Bulletin – Performance: The Immediate Future
26th August 2020
|August update and the plans to Christmas 2020|
Article by Patrick McIntosh, [email protected]
Pride comes before a fall, but we think it is important that you recognise how extraordinarily well your KMG portfolio has performed through the pandemic and over the year to date.
Please enjoy the graphs below as you may have been thinking that the position was far worse, but please also remain very grounded to the reality of where we are in the current political, economic and viral world in which we are living.
Ahead of us we face the probability of a very mixed and messy Brexit, huge confusion as we move towards the American presidential election, ongoing trade wars especially regarding Huawei and the control of artificial intelligence technology and the evolution of 5G as it is rolled out across the world.
Perhaps the biggest challenge is summarised in this quote from Isaac Newton:
“I can calculate the motion of heavenly bodies but not the madness of people”.
Like it or not, humanity has taken a step change into an extraordinary future. Like it or not, humanity is going to have to get used to the idea that we as individuals own the problem, and we as individuals have to support each other in order to come through the pandemic into a brighter, more stable, profitable and harmonious future. Governments can only do so much to support their electorates into a brave new world.
Your portfolio has performed as well as it has, simply because we recognised so many of the trends which are now becoming apparent to us all, and did so years ago so that we have been embracing the sort of investments and assets which are now performing so well. These of course include artificial intelligence, technology, health care pharmaceuticals and medicine, climate change, decarbonisation, and evolving habits around what we eat and how we live including the relevance of material wealth.
As people begin to realise the price is what you pay but the value is what you get (especially when it comes to life expectancy), so we expect to continue a human shift towards paying much more for those things that not only look after us as individuals but look after the planet on which we live. This is true for each and every one of us as well as for each and every government across the world.
We predicted many months ago vaccines would be available in the autumn, and this now seems entirely possible. Indeed, there are possibly 20 or more vaccines that are in trial and/or in some form of implementation across the world from Russia to America to China and into Europe. However, it also has to be recognised that the virus is mutating and it seems most likely that there may never be a perfect vaccine (in fact there never has been a vaccine for any disease that is 100% successful). What vaccines will help us to do, however, is to build global immunity, greater antibody resistance and therefore less infection, more stability and greater likelihood of survival for those infected by the virus. Do not forget that the vast majority of us will experience little or no effect from the virus other than the symptoms we have from the usual strains of flu and colds that happen each year anyway.
Do not be surprised if you end up having more than one vaccination, and do not be surprised if in time you are tested for antibody resistance on a fairly regular basis – especially if you are in certain health groups, certain age groups or various employment sub-sets with higher exposure to infection than most people.
Our view is that the globe will not have comprehensive protection against the pandemic for the next 12 to 18 months even though many of us already have protection through herd immunity, or as a consequence of the probability that the virus will slowly weaken as it travels through humanity, as have previous viruses such as during the pandemic in 1918/19.
Our Investment Committee considered whether there was a deliberate move by global politicians to shift the blame to civil servants and incompetent bureaucrats in order to shrink government and to avoid electoral defeat. It is pretty difficult in this country to comprehend the shambles of the examination results system or the track and testing system let alone the other malfunctions of government; but in the end we have to consider that government is simply a reflection of us all. It is what our electoral system gave us and what the country voted for. So, the hypothesis that political evolution occurs through the cockup theory continues unabated, particularly here and in the United States of America.
The race between Biden and Trump is not a foregone conclusion but by the same token markets in general have taken both outcomes into consideration, and we in turn have also balanced your portfolios to cover either outcome.
Brexit becomes less and less important to us if only because although the economy saw a 20% collapse in GDP earlier this year the idea that we may lose or gain 5% of our GDP as a consequence of Brexit now becomes somewhat academic in the greater scheme of things. The probability of a high-level agreement moving towards World Trade Organisation guidelines seems increasingly possible and we will probably then spend the next 5 or 10 years arguing about EU fishing rights in UK waters versus City of London access to European markets, or the impact on the global economy versus migration – and all the time we will continue to evolve into a more globalised world. It will all be different to that which we may have thought would have happened before the pandemic, and technology along with demography will continue to be the driving themes in this country, Europe and beyond. We continue therefore to invest in these themes and to take a long-term view.
