Investment commentary from BMO Global Asset Management - September 2020

Craig Hendry

Craig Hendry

Managing Director & Chartered Financial Planner

17 September 2020

Craig Hendry, Managing Director of Johnston Carmichael Wealth caught up for a quick Q&A session with Investment Manager at BMO Global Asset Management, Paul Green.

Craig: From an investment perspective, how would you summarise the recent market activity?

Paul: Equity markets bounced back strongly during the second quarter, recovering much of the ground lost earlier in the year. Tentative signs of economic recovery, together with significant government and central bank support, provided the impetus. Government bonds remained well supported and corporate bonds benefited from investors seeking yield.

Craig: Looking at more detail in terms of asset allocation within the portfolios, which positions have paid off and which ones haven’t during the quarter?

Paul: To look at what has driven performance in Q2, you need to look at both asset allocation and fund selection performance contribution:

For asset allocation, and in terms of a positive contribution during the quarter, a relative avoidance (underweight) of fixed income assets across all five Lifestyle portfolios was positive during the quarter – a reversal of fortunes from the previous quarter. A bias towards Asian equities (overweight) across Lifestyle portfolios 4, 5, 6 and 7 was positive after a strong quarter for the asset class.

Similarly, an emphasis on Emerging Market equities across Lifestyle portfolios 5, 6 and 7 was positive after a strong three months for the asset class.

Conversely, our bias towards absolute return funds (seeking to deliver a positive return irrespective of market conditions) was negative over the quarter as these assets lagged in a strong quarter for the likes of equities. Also, a relative avoidance (underweight) of European equities was negative as they performed well during the period.

In terms of a positive contribution from our fund selection, Majedie US Equity (Lifestyle 3, 4, 5, 6 and 7) had a good quarter in an absolute and relative sense, outperforming the IA North American sector average by 2.1%, up 22.3%. The best performing Japanese position was once again Tokio Marine Japan Focus (Lifestyle 3, 4, 5, 6 and 7) which was up 24%, ahead of the sector average by 8.5%.

TT Emerging Markets Unconstrained (Lifestyle 5, 6, and7) had a good quarter, up 25.3% and ahead of the IA sector average by 5%. The newly introduced Schroder Sterling Corporate Bond fund (Lifestyle 3, 4, 5, 6 and 7) performed strongly, outperforming the IA sector average by 4.1%, delivering an absolute return of 11.5%.

However, it was a weaker quarter for income-focused funds relative to those with a more growth orientated remit. Polar European ex-UK Income (Lifestyle 4, 5, 6 and 7) underperformed the IA sector average by 5.5%, despite rising 15.3%. The holding of Eastspring Japan Dynamic (Lifestyle 3, 4, 5, 6 & 7), with its large cap value style, suffered again over the quarter, rising 10.3% but behind the IA sector average by 5.3%.

Federated Hermes Asia ex-Japan (Lifestyle 4, 5, 6 and 7) saw a weaker relative return, up 15.7% against a broader sector return of 20.25%.

Peter: Being an active manager, can you tell us more about activity within the portfolios and specific purchases and disposals you have made?

Paul: In a better quarter for equity markets, we continued to make changes to your portfolios, meaning the activity over the first 6 months of the year has been higher than typical. Times of uncertainty and rapid market moves, such as we witnessed in recent months, often provide opportunities for active managers to make changes which will hopefully bear fruit in the quarters and indeed years ahead. Many of the changes we made over the second quarter have been at the fund selection level with relatively modest changes to the asset allocation.

Across all five portfolios, we reduced equity exposure by around 5% as markets rose. This was done primarily via selling index Futures. These instruments give us the ability to efficiently and quickly adjust the equity market exposure of the portfolios.

Within Lifestyle portfolios 3, 4, 5, and 6, we reduced the exposure to UK government bonds (Gilts) as the yield on UK government debt (which moves inversely to the price) fell to record lows.

For Lifestyle 3, 4, 5, 6 and 7 new UK equity positions in LF Lindsell Train UK Equity & Montanaro UK Income were added across the portfolios over the quarter. In portfolios Lifestyle 6 and 7 – we used volatility (fluctuations in prices) over the period to add a small position in Hermes Global High Yield Credit, following a material cheapening up of high yield (lower rated) bonds in March.

Within Lifestyle 3, 4, 5 and 6 new positions were added in TwentyFour Corporate Bond to complete the repositioning of the portfolios’ corporate bond exposure over the quarter.

For Lifestyle 4, 5, 6, and 7 we started a position in LF Miton European Opportunities Fund during the quarter. Its inclusion provides some mid-cap growth exposure to our European selections.

Within Lifestyle 3, 4, 5, 6 and 7 we sold Majedie Tortoise after a changein its positioning meant it became more correlated with other equity focused funds already held within the portfolios.

For Lifestyle 4, 5, 6 and 7 following the manager resignation, we sold the position of Hermes European ex-UK Fund. For Lifestyle 3, 4, 5 and 6 we sold our position in Royal London Sterling Bond, completing the changes made to the corporate bond allocations. Lifestyle 6 –as part of the changes to the corporate bond allocation, we sold Liontrust Strategic Bond.

Peter: What’s BMO’s current outlook?

Paul: The world economy is in recession and, although we’ve seen some indications of a trough, it will be some time before we have clarity around the timing and speed of any sustained recovery. Given the sharp market rebound and ongoing nature of the COVID-19 pandemic we remain relatively cautious.

We are underweight equities and fixed income but have used recent weakness to add to both investment grade and high yield bonds as valuations looked more attractive. We maintain an emphasis on absolute return orientated strategies as well as select specialised property locations. Geographically, the UK looks cheap with opportunities for stock pickers and Asia seems to be recovering well from the pandemic. We are cautious towards the US and monitoring Europe closely given valuations and European Central Bank stimulus.

The outlook remains clouded and volatility is set to remain a feature. We will continue to assess the situation closely with a view to navigating risks and harnessing opportunities that emerge. We have been in close contact with our underlying managers with many are now telling us they are beginning to see opportunities emerge.

Please note: This blog does not constitute investment advice or recommendations to buy or sell investments and you should not place undue reliance on such statements or returns, as actual returns and results could differ materially due to various risks and uncertainties.

Views and opinions have been arrived at by BMO Global Asset Management and should not be considered to be a recommendation or solicitation to buy or sell any funds that may be mentioned.

Past performance should not be seen as an indication of future performance.

The value of your investments and any income from them can go down as well as up and you may not get back the original amount invested.

These funds invest principally in units in collective investment schemes. Please refer to the investment policy.