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Unprecedented use of the word ‘unprecedented’

26th March 2021

This week has been one of reflection as the UK looks back on a year since the start of the first lockdown. Remarkably, this same week a year ago also marks the bottom of global stock markets.  Since the lows of 23rd March 2020, the UK stock market is up more than 40%, while the US market is up over 75%! How can it be that the worst was behind us from an investment perspective, yet the worst was still to come for us all personally and for global economies? If you look at any graph of COVID-19 cases or deaths, it is clear that we had no idea of the scale of what was to come. According to the website, as at 23rd March 2020, the UK’s cumulative COVID-19 death toll was 938, a number that is now less than 1% of the current tragic total of 126,284 deaths. The cumulative death toll globally now stands at a shocking 2.74 million.

The UK economy contracted by 9.9% in 2020 – the worst on record. Statements from various central banks and governments promising to do “whatever it takes” to support their economies, may explain why the markets troughed at that time. But I challenge anyone to have forecast that the following 12 months would be the strongest on record for US equities. As my colleague Ben Conway wrote last week, we don’t try to forecast what will happen as we know we won’t get it right – and (agreeing with John Maynard Keynes) we believe “it is better to be roughly right than precisely wrong”. Since we didn’t know what was going to happen, we felt that our time was better spent focusing on trying to get some certainty at what was a very uncertain time.

In the space of just two weeks in March 2020, the HFM team conducted an incredible 80 meetings with managers of our underlying funds. We sought to understand what was happening across all the asset classes in which we invest, by picking the brains of the smartest fund managers in the country. Having great access to such talent is an understated benefit of active management. At the end of the process we had a much clearer idea of where the value was in the various markets and were able to make much more considered decisions during what was a volatile and emotional time.

One of the biggest calls we made in late March 2020 for our Distribution Fund was increasing the allocation to corporate debt funds at the expense of equity income funds, based on prevailing valuations and certainty of income. It was clear that companies were going to sacrifice the dividends in order to save the businesses, while coupons on their debt are contractual obligations and couldn’t be missed. This gave us confidence that the very attractive yields on offer back then were reliable. Our meetings with credit managers gleaned that Asian High Yield was yielding 20%, pan-European High Yield 10% and vanilla corporate bonds around 5%. All the managers believed that these returns were discounting a worst case scenario in excess of that witnessed during the Great Financial Crisis, and therefore worth the risk.

Meanwhile, property yields also shot higher on fears that rents would be missed if tenants were unable to trade due to lockdowns, but our conversations with property managers assured us that many businesses, such as those in the logistics or social care sector, were likely to be unaffected and rents should continue to flow to shareholders. We consequently added to our property exposure via deeply discounted REITs.

Investment trust discounts widened out across the board irrespective of fundamentals, providing rich pickings indeed for our Global Opportunities Fund. This has helped it to be one of the best performers in the IA Flexible Sector over the past year.

The comfort gained from speaking to managers and hearing their views on what was happening ‘on the ground’ allowed us to add some risk to portfolios but in a more measured way. We were able to consider the downside risks, given the unprecedented (that was a well-used word at the time!) environment, rather than merely hoping equity markets would look beyond all the bad news and ascend relentlessly to new highs.

Of course with the benefit of hindsight, a year ago we should have put as much as each Fund’s mandate would permit in equity markets, or specifically US technology (Nasdaq up about 100%), but we believe that the decisions we made for the Vanbrugh and Distribution Funds were appropriate and have been proven by the subsequent performance. Despite having equity weights below the average fund in their respective sectors, both Funds have broadly matched their sectors over the past year. Meanwhile, the Global Opportunities Fund, with an average equity weight of 72% over the past year, has comfortably beaten its sector and the UK stock market, and even the US market when translated into sterling.

We will be pleased to see the back of this year for so many reasons, but we believe we are better managers with lots of lessons learned as a result of the experience and we hope our loyal investors have also ‘enjoyed’ the journey – it’s been emotional!

Daniel Lockyer – Senior Fund Manager

Daniel Lockyer

This financial promotion is issued by Hawksmoor Fund Managers which is a trading name of Hawksmoor Investment Management (“Hawksmoor”). Hawksmoor is authorised and regulated by the Financial Conduct Authority. Hawksmoor’s registered office is 2nd Floor Stratus House, Emperor Way, Exeter Business Park, Exeter, Devon EX1 3QS. Company Number: 6307442. This document does not constitute an offer or invitation to any person, nor should its content be interpreted as investment or tax advice for which you should consult your financial adviser and/or accountant. The information and opinions it contains have been compiled or arrived at from sources believed to be reliable at the time and are given in good faith, but no representation is made as to their accuracy, completeness or correctness. Any opinion expressed in this document, whether in general or both on the performance of individual securities and in a wider economic context, represents the views of Hawksmoor at the time of preparation and may be subject to change. Past performance is not a guide to future performance. The value of an investment and any income from it can fall as well as rise as a result of market and currency fluctuations. You may not get back the amount you originally invested. HA4318.

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