A portfolio for the next decade: taking stock after an eventful year

At the start of 2020, we wrote an article called "A portfolio for the next decade", setting out four recommendations to ensure our charities portfolios are fit for the next ten years and beyond. We could never have predicted that 2020 would be such a tumultuous year. Aside from the tragic human impact of Covid, the pandemic has had a significant impact on financial markets. As we take stock of where we’ve got to and look forward, our original recommendations not only stand true, but in some cases have been strengthened by everything we’ve seen this year.

1. A global approach in equities

At the start of 2020, we recommended charity investors take a global approach to equities. Historically, many charities have had a bias towards UK equities due to the income premium offered and the currency alignment. However, this year has seen polarised performance of the UK and global markets. Back in March when the pandemic truly became global, we saw a significant fall in markets, with global equities falling 35%. We then saw a strong and rapid recovery in markets, which resulted in global equities ending the year up 10%. The speed of this recovery, which was much faster than the recovery from the Global Financial Crisis, is remarkable given troubling economic data and rising Covid cases in many countries.

Not all recoveries are created equal

However, not all recoveries are created equal. Much of the market gains have been driven by the US market and in particular, the large technology stocks known as the FAANMGs – Facebook, Apple, Amazon, Netflix, Microsoft and Google. These stocks now account for ~25% of the US equity index and have delivered seemingly insatiable gains throughout this year. Conversely, the UK market has struggled, owing in part to its greater allocation to unloved sectors such as energy and financials which have been hard hit this year. UK equities are still down 15% since the start of 2020 and clients with a greater allocation to the UK will have seen asset values struggling to recover their pre-pandemic peaks.

Furthermore, with income being one of the main reasons charity investors may have a bias to the UK, this year has seen widespread dividend-cuts. UK dividends are estimated to be down 36% this year, 45% next year and 1% in 2022, compared to 2019 levels.

Figure 1: Global equity market performance

^{Source: Thomson Reuters. Data to end September 2020, total return in GBP. Past performance is not a guide to future performance.}

Figure 2: FTSE 100 dividend futures

^{Source: Bloomberg, Cazenove Capital, 28 September 2020. Forecasts are not guaranteed and should not be relied upon.}

2. Looking for alternative sources of return

At the start of 2020, we talked about rising government debt levels and interest rates remaining lower for longer, which has led investors to look for alternative sources of return, away from bond markets. This theme has only been accelerated by the pandemic. Since March, we have seen government spending surge and interest rates plummet as governments try to support their economies. With bond yields falling even further and entering negative territory in some economies, investors looking for returns and diversification have had to cast the net wider.

Figure 3: Covid-19 policy response has led to big rise in government debt

^{Source: Bloomberg, Cazenove Capital, 28 September 2020. Forecasts are not guaranteed and should not be relied upon.}

Last year, we cited private markets as an area offering diversification and alternative sources of return. Private assets have not been immune to volatility this year. For example, real estate has also seen polarised performance with sectors such as high-street retail being hard hit while warehouses and industrials have benefitted from the rise in e-commerce.

Importantly, the long-term case for investing in private assets remains and historically, times of crisis can be a prime time to invest in private markets. 2008 and 2009 were some of the best years to invest in private equity in some cases, with volatility creating opportunities. In 2020, private equity has provided a crucial lifeline for many private companies this year and looking ahead, we believe private markets have an important role to play in charity portfolios.

3. Investing sustainably

There has been step change in sustainable investing this year and sustainability is increasingly important for investors,  companies and regulators alike. With greater expectations from society for companies to show their impact on people and the planet, we have seen a rising number of ESG-related regulations, which has led to greater disclosures from companies (often in the form of CSR reports). Furthermore, companies which are putting all their stakeholders, not just their shareholders, at the centre of what they do have outperformed.

Today, 77% of charity investors have chosen to adopt a policy to link their mission to their investments, which compares to 59% in 2015, according to our recently-published research, Intentional Investing. Moreover, fewer charity investors think that responsible investment reduces financial returns, with more expecting an increased return. There are a number of ways to approach sustainable investing and while most charity investment policies seek primarily to avoid harm, there has also been an increase in those charities striving to have a positive impact with their investments.

4. Focusing on value for money

The investment landscape has continued to evolve this year and with yields at record lows and equity markets increasingly polarised, focusing on value for money has never been more essential. At Cazenove, we offer a range of investment approaches, all of which firmly focus on achieving the best outcomes for our clients, at a reasonable cost.

Our portfolio for the next decade: taking stock

This year has been incredibly challenging, especially for our clients where this market volatility has coincided with increased demands on spending and greater challenges to fundraising. We believe taking a global approach to equities, including alternative sources of return, investing sustainably and continuing to focus on value for money will ensure your portfolio is well-positioned for the decade ahead.

To discuss any of the themes mentioned in the article, please contact your Cazenove Charities representative.