We do not expect to see much inflation in the system in the very short term although you will probably see some increases in prices in local services where overheads automatically increase as a proportion of through-put such as in restaurants, hairdressers etc. What we do, however, see as a significant longer-term trajectory is that the mountain of money and fiscal stimulus that has been poured into the global economy (and which will probably continue to be poured into the global economy for some time to come) not only resets the global economy evolving it into a different trading environment around climate change, better healthcare and future technology, but also expands the global economy to generate more profit, more wages and automatically more tax without necessarily putting up taxation. In this way we can service some of this debt and support evolving human life in ways that are probably beyond our wildest imaginations in the short-term. This change, we think, is bound to be inflationary even though it may not materialise significantly for two to five years or beyond. Because timing is so difficult to predict we feel that you should remain invested to cope with the potential for inflation whenever it may materialise as a consequence of so much stimulus available and money to be invested and spent by individuals and governments.
In the short term the unravelling of the furlough scheme and unemployment benefits together with global governments’ need to gently nudge humanity back to work and understand that we must all live with the pandemic and allow a natural course of events to unfold will mean that there is the potential for a great deal of volatility and unpleasantness leading in some cases to significant social upheaval. However, we think the level of social upheaval will be much less than that which we saw at the beginning of the 20th century and which led to the First and Second World wars. Remember too that the number of people who died in the pandemic of 1918/19 was significantly more than the number of people who died in the war that preceded it. This very sad and unpleasant fact should not be a reason to avoid investing in the future as we must all realise that in the end humanity will evolve and change, develop and expand and become more profitable.
We are going to reduce the cash balances within your investment portfolios by about 2 to 3%. This will not be a significant change and we will continue to hold a large amount of cash on deposit and retain significant defensive qualities within your portfolio.
We are going to reduce, to a small extent, your exposure to the UK economy and expand your exposure into the Far East and into those countries which are more likely to cope with the pandemic (global funds) and recover more quickly than Europe and the UK by topping up existing funds you already hold.
We are also going to develop the themes of climate change sustainability in all its forms and across all its markets because this must be the future if humanity is to survive investing into a global fund – Royal London Global Sustainable Equity (details attached).
We will remain thinly spread, globally diversified and strategically placed across an enormous range of investment themes in order to capture as much of the upside and minimise as much of the downside as we can. We acknowledge as always that the best
form of defence is maximum diversification and not believing in any one investment theme above any other as being the Holy Grail. As always, your portfolio is not designed to shoot the lights out, but to continuously provide you with reasonable investment returns in any market and in any circumstance.
Please understand, however, that through the course of the next 6 to 12 months you may see enormous volatility and huge changes in the value of your portfolio both down as well as up but this should not be a reason to panic nor move into cash or gold because in both cases these investments in themselves are hugely volatile risk strategies which could equally underperform and so do incredible damage to your wealth and future financial security.
As discretionary clients of KMG Investment Management, we are advising you of the changes which will be made from the 4th September 2020.
We have continued to asset allocate your funds so that there is no change in the total exposure to equities and we will continue to monitor and manage the volatility of the strategy.
Tax and fees
Please remember that these changes will not incur any fees as neither KMG nor the platform charge for switches. There will be a marginal increase by up to 0.04% in the fees for the funds within the portfolio or they will remain the same depending on which portfolio you hold.
Where funds are held outside of an ISA, pension or bond, the changes will be subject to capital gains tax. Where profits are made, we make no apologies for creating taxable gains – no pain no gain. We never let the tax tail wag the dog. Any tax will not be payable until January 2022 and as always, we will inform you of gains to include in your tax return in the future.
Where the changes involve existing funds in your portfolio, we have not issued the key information documents for them but attach the new fund details for Royal London Global Sustainable fund. Tables showing the changes to the portfolio are currently being produced and we will place these onto our website as soon as possible.
We wish you all a happy and exciting autumn!