6th April 2020

Quilter Cheviot: MPS performance update: march 2020

Fears over the coronavirus have gripped markets in recent weeks, with the second week of March delivering a series of almost unprecedented headlines. A fall of over 10% in one day for the FTSE 100 (its worst since 1987), similar drops across European stock markets, and the fastest ever move into bear market territory by US stocks were just some of the news stories from the week, despite a wide array of measures announced by central banks.

Over the coming weeks, we expect governments and central banks will continue to announce new measures, and this belief was confirmed by the Federal Reserve’s decision to effectively cut US interest rates to zero on Sunday 15 March. While investors should be prepared for further market volatility, the experience of the Global Financial Crisis a decade ago has in some respects left the authorities well prepared to deal with the current crisis.

Away from the impact of Covid-19, markets were also affected by the breakdown in the OPEC+ agreement, chiefly due to a disagreement between its most important members, Russia and Saudi Arabia. Russia’s unwillingness to agree to a cut in oil production to support OPEC members prompted Saudi Arabia to announce an increase in production and offer deep discounts to attract new customers. Such a move will flood the oil market with extra supply, at a time when demand is weak due to Covid-19.

Turning to the MPS strategies, returns for March have naturally been dependent upon the risk profile of each strategy. As one would expect, MPS Global Growth and MPS Growth – both primarily allocated to equity funds – have experienced the largest drawdowns. In contrast, the MPS Conservative strategy, with an allocation biased towards bonds, alternative investments and cash, has provided greater protection against the turbulence seen across stock markets.

At the beginning of the year, we wrote in our fourth quarter wrap-up that while our tactical tilt remained towards equities, we believed it prudent to retain diversifying assets across the strategies. We have stuck to this base case positioning, with many of the non-equity holdings providing useful diversification.

We would particularly highlight the performance of the alternative funds held across the MPS and MPS Index (IDX) strategies. PIMCO GIS Dynamic Multi-Asset is marginally up over the year to date, while Janus Henderson UK Absolute Return is roughly flat over 2020. Being precise with performance figures is difficult when markets are moving so quickly, but we are confident that both funds and our wider alternative funds allocation will continue to act as a stabilising factor across the MPS range.

Equally, in a market moving at such speed, we retain our belief that significant changes to the strategies’ equity exposure at this juncture in an attempt to time market movements would not serve investors well over the long term. Such a wholesale approach is rarely successful, and remaining invested (in accordance with an individual client’s investment objective and time horizon) remains the most sensible approach to take.

It is also worth noting that the managers of the underlying funds will have been taking action. Vulcan Value Equity, one of our highest conviction US managers, has been taking advantage of recent market movements, for example, adding to those companies they believe have the greatest long-term potential. Much of our time over the past fortnight has been spent in consultation with fund managers and in understanding their current positioning and response to markets. It is important to view their activity in the context of the MPS strategies’ tactical asset allocation decisions and understand how or where we may be able to add value for investors.

Fundamentally, we believe the MPS portfolios to be well positioned and with cash weightings at slightly elevated levels across the core strategies (approx. 8% in the MPS Balanced strategy), we are actively considering putting money to work where appropriate. We have not yet pulled the trigger on any trades, but are actively assessing the situation. With volatility likely to persist in the near term, neither will we deploy cash all at once. Our objective is to add value by assessing the positioning of each strategy over the forthcoming weeks and take advantage of opportunities as they arise. At the current time, we expect the global economy to experience a short recession, followed by a recovery towards the end of the year. We would caution against trying to time the upturn in stock markets, which normally anticipate positive economic news.

Volatility is, of course, a feature of stock markets, and as the chart below shows, a fall of 10% or more is by no means uncommon, even in calendar years that have proven rewarding. It is worth emphasising that previous unforeseen events have resulted in markets recovering and, looking back at scenarios such as the SARS outbreak in 2003, the bounce back can be quick. Over the coming weeks, we will be closely monitoring the situation in Italy to see if there is a levelling off in new cases, as well as developments in the US. This, along with support from governments and central banks, will be important to the direction of stock markets in the near term.

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Investment Commentary, Investments