The Investment Committee (IC) met on Monday 23 January and reflected on the downstream impact of the dramatic escalation in geopolitical risks, due to the Russian invasion of Ukraine, now almost 12 months ago, and the associated commodity price shocks.

The macro environment is radically different to the optimistic one prevailing at the start of last year. Global growth has slowed much more than anticipated, whilst the expected ‘temporary’ spike in inflation, rather than easing, further increased and has become embedded. As core measures of inflation remained far above central bank targets and headline rates reached double digits in most economies, this prompted global central banks to embark on the most rapid pace of policy tightening in 40 years.

The current macro perspective can perhaps be best described as a fiscal and monetary ‘hangover’. The previous 10-year plus regime, where a 2% inflation target was made possible due to secular disinflationary forces, is not normal by historical standards. The supply chain problems that emerged in 2021, following the initial economic recovery from Covid, extended into 2022 as labour shortage issues and the ensuing commodity price shock embedded a higher level of inflation and lowered growth expectations.

Now the elephant in the room is high inflation, requiring rising global interest rates and a reduction in the bloated balance sheets of the central banks. This implies steeper yield curves, more quantitative tightening and ongoing high budget deficits. Alongside extended levels of bond market leverage (mainly due to widespread use within LDI strategies) and persistently high inflation, the risk of a liquidity driven global government debt crisis and ongoing bond volatility increases.

The impact of both the energy supply shock and the rapid tightening in monetary policy will slow global real growth, but also risks some economies flirting with moderate or intermittent recession in 2023. This is particularly pertinent to the UK economy, forecasted by the IMF to be the only G7 country to contract this year. It continues to grapple with supply chain issues following the Covid bounce back and has a higher dependence on expensive liquid natural gas, which has been driving up the cost of living even further. This is alongside rising taxes, labour shortages, widespread public sector worker unrest and the persistent lack of productivity growth in the economy.

However, whilst there are significant short-term headwinds in the UK, markets always look forward and signs of inflation easing will help slow the pace and quantum of further rate rises. The IC discussed the latest proposed Capital Markets Assumptions (CMA’s) to be applied in Dynamic Planner. The impact of the sharp rise in bond yields across the board over the previous quarter and the observed uptick in their volatility, has been reflected in the calibration process when setting the CMA’s this quarter.

Given the considerable economic headwinds, the key unknowns are how close we are to reaching the peak in the interest rate cycle this year and the extent of potential corporate defaults, which are still running at low levels by historical standards. For equities, the focus is now on the extent of earnings downgrades and how much of the recession risk is already priced into current valuations.

Dynamic Planner’s asset and risk model provides volatility, covariance, correlation and expected return assumptions, which are updated each quarter. They cover a wide range of bond maturities, equity market capitalisations and alternative assets, thereby equipping users with the flexibility to tilt portfolios relative to the risk-adjusted benchmarks as they see fit. Since the CMA’s are updated each quarter, these remain sensitive to long-term secular trends and reflect the average expected outcomes for investors buying and selling at different times over the cycle.

You can read the full Investment Committee update here

In light of elevated economic and market volatility unfolding globally, and the UK government’s recently announced major tax cuts and increases in government borrowing, the rapid plummet in the value of the Pound and UK gilts has been truly eye-watering. Below, is insight from the Dynamic Planner Investment Committee, to add a more practical perspective on currency swings, away from market noise and speculation.

Exposure to foreign exchange movements goes with the territory – if you want to benefit from a diversified portfolio offering access to UK and global equities, bonds, or alternative assets.

Swings in currencies can however significantly impact portfolio returns, positively as well as negatively, when translated back into British Pound terms.

They are very difficult to predict, particularly over shorter time periods, as we have recently witnessed when market confidence can move rapidly based on changing economic fundamentals. Over the longer term though, the effects of currency movements often tend to even themselves out.

Several asset managers do consider currency movements to be an important part of their tactical asset allocation and currency hedging decisions. Others however avoid trying to second guess the vagaries of foreign exchange markets and instead take a more strategic perspective, relying on a broad mix of currency exposures in their portfolios to even out fluctuations longer-term.

The full implications of shifts in currencies can be hard to fully understand…

At Dynamic Planner, each benchmark asset allocation is carefully constructed to balance return expectations in line with investor risk tolerance.


Since 2017, the strategic direction of travel, of the asset allocation decisions taken by the Investment Committee, has been to gradually increase exposure to non-£ assets, both equities and bonds, while prudently adding to money market deposits for added diversification.

The 2022/23 asset allocation review has continued with this strategy.

