Discretionary Investment Management | Bob Tannahill
13 May 22
Investing in a changing world - Is your investment portfolio still right for you?
A lot has changed in the decade or so since the Ravenscroft investment management team made global themes the core of its investment strategies and that rate of change only seems to be accelerating with the events of the last few years.
With markets having a periodic wobble, the team thought now was a good time to take a step back and remind ourselves of the things that matter to your portfolios in the longer term. History shows that investors who have diverse portfolios, of good quality assets, that are aligned with their personal circumstances have a great track record of delivering longer-term returns, despite all manner of historic crises.
So, we invite you to take a moment to reflect on your investment objectives and if you want to discuss anything with us to get in touch. After all, we are here to help you achieve your investment goals.
Has it really been a decade?
Back in 2011, Steve Jobs had recently announced a new device known as an “iPad”, Donald Trump was a game show host and going on holiday didn’t involve someone sticking a swab up your nose. At that time, we planted our flag in the sand as a thematic investment house and made the case for long-term themes like technology, healthcare and consumer products as durable pillars of your portfolio.
In what seems like the blink of an eye a decade has passed; there are quite a few more grey hairs dotted around the team and a lot has changed however those themes have proven to be solid drivers of your returns. Below are the average annual rates of return on our core strategies over the last 10 years, which stand testament to that:
Ravenscroft strategies are based on model portfolios and are net of a 0.75% p.a. fee.
ARC Indices are based on real-world portfolio data submitted to ARC by a panel of managers.
Data is in Sterling, includes both capital gains and income and runs from 31/3/12 to 31/3/22.
A period of change
It is not the strongest of the species that survive, nor the most intelligent, but the one most responsive to change (Charles Darwin)
Today the world looks very different from how it looked back in 2011. As we enter 2022, we can see that inflation is surging, US CPI is running at 8.5% and is the highest level of inflation since the 1980s, central banks are withdrawing support, interest rates are rising, Russia has invaded Ukraine and bond and stock markets are bifurcating. Some sectors, like oil and energy, are very strong while other sectors, such as technology, are struggling. After two years of lockdowns, travel restrictions, and unprecedented monetary policy the world is emerging from the global pandemic in a very different place.
We believe the time is right to take stock and have an open mind about how to navigate the next 10 years. From climate change to geopolitics, we are seeing major shifts in the world around us and while we still firmly believe that the long-term drivers of our themes remain unchanged, we are conscious that the best way to build portfolios around them may look different in the next decade compared to the last. Take bonds as an example - will they still provide the counterweight to equities that they have done in the past or will we need new safe-haven assets, such as gold, to balance out portfolios in a world where inflation is as much of a risk as a recession? These are the questions we must address as investors today.
Choosing the right investment strategy for you
At times like this, it is more important than ever that your portfolio is aligned with your investment goals, time frame and risk tolerance. Making sure that your portfolio is suited to you is one of the most important factors in ensuring you get a good outcome from investments over time, so we want to be sure it’s right. So, if you have any questions, are worried about markets, want to check that your portfolio is still right for you, or if your circumstances have changed, please give us a call, send us an email or drop by our offices. We would be delighted to arrange a call or a meeting.
Nothing is guaranteed other than death, taxes and market volatility
Over the last decade, we have witnessed several periods of heightened market volatility - the fears around Chinese growth in 2016, the last US interest rate tightening cycle in 2018 or the pandemic in 2020. While these events are significant, taking a step back to consider the long-term tends to make such events appear as mere blips on the chart. And while not all market drops recover as quickly as 2020, the tech bubble in 1999 took several years to recover from for example. In the long run, diversified portfolios of good quality assets have an excellent track record of providing returns over time. As you can see on the chart below, global equities over the last 30 years have returned a little over 9% per annum (on average) despite pandemics, bubbles and wars.
Is your portfolio strategy still right for you?
If you want to check if your current strategy is right for you a great place to start is by reminding yourself of what each strategy is trying to do. We have built these strategies with the aim of suiting a broad range of people and so each one has its own style.
This strategy operates with cautious investors in mind and aims to deliver returns, but always with capital volatility in mind. It does this through a blend of bonds and a small allocation to dividend-paying shares and can do two different things for investors: it can provide an income stream, currently 3.0%, alongside a small amount of capital growth, or that income can be re-invested to provide a cautious approach to capital growth. The percentage of equity investments is typically around 25% and is limited to a maximum of 35%.
