Wellian Weekly 30.03.2020

Investing In Times of Uncertainty

Exhibit A – Daily performance of the L&G UK Mid Cap Index Fund year to “date” (with “date” being 26 March 2018)

Exhibit B – Daily performance of the L&G UK Mid Cap Index Fund year to “date” (with “date” being 26 March 2019)

Exhibit C – Daily performance of the L&G UK Mid Cap Index Fund year to “date” (with “date” being 26 March 2020)

All three charts are measured with the same scale.  Notice anything different about Exhibit C compared to Exhibits “A” and “B”?

The L&G UK Mid Cap Index fund is a passively managed fund which invests in the FTSE 250 ex Investment Trusts (c190 stocks).

I chose, on purpose, to use an index to highlight the extreme price swings we are witnessing this year compared to the last two years.  I also chose an index that was diverse which “should” mute returns as when one stock rises another might fall thus dampening price swings at the index level.  Using data as at the end of January, the top 10 holdings of the Mid Cap Index accounted for less than 15% of the index.  I also chose an index that was diverse in terms of sector allocation.

I could have chosen the FTSE 100 as the “exhibits” above and the price swings would have been just as violent, but possibly it could have been argued differently. For instance:

  • There are 100 stocks (roughly half the amount of stocks compared to the Mid 250 Index)
  • Oil and gas account for 13.70% of the FTSE and only 2.30% of the Mid 250.  We’ve all seen the price movements of the oil price in the last couple of months. Having a much greater exposure to oil stocks could exacerbate the returns
  • Admittedly, the two largest sectors of the mid-cap index (Financials and Industrials) account for 29.80% and 26.40% respectively compared to 21.50% and 9.50% of the FTSE 100, so you are not necessarily comparing like-with-like risks…
  • The top 10 stocks of the FTSE account for 45.30% of the total
  • The largest stock in the FTSE 100 accounts for 8.70%, whereas the largest weight in the FTSE UK Mid Cap fund is 1.70% (so you could argue there is greater stock specific risk in the FTSE 100).

You could go on and on about picking holes in each of the indices and why one might be a better measure than the other, but the whole point was to show the market movements of the last couple of weeks is completely amazing. Having been involved in constructing investment portfolios since 1994, I have worked through some very unusual times – The Tequila Crisis, The collapse of LTCM, The Asian Crisis, The DotCom boom, the Global Financial Crisis, The Brexit Referendum vote and many other stumbles and falls along the way. This one is the most unusual for me though. The speed that the global economy has ground to a halt is stunning. The speed in policy response from the UK and US has been equally stunning. The speed of the fear, panic, doom and gloom is stunning too.

Many commentators are suggesting a V shaped recovery and a very strong economic bounce back. Others are saying this is “end of days”. Either way, we are living through unprecedented times. The chart below, courtesy of Goldman Sachs shows not only the severity of the equity market collapse (it’s the S&P 500) but also the speed compared to other bear markets. Words are hard to describe what is going on at the moment.

Equity markets do go up and down, sometimes excessively, sometimes sedately. Sometimes the reasons why they do so is not fully known or understood. At the end of 2019 if you would have asked me what the biggest threats were to the global economy in the forthcoming year, the spread, speed and impact of a virus emanating from a wet market (probably caused by diseased bats) in a city in China (that I’d honestly never heard of) that within 12 weeks would have caused tens of thousands of deaths, infecting hundreds of thousands if not millions and causing lockdowns for weeks for the population of lots of cities throughout the world would not have been at the top of my list. I am fairly sure it wouldn’t have been in the top 10.

So, from an investing perspective, what do you do? The speed of the fall pretty much caught everybody out (although there will be headlines of “hedge fund makes 100% overnight”) and now we are in a situation of “…how much further can it go?” “…are we catching a falling knife if we want to invest today?” “…what are the ramifications for other asset classes?” “…how long will the recession last?” and so on.

We are long-term investors. We also like the saying that “the darkest hour is just before the dawn” and even though equity markets might fall further from here (5%? 10%? 20%? More?), dividends may (read “are likely to”) get cut and is an investment which is now 30% cheaper than it was only a month ago a good price? Of course you have to ask the question of “was it good value a month ago” to form some form of base measurement. A great deal depends on your investment time horizon. We are not saying now is the time to get in, we are not saying now is the time to exit and watch from the sides. We are long term investors and when you consider the chart below, which tracks the Mid Cap Index from its inception in 1985 (an index which as well as the global economic crises I have witnessed in my investing career can also add among others the 1987 crash (see if you can spot in on the chart below…..) and even accounting for the massive falls we have witnessed this quarter, a 3000%+ return certainly beats cash on deposit

I would love to have penned the phrase “time in the market as opposed to timing the market” but it’s a favourite of mine. This chart exudes patience to achieve objectives. If you continued to invest in the troubled times of 1987, 1994, 1998, 2000, 2004, 2008, 2016 or even today and you can look into the future, investing in times of uncertainty is not necessarily a bad thing.

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