Join Chief Investment Strategist, Abhimanyu Chatterjee on 20 October for his quarterly update, where he will discuss these allocation changes

By Sam Liddle, Sales Director, Church House Investment Management

For a long time, the 60/40 approach to portfolio management was perfectly effective. Offering a combination of equity-like returns and stable income, it allowed investors to participate in any market upside, while at the same time offering protection during periods of volatility. Simple. However, the approach has faced snowballing criticism over recent years in the face of unprecedented market performance.

Why?

Well, over time, as the value of each asset in a portfolio shifts in line with its performance, its size within the total portfolio in percentage terms will naturally also change. To keep the 60/40 split between equities and bonds in check, then, it becomes necessary to sell overperforming assets and add to underperforming ones periodically.

In and of itself, this is not a problem. In fact, rebalancing in such a way is good practice –working to reduce concentration risk and prevent emotion-driven decisions like panic buying and euphoric selling. And in an ideal world, the underperforming assets into which the investor re-invests would see an uptick in performance, enhancing total portfolio returns and smoothing out volatility.

The issue, however, is that this hasn’t been the case at all in recent years. We have seen unprecedented global central bank support since the global financial crisis in the form of interest rates and other initiatives designed to aid economic recovery.

On the one hand, this has consistently suppressed bond yields, leaving them stuck at just a fraction of the level at which they have typically sat historically. On the other, it has enabled equity prices to soar to new records, with valuations stretching to levels consistently highlighted as unsustainable by commentators.

As you’d imagine, maintaining the 60/40 split against this backdrop has consistently required investors to sell off overperforming equities and invest in underperforming bonds. And in the eyes of many, this has been akin to throwing good money after bad, effectively wiping away returns time and time again for no good reason.

Turning tides

So, while the 60/40 approach may not have generated the best returns in recent years, is it fair to classify it as ‘dead’? No, we don’t think so. And the reason why is that things are now changing seismically in the market.

The tremendous injection of liquidity by central banks throughout, and in the wake of, the pandemic has pushed inflation to unsustainable, multi-decade highs worldwide. As a result, those same central banks are now being forced to increase rates in earnest to steer clear of hyperinflation.

Likewise, we are now seeing institutions like the Bank of England and the Federal Reserve move away from their roles as the de facto buyers of corporate debt. In some cases, they have even begun to unwind their recent purchases back into the market.

There’s an argument to be made, of course, that the ongoing conflict in Ukraine is slowing this tightening of monetary policy. But this will only be temporary – higher rates and tougher stances are an inevitability over the long term.

And for many investors, the move away from the seemingly endless ‘growth’ phase that has favoured equities and hurt bonds for so long and into the ‘slowdown’, ‘recession’ and ‘recovery’ phases is going to come as quite a shock.

Indeed, there’s a good chance that we will see heavily stretched equity valuations come into question as rising rates continue to elevate bond yields. And if this takes place, then something closer to the 60/40 approach – with its emphasis on income alongside growth­, may suddenly become much more effective.

Yes, there have been significant losses for some bond investors so far this year but by proactively protecting holdings, either through curve positioning (the duration), credit quality or more explicit interest rate hedges via floating rate bonds, is crucial to getting the fixed income element of portfolios right.

Government benchmark yields have risen sharply and holders of too much duration have certainly paid the price. But bear in mind though the opportunities that this readjustment has created through a combination of the increase in the ten-year gilt yield (discounting a move to 1.5% in UK interest rates) and the widening of the credit spread above that.

Only a few months ago, the short end of the gilt curve was almost negative, now we have two-year gilts offering a mighty 1.3%. Not that attractive in itself, but when you add a credit spread on top, you can access a fair yield on a total return basis. There are now a number of quality bonds, issued last year when yields were low, that are trading well below par.

The 60/40 approach to portfolio construction was unquestionably of limited effectiveness throughout the enormous post-millennium equity bull market. However, to describe it as ‘dead’, as many commentators have, is so definitive. After all, it promotes a responsible approach to asset allocation that accounts for both growth and volatility. And in a world where many indicators suggest we are moving towards a more depressed stage of the market cycle, this is becoming increasingly invaluable.

Find out more about Church House investment solutions.

 

First published on Trustnet. The above article has been prepared for investment professionals. Any other readers should note this content does not constitute advice or a solicitation to buy, sell, or hold any investment. We strongly recommend speaking to an investment adviser before taking any action based on the information contained in this article. Please also note the value of investments and the income you get from them may fall as well as rise, and there is no certainty that you will get back the amount of your original investment. You should also be aware that past performance may not be a reliable guide to future performance.