As a bond-focused strategy, we have been thinking about higher interest rates for many years and we have been taking steps to position the portfolio to have the best chance of delivering its objectives, despite a shifting world. This has included changes such as the introduction of more infrastructure into the portfolio, moving government bond positions into inflation-protected bonds and building up a large allocation to short-dated corporate bonds that are well-positioned to weather higher interest rates.
The Balanced strategy aims to strike a balance between capital growth and managing volatility during times of market stress. To do this, the portfolio consists of a diverse portfolio of shares and bonds that will change over time, depending on how we see value and risk in each asset class. A typical equity allocation is 50% with a maximum weighting of 60%. The Balanced strategy aims to consistently operate with a much lower level of volatility compared to global equities, although, as with everything, there will be short-term periods of time where it is heightened.
As with all our portfolios, we are adapting to a changing environment. The core of the portfolios remains invested in high-quality global consumer stocks, healthcare, technology and emerging markets. On the bond side, the portfolio is invested in a broad array of bond assets, including US TIPS (inflation-protected government bonds), global corporate bonds and high-yield bonds. Over the last year, we have added exposure to the UK due to a valuation disparity - the UK stock market had been suppressed for many years whilst Brexit was negotiated, offering an excellent investment opportunity. We have increased the weighting to dividend-paying global companies, which will dampen portfolio volatility as some of the return is via dividend as opposed to pure growth. Elsewhere we are looking at broadening our exposure to assets such as gold, which should benefit from a prolonged period of inflation.
The Growth strategy has been designed to do what it says on the tin, and when there is uncertainty around world growth, the strategy will experience heightened volatility. This is an unfortunately unavoidable part of the journey when aiming for higher long-term returns. The fund tends to have a quality growth bias and a higher emerging market exposure than Balanced. Therefore, it is fair to say that the impact of equity markets is fairly influential on its return profile. The typical equity allocation is 75%, with the remainder being allocated to fixed income and cash. The equity allocation could go down to 65% when valuations look stretched and the future is uncertain and as high as 85%. As with Balanced, this will depend on the opportunities available.
As with all our portfolios, we are adapting to a changing environment. The core of the portfolios remains invested in high-quality global consumer stocks, healthcare, technology and emerging markets. On the bond side, the portfolio is invested in credit and, for the first time, US Treasuries (government bonds), which should provide some protection should equity markets fall, and we have also revisited the US TIPS. Inflation has been painful for our growth stocks, which was discussed in our quarterly, and we are currently looking at an equity fund that will benefit should a prolonged period of inflation emerge.
As with the Balanced strategy, last year we also added exposure to the UK due to a valuation disparity, and this still remains as attractively valued today as it did then.
Global Solutions Strategy
Global Solutions is the newest addition to our range, having launched in March this year. It is a 100% thematic equity portfolio, and, as with the Growth strategy, will experience a higher level of capital volatility as it pursues higher long-term growth rates.
The fund’s objective is long-term capital growth and it seeks to pursue this through alignment with businesses that are providing the solutions to some of the world’s most pressing issues. We expect it to move in line with equity markets and in some instances may exhibit more volatility given the long-term nature of the underlying investment themes, such climate change and the need to decarbonise our economies. This will take decades to complete, although the investment opportunity will occur along that pathway. This was discussed during our recent presentation, which you can find on our website, along with further information
While the current environment is undeniably an uncertain one, with volatile asset prices, we remain confident that our long-term themes remain intact and that your portfolios are well-positioned to navigate this changing world.
We also have a responsible investing page that contains many articles you may find interesting and give further clarity on the long-term themes in which Global Solutions invests in:
Global Blue Chip
While this article focuses on our four multi-manager strategies, we must not forget about our direct equity strategy, Global Blue Chip. As this strategy looks at the world company by company, we haven’t included it for the sake of conciseness, however, for clients wanting more information there are several updates available on our website:
We are here to help
If the above has made you think that now might be a good time for a financial health check, please feel free to give us a call, send us an email or drop by one of our offices. Our job is to help you achieve your investment goals and the team is here to help and happy to arrange calls or meetings if you wish to discuss anything.
The Investment Management Team
T: 01481 732769