Welcome to our latest investment commentary covering the first quarter of 2021. We hope you and your family are well and are looking forward to the prospect of some normality returning over the next few months.
This update provides some in-depth commentary on the markets and our views moving forward.
Q1 2021 REVIEW
Market Performance and Government Bond Yields
The markets started the quarter with some good gains, before giving some of this back, leading to a wide dispersion of outcomes. This was largely due to the sharp rise in Government bond yields.
The majority of assets are priced relative to the yield on a Government bond, most commonly the US 10 year Treasury bond. When yields are low, many assets are repriced higher because they are relatively more attractive. In some cases, these moves higher have been significant, particularly during the earlier stages of the pandemic where particular sectors were benefitting.
As some form of normality is now on the horizon and the prospects of inflation have been rising, bond yields began moving higher. This makes them more attractive and therefore causes the prices of many assets to fall. This is essentially what we have seen over the past two months.
However, the rise in bond yields has been very fast and took most by surprise. The last time we saw anything like this was in November 2016, following the election of Donald Trump, however, the move this year has been larger. Steadily rising bond yields can be absorbed by the markets, but a sharp move like the one we have seen can cause some short-term stress.
Some areas of the markets can perform well in this environment such as the banks and other economically sensitive areas. This has led to a continued rotation out of sectors such as Technology and into the sectors that have performed well more recently.
In the previous quarterly note and in the subsequent webinar, we made mention of some of the portfolio activity planned for the quarter. This included the introduction of the AXA Fintech and Foresight Infrastructure funds and an enhancement to our Healthcare exposure via two holdings; the Baillie Gifford Health Innovation fund and L&G Healthcare Breakthrough ETF. These changes were made in February. We believe healthcare is on the cusp of revolutionary developments and are therefore excited about the long-term prospects for these funds.
We also mentioned that we expected the bond markets to offer little in way of returns for at least this year and that they were losing their diversification benefits. For the active models, we reduced our bond exposure and added to the hedge funds that we already had investments in. We are pleased to say that this move has worked well so far, with all of our hedge funds delivering positive returns of between 3% and 9% this year and that they performed well during the volatility seen over the past few months.
We did selectively hold on to some bonds in which we saw some upside, but also repositioned into others such as the Tabula US Inflation ETF. We expected inflation to rise as we emerge from the pandemic, but the usual methods of gaining exposure to this such as inflation-linked bonds looked troubled to us. Tabula introduced a new and smarter method of gaining inflation protection last year, which very few of our peer groups own. Whilst most of the bond market was down during the quarter, this ETF delivered +2.2%. In contrast, the inflation ETF we sold out of was down 3%, and the fund owned by the majority of the peer group, the CG Dollar fund, was also down 3%.
Some of our equity holdings have also performed well during the rotation, with our UK smaller company exposure, in particular, delivering strong returns. The Chelverton UK Growth fund returned +13.9% and Liontrust UK Micro +14.1%. A widely owned ETF in the portfolios, the iShares World Value ETF, has the job of performing during these environments and we are pleased to see it delivered +12.3% during the quarter.
We are used to seeing areas such as Technology reaching for new highs, however, that is not currently the case and we are instead seeing the economically sensitive areas looking a little stretched. Due to this, we recently rebalanced the portfolios to lock in the gains made on the funds that have performed well.
WallStreetBets and Gamestop
We thought it was worth mentioning the incredible activity seen in relation to the company Gamestop. This is a gaming retailer in the US that has a strong high street presence. Its share price had already been in decline but came under more pressure during the pandemic.
A group known as WallStreetBets on the Reddit social media platform took interest in the company and encouraged its followers to invest in the company. This caused the share price to rise by the end of 2020. The hedge fund community took note of this and began building short positions against Gamestop, expecting the share price to fall again from which they expected to profit from. However, WallStreetBets decided to challenge the hedge funds and asked its members to buy more of the stock. This created a “short squeeze”, where the hedge funds were forced to sell their trades because of the losses sustained, causing the share price to accelerate higher.
The end result was that the share price of Gamestop rose from $3 to a staggering $483 over the course of January, creating significant gains for many retail investors and losses of up to $20bn for the hedge fund industry. We were not exposed to this in either direction, but it is a fascinating story that will go down in the history books as a “David beats Goliath” event.
A New Normal?
It is likely that by the end of 2021, most developed countries will have vaccinated their most vulnerable people at least, with many vaccinating large proportions of their populations. Therefore, life to some form of normality could return this year.
Clearly, the risk of mutations will persist and so it is likely that protective measures such as masks may be the norm for longer. An experimental concert recently went ahead in Barcelona, where all attendees had to do rapid COVID tests to prove they were not infected, and they had to wear masks throughout the performance.
We would not be surprised to see these measures being implemented across other events, outings and travel.
Markets and The Thematic Approach
At this stage, we believe the rotation in the markets is a short-term event and reflects the reopening of economies and a strong pickup in economic growth. Many of these more sensitive industries, such as high street retailers, were challenged going into the pandemic and are likely to continue being challenged in the future. The share price of Marks & Spencer for example has risen by more than 80% since October 2020 when the rotation trade began, however, the challenges it faces will remain for the foreseeable future.
We, therefore, believe that the long-term trends and themes we have previously discussed, such as the shift to ESG investing and the uptake of renewable energy, will reassert themselves in the near term. We expect economic growth to normalise and return to pre-COVID levels, which in turn will be supportive of the themes discussed.
Whilst there has been some volatility at the sector level this year, we remain positive about the medium-term outlook for the markets and the structural growth sectors we have mentioned over the past year. Once economic growth looks set to normalise, we expect the sectors to begin moving in tandem again and it is possible we could see an outcome as in 2019, where many asset classes rose together.
We may be making some small changes to our portfolios over the next few months. For our advisory clients, please keep an eye on your inbox for the fund switch notices.
We hope you find this review informative and look forward to hearing from you if you have any questions.
This publication has been prepared for information purposes only by Carrington Investment Consultants Ltd t/a Carrington Wealth Management. The value of investments, and any income generated from them, will be affected by interest rates, exchange rates, general market conditions and other political, social and economic developments, as well as by specific matters relating to the assets in which it invests. Investors should be aware that the value of units may well fall as well as rise, is not guaranteed and that past performance is not a guide to future performance. Different funds carry different levels of risk and investors may not get back the full amount invested.