It is hard to imagine a more tumultuous year to be an investor.
The fastest ever bear market in history was followed by an equally speedy recovery. Unprecedented - not a word I use lightly - monetary and fiscal policy came to the rescue of both the global economy and markets. The year end saw shares at all-time highs and interest rates close to all-time lows.
Despite the headlines, the lock downs, the human cost of COVID-19 and disruptions to millions of lives, long lived investment truths remained as relevant as ever, if sometimes clouded by volatile prices and news flow. It was these truths, playing out in their typical timeless fashion that drove returns for your funds over the year.
Markets are forward looking – markets don’t read today’s newspaper, they seek to predict tomorrow’s. That, somewhat clumsy metaphor, explains why markets and individual company shares can hit all-time highs despite the gloomy headlines and the worsening health situation. To be successful in markets investors need to think about the future, not the present. Markets are looking through the health crisis towards the vaccine and towards the economic benefits that will accrue from supportive economic policy and low interest rates. While this cycle is highly unusual, to say the least, that dynamic of forward looking markets isn’t.
Don’t fight the Fed – in his 1970s book “Wining on Wall Street” Martin Zweig coined the phrase “don’t fight the Fed.” His quote refers to the importance of central bank monetary policy in determining the overall direction of the share market. If central banks are cautious, pushing up interest rates and restricting the flow of money, it’s a time to be cautious. If the reverse is true, it pays to be more constructive in your outlook. Zweig’s insight rang true in 2020.
Quality pays – the Fisher Funds investment mantra is quality, quality, quality followed by growth. By quality we mean investing in those companies that have a strong market position, visionary management and that have opportunity in front of them for future earnings growth. Quality companies shine at the best of times but their glow only increases in the worst of times. We clearly saw this in 2020 with quality companies, and the Fisher Funds investment approach and quality companies decisively outperforming the broad market across all of the premium funds. The team did a great job.
Outlook for 2021
Speculating on the future direction of the market is fraught with danger, but there is little doubt that many of the risks that clouded the outlook in 2020 are clearing and that the economic cycle is likely to be more supportive for growth assets.
We are in the midst of a typical, albeit muted, recovery cycle and there will be plenty of good news for investors to latch onto:
Monetary policy will continue to be supportive of growth
The impact of expansionary fiscal policy enacted during the depths of the pandemic will continue to flow through supporting economic activity
Vaccine distribution will pick up at the same time we get through the northern hemisphere winter bringing improved health news
The removal of Presidential election uncertainty in the United States and, even though the democrats were successful in the recent Georgia senate run off, power is finely balanced meaning likely legislative gridlock. This is a good scenario for share markets, which are typically wary of change
Companies have been building up cash balances, creating fire power for capital expenditure, merger activity or increased returns to shareholders. In the US, for instance JP Morgan estimate the top 500 companies are sitting on record cash balance of ~$2.1 trillion ex Financial stocks.
While the news flow, especially early in the year, will be supportive, that doesn’t mean that there aren’t risks that may emerge. I would call out two that have an impact on our investment strategy.
The first of these is signs of life in the outlook for inflation. While the risk of a rapid rise in inflation looks remote, caution is required. Senior Portfolio Manager David McLeish is positioning for this in our fixed income portfolios with a shorter than typical maturity profile and favouring floating rather than fixed rate investments. For shares, inflation has a more nuanced impact. A little can be helpful enabling business to pass on cost increases, a lot tends to be harmful. For now that seems unlikely.
The second is pricing in some parts of the share market. With markets forward looking and investors reading the positive tea leaves of a better 2021 some parts of the market have been caught up in somewhat of a speculative frenzy. For us these extremely frothy parts of the market represent a risk that we would rather avoid. There are much less high profile, but we think lucrative investments that are worth focusing on.
Portfolio strategy
The recovery from the COVID-19 pandemic will be the dominant theme driving investor choices in 2021. How this flows through to each of our portfolios differs strategy by strategy and is commented on by each of the portfolio managers in the pages that follow, but there is a central dominant theme.
We endeavour to build all weather portfolios that are able to deliver attractive returns to you in a range of different market or economic scenarios. That means owning some companies that have very little reliance on the economic cycle to grow and will be defensive should economic performance disappoint. It also means owning some high quality businesses that are more sensitive to the economic winds and will deliver improved results should things turn out better as expected.
The combination of these different types of investments and blending them into an all-weather portfolio we believe is the most robust way to manage your wealth. It held our portfolio in good stead in 2020 and we believe will continue to deliver good results in 2021.