By Brooks Macdonald

Several major global events – including most recently the coronavirus pandemic and the Russia/Ukraine situation – have prompted investors to flee financial markets, but history shows this could have been a mistake. In this article, we discuss the importance of remaining invested and how missing the best performing days could have led to a portfolio’s significant underperformance over the long-term.

What potentially seems a distant memory, the stay at home orders and dystopian feel to everyday life sent shockwaves through financials markets at the start of 2020, as a result of COVID-19. More recently, Russia’s invasion of Ukraine has rocked markets. In such conditions, it may be tempting to consider exiting the financial markets or switching to cash, with the intention of reducing further expected losses.

Trying to time the market can seriously damage your investment returns

Amidst heightened volatility, it is understandable that many are concerned about the impact on the value of their investments. But, while sharp declines in markets can naturally be disconcerting, if you want to give your investments the best chance of earning a long-term return, then it’s a good idea to practice the art of patience.

When markets fall and fear dominates, it can be difficult to resist the temptation to sell out of the financial markets and switch to cash, with the idea of reinvesting in the future when feeling more positive about market prospects – trying to ‘time the market’. But this is a strategy that carries with it the risk of missing out on some of the best days of market performance. And this could have a devastating impact on long-term returns.

Remaining invested may be an emotional rollercoaster during times of market stress, but research shows time and again that this is the best investment approach over the long term. For example, one study of US equity mutual fund investors showed that their tendency to try and time the market was a key driver of their underperformance (Dalbar, 2019)1. In the current environment, it is understandable that many people are concerned about geopolitical risks, and how this is being reflected in the value of their investments. To give some context, the speed at which the market entered into ‘bear’ territory (typically a 20% decline) in response to the coronavirus pandemic was the fastest in history. The current sell off does not qualify as a bear market but has dropped 10% since recent highs as shown in the chart below.

1 Dalbar (2019). ‘Quantitative Analysis of Investor Behaviour

Despite temptations to switch into cash, data shows that missing out on just the 10 best market performing days can have a big impact on long-term returns.

Staying ‘fully invested’ during the ups and downs has resulted in an initial £100,000 portfolio, for example, having an ending value of £445,000, compared to £250,000 for those that missed the 10 best days in previous 20 years. This effect also highlights the powerful effect of ‘compounding returns’ over time. If, for example, the 50 best days are missed, the long-term returns are indeed negative.

A different way of delivering the same message, where staying invested over the 20-year period generates annualised returns of 7.9%, compared to 0.8% annualised returns if one misses the 30 best days:

One of the most common reasons investors lose money is when they try to time the market, trying to avoid the worst days of the stock market by cashing out and then re-investing when they think the market is going to pick up. However, as the chart shows, the best and worst days of the stock market cluster. Try to miss the lows and you’ll probably miss the highs too.

Missing the best days during the downturn and subsequent upturn can again have a large impact on the returns generated over the subsequent period.

With the benefit of hindsight, we are now fully aware of the global impact of COVID-19, and the rapidity in which it has hit equity markets. While markets rivalled the speed of the virus in trying to price-in the near-term damage, we expected they could also be swift to act when a tipping-point was seen to be close- at-hand. World equity markets returned to highs around 120 days following 2020 lows.

By keeping to an established and proven investment framework, we can look to take advantage of short-term volatility as we continue to seek out longer-term investment opportunities. We look to avoid behavioural biases that may result in decisions that negatively impact long-term return potential. Yes, the journey may not be smooth, but generally it is important to look through the noise, and remain invested during times of market stress.

 

Important information

Investors should be aware that the price of investments and the income from them can go down as well as up and that neither is guaranteed. Past performance is not a reliable indicator of future results. Investors may not get back the amount invested. Changes in rates of exchange may have an adverse effect on the value, price or income of an investment. Investors should be aware of the additional risks associated with funds investing in emerging or developing markets. The information in this document does not constitute advice or a recommendation and you should not make any investment decisions on the basis of it. This document is for the information of the recipient only and should not be reproduced, copied or made available to others. The MSCI information may only be used for your internal use, may not be reproduced or re-disseminated in any form and may not be used as a basis for or a component of any financial instruments or products or indices. None of the MSCI information is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such. Historical data and analysis should not be taken as an indication or guarantee of any future performance analysis, forecast or prediction. The MSCI information is provided on an “as is” basis and the user of this information assumes the entire risk of any use made of this information. MSCI, each of its affiliates and each other person involved in or related to compiling, computing or creating any MSCI information (collectively, the “MSCI Parties”) expressly disclaims all warranties (including, without limitation, any warranties of originality, accuracy, completeness, timeliness, non-infringement, merchantability and fitness for a particular purpose) with respect to this information. Without limiting any of the foregoing, in no event shall any MSCI Party have any liability for any direct, indirect, special, incidental, punitive, consequential (including, without limitation, lost profits) or any other damages. (www.msci.com)

Brooks Macdonald is a trading name of Brooks Macdonald Group plc used by various companies in the Brooks Macdonald group of companies. Brooks Macdonald Group plc is registered in England No 4402058. Registered office: 21 Lombard Street, London, EC3V 9AH. Brooks Macdonald Asset Management Limited is regulated by the Financial Conduct Authority. Registered in England No 3417519. Registered office: 21 Lombard Street, London, EC3V 9AH.

