Monthly Archives: December 2019

Portfolio Update – Post Election December 2019

Following last week’s General Election result, we have taken the decision to increase exposure to the UK equity market for the majority of our portfolios. For the first time in over a decade, we have a government that has a free hand politically and provides much greater certainty that the UK’s exit from the EU will happen sooner rather than later.
Stock markets and sterling both rose at the end of last week following the election results, but the last couple of days have shown that there is still a long way to go before Brexit is delivered. The introduction of a legal provision by the Government barring an extension to trade deal negotiations has increased the prospect of a no-deal Brexit, and this has seen the FTSE 250 and sterling lose momentum from their gains last week.
The increase in the allocation to UK equities comes at the expense of US equity holdings which appear quite expensive when compared to other markets, and with an impeachment trial and Presidential election due in 2020, the US will be entering its own period of political uncertainty.

Some Brief Thoughts On The Election Result

Well it finally seems to have happened. People have voted to end the Brexit uncertainty and have delivered a clear Conservative majority government.

The early reaction from the markets is incredibly positive, with sterling up around 3 cents on the dollar since the results were announced last night and both the domestically focused FTSE 250 and the internationally focused FTSE 100 have posted impressive gains, the former breaking a new record today. In the case of the FTSE 100, this is especially impressive considering the significant strengthening of sterling – a factor which is usually negative for stock prices.

I have said for a long time that uncertainty is almost always worse than the outcome, even if the outcome is bad. No matter your views on Brexit, I do believe that having a conclusion to the whole issue will allow individuals, businesses and government to ‘get on’ and move things forward.

I know of many individuals and companies who have been delaying decisions around investing and hopefully this clear result will now unleash some of these held back investment funds.

Now of course things are rarely simple. The deal to take us out of the EU (which now looks very likely to be implemented on 31st January) is only the beginning and there will need to be future trade negotiations with the EU to hopefully secure a sensible, post divorce trading relationship.

Additionally, the SNP’s surge in Scotland will inevitably bring up the issue of a second referendum on independence. Although this will probably have a smaller impact on markets than Brexit, if the previous attempt is anything to go by, it could cause volatility in sterling and some short term uncertainty on the markets. I did mention at the client event a few weeks ago – I believe that political uncertainty is now the new normal.

I also feel that the Conservative victory is a victory for personal finance. Despite the Conservative manifesto essentially maintaining the status quo when it comes to personal tax and finance, that status quo, I believe, is incredibly generous. I don’t think that there is any doubt that last nights result is positive for wealth creation.

Finally, in all the election noise it was easy to miss some positive news out of the US last night with tentative signs that we might also get the start of a resolution to the US / China trade war.

All in all, Friday 13th has been lucky for markets, lucky for sterling and, lucky for the Conservatives.

The Buckingham Gate Investment Committee will be convening early next week to discuss the election results and consider if any changes need to be made to the portfolios in response. We will, as always, keep you updated on our latest thinking.

Buckingham Gate Portfolio Review – December 2019

Lindsell Train UK Equity : The importance of liquidity

The demise of the Woodford Equity Income fund has shown just how important it is for a fund to be able to manage it’s outflows. For those who need reminding, the fund had suffered from a run of redemption’s over a period of time and was suspended in early June when it was unable to meet the request from Kent County Council to withdraw its investment of circa £250 million in the fund.

The reputational damage incurred has since led to the decision to remove Neil Woodford as manager of the fund in October and an announcement that the process of winding up the fund would begin in January 2020. This leaves the reputation of Neil Woodford, once considered as one of the most successful fund managers during his tenure with Invesco Perpetual, in tatters and seems very unlikely that he will ever recover from this and return to a position where he is trusted to manage other people’s money.

The fallout from the implosion of this fund has seen analysts much more focused on liquidity risk than ever before, and one of the casualties of this enhanced inspection has been the Lindsell Train UK Equity fund. Following our latest portfolio review in early November, Square Mile have taken the decision to downgrade the fund over liquidity concerns and it was removed from all of the Buckingham Gate portfolios on the 18th November 2019 and replaced with the Liontrust Special Situations fund.

The Lindell Train UK Equity fund has long been considered one of the most successful UK Equity funds, and under the management of Nick Train since it’s inception in July 2006, has generated a return of 377% compared to 119% from the FTSE All Share over the same period. However, performance over the last six months has been poor, and the fund has seen significant withdrawals over recent months with September seeing its largest ever monthly outflow of £374 million. While these withdrawals can be explained by a lack of appetite of investors for UK equity markets as a whole due to Brexit etc, the level of withdrawals and the structure of the Lindsell Train fund are causes of concern.

While there are a great deal of differences in the investment approaches adopted by Neil Woodford and Nick Train, there are similarities in that they both have the courage of their convictions in choosing the companies that they invest in. Nick Train’s investment process has been characterised by a low turnover approach and the ability to invest heavily in companies that he believes in. This highly concentrated portfolio approach has been one of the main reasons for his success, but also has the potential to be his downfall.

Square Mile’s analysts are very concerned that the large concentration of assets in the fund’s top 10 holdings could see the fund struggle to sell these at a cost effective price should significant outflows persist.

It is important to reiterate that Square Mile have no immediate concerns about the ongoing viability of the fund, and it has consistently met its performance objectives and redemption requests. However, the fall from grace of the Woodford Equity Income fund has made analysts very mindful of history repeating itself and are keen to look at other investment strategies that may work better in current market conditions.

There is absolutely no way of telling if this will be a good or bad decision for the portfolios in the future, but it is clear that Square Mile are very conscious of avoiding the trap that what has worked in the past will continue to work in the future.

If you have any questions on the above, please do not hesitate to get in touch with us by calling 020 3478 2160 or emailing [email protected]