Well-positioned for the rebound

We maintained our exposure to equities through the third quarter, allowing us to continue to benefit from the ongoing recovery in stock markets. While our overall asset allocation has not changed significantly, we have made some adjustments within asset classes and introduced a new theme, Chinese bonds, to portfolios.

Global approach

We have continued to reduce our UK equity exposure in favour of a more global approach. The transition, which has been under way for several years now, has served us well this year. The performance disparity between the UK and US markets is now wide. As at the end of August, the FTSE was down 20% year-to-date while the S&P was up 10%. The FTSE has long suffered from a heavy weighting to energy and financials and relatively little exposure to technology. There may now also be a “Brexit discount” coming back into play, with a “no trade deal” exit looking ever more likely.

US tech leads the way

^{Past performance is not a guide to future performance. Source: Refinitiv Datastream, September 2020}

Favoured themes performing strongly

We have allocations to several themes that have continued to help returns in recent months. Firstly, technology. Share prices of some of the largest companies in the sector have enjoyed a meteoric rise this year. However, we don’t think this is a replay of the dotcom bubble; by way of contrast, many of these businesses are very profitable and still growing fast. Perhaps the biggest risk they face is becoming victims of their own success; regulators could force them to change how they do business.

Healthcare, another sector where we have significant exposure, has also performed well.

Perhaps more surprisingly, Chinese equities have been a significant contributor to returns. China may have stumbled early in its handling of coronavirus, but the country responded quickly and decisively, allowing the economy to recover well ahead of the rest of the world. The government and central bank still have firepower to further support growth if required.

A theme running through our fund and stock selection has been balance sheet strength. This has helped us minimise our exposure to companies that have been forced into dilutive capital raisings or other forms of restructuring. 

Adding to the defensive ballast

We are mindful of the risk of renewed volatility, with Covid-19 an obvious source of uncertainty. With this in mind, we have slightly increased our exposure to government bonds through an allocation to long-dated US treasuries. These offer attractive diversification properties. The market has been relatively volatile of late, as bond prices have fallen in response to rising inflation expectations.

Pricing in the US mortgage market is based on long-dated Treasuries, which makes it likely that the Fed would look to prevent yields rising (and bond prices falling) significantly.

More recently, we have also made an allocation to Chinese government bonds. The market offers an attractive level of income compared with the UK and US, as well as a return profile that is relatively less correlated to other asset classes.