More information about the Brooks Macdonald Group can be found at: www.brooksmacdonald.com

Like all of us, we are deeply disturbed by what is happening in Ukraine. While it may not be equal to that, we fully understand your clients will have concerns right now.

We want to provide you with reassurance and information below regarding our model and processes, which you can share when speaking with your clients about their investments. If you have further questions or concerns, please do not hesitate to contact the Dynamic Planner Client Success team in the usual way.

Capital Market Assumptions and benchmark asset allocations

Dynamic Planner provides forward-looking, ex-Ante assumptions for real returns, volatility, correlations and covariances, and associated calculations such as 95% VaR. They are calculated objectively through proven, statistical models using many decades of data – and rigidly reviewed, monitored and governed to ensure discipline and objectivity.

In Dynamic Planner, you can accurately risk profile any combination of assets. So, however you choose to position yourself tactically, over or underweight to our benchmark, you can understand the risk and expected return.

At times like this, there will no doubt be assets, countries and companies that will do better or worse. This could also change quite quickly. Ultimately, in the medium to long-term, this will mean a change to the constituents and weighting or ranking of the indices that define the assets within our Capital Market Assumptions.

If you want your firm’s or your clients’ investments to react to these changes, then you would need to rely upon a professional fund manager to do that effectively on your behalf. We would therefore, as we always do, encourage the use of the appropriate Risk Target Managed [RTM], Risk Managed Decumulation [RMD] and Risk Profiled solutions in Dynamic Planner.

Risk characteristics within Risk Profiled solutions

Dynamic Planner is unique in the way that it calculates the risk profile of solutions, especially RTM and RMD. We insist that asset managers provide us with the underlying holdings and their weights throughout the review period, including specific stock and derivatives. We calculate the solution’s risk profile using the correlations and covariances of all those underlying instruments.

We hold a database of more than 40,000 instruments and continually review their risk characteristics relative to 72 asset class indices, considering a wide range of potential factors, depending on the nature of the instrument. Dynamic Planner’s Asset Risk team have been considering these risk factors and how they may change the risk factors of certain instruments in light of the crisis in Ukraine, sanctions and market closures.

The Solutions Risk team are using these live risk factors of the underlying instruments within any solution to calculate its risk profile, as well as engaging with asset managers as to whether and how they may be reacting within their mandate to meet a solution’s objectives.

MSCI ESG ratings

We have always known that this is an emotive, complex and evolving issue that we do not have the in-house expertise or resource to fully understand or monitor at an investment instrument level. We rely upon ESG research from MSCI, respected pioneers in this space. Currently, we only make the MSCI ESG fund reports available to Dynamic Planner users, but we do have the full MSCI stock holdings level data available to us.

We have engaged with MSCI and they have said that, owing to the unprecedented nature of the current crisis, and the severe economic pressures facing Russian listed companies, they have implemented a series of ESG ratings downgrades with immediate effect. MSCI will continue to assess these companies’ ratings on an ongoing basis.

They have applied an ESG ratings ceiling of ‘B’ for all Russian companies within their coverage. Companies that were already ‘B’ or ‘CCC’, retain that rating, but all others have been downgraded to this ‘Laggard’ status.

Within MSCI’s corporate governance methodology, Russian companies will see the application of a ‘Very severe’ assessment on the ‘Other high impact governance events’ key metric. Additionally, Russian state-owned enterprises will see the application of a ‘Severe’ flag on the ‘Financing difficulties’ key metric, owing to their additional risk and exposure to sanctions, export restrictions, and removal of access to international financing channels.

MSCI have also downgraded the ESG government rating for Russia from BBB to B (equivalent to ‘Laggard’ status).

At a multi-asset fund solution level, which are very diversified by nature, it is unlikely that such actions of Russian companies or state will have turned the dial on their overall MSCI ratings yet. However, for those relying upon Dynamic Planner and MSCI data, recent actions are being proactively picked up within the assessment of their ESG risks.

If you have any further concerns about market conditions and your customers, please get in touch with the Client Success team.