The confidence with which the year started, a new UK Government with a working majority and a Brexit strategy in place all seems like a distant memory.
So much for our contention in Q4 last year that we were past ‘peak uncertainty’. Everything changed over the last two weeks of February, as the realisation dawned that the coronavirus had got out of China and quite how virulent it was.
In our January report, we suggested that it was getting harder to find value and that the relationship with underlying corporate earnings was right at the top of the range (outside recessions). Going on to suggest that, without a marked improvement in earnings, a ‘pause to refresh’ was in order. Well, we have the recession in short order and stock markets collapsed in a manner to rival 1987’s crash. In particular, the third week of March saw genuine panic of a type that we haven’t seen for a while with indiscriminate selling and violent price swings (exacerbated by the wretched ETFs).
We would like to add that we are not in panic mode, this is ‘what we do’. This sort of volatility provides plenty of opportunities and we have been extremely busy. We aim to concentrate on the underlying companies, the price at which we are being offered partial ownership of great businesses, and not concern ourselves with endless prognostications from pundits. We have no desire to give false hope as to how long this might last, it could easily get worse yet, but experience has taught us the value of sticking to our principles and the discipline of good investment and risk management.
Clearly, we are heading into a sharp recession, considerable short-term damage has been done to economies around the world. As yet, we have no clear idea how long this will last. The good news is that central banks have acted swiftly and decisively to prevent this becoming another financial crisis. The speed with which they acted (much more quickly than during 2008/9) is commendable and on, effectively, an unlimited scale.
After a shaky start, governments have also rowed-in with appropriate direct measures. We have been impressed with our new Chancellor, Rishi Sunak, who appears to have a good grasp of what is required. Sadly, President Trump appeared to be in denial for several weeks, which is likely only to make the American epidemic worse. Overall, the support packages from governments worldwide really are on an unprecedented (much overworked word at the moment) scale. This will require government borrowing on an equally grand scale but, for the moment, it is the correct thing to do.
As mentioned previously, we do not wish to peddle any soothing nonsense as to a recovery from this malaise (in the country and the markets); we don’t know how long this will take. It is a time to ‘stick to our knitting’ and begin to look forward to what might change on a more permanent basis.
For investors in the Church House Tenax Absolute Return Strategies Fund, particularly for retirees wanting to draw income from their portfolio, volatility can become a real issue due to something known as “sequencing risk” – also known more colloquially as “pound cost ravaging”. These terms describe the process by which taking withdrawals of capital and income from portfolios in falling markets can leave capital depleted and, in turn, income permanently lower.
An absolute return fund that delivers volatile returns risks undermining the purpose of absolute return investing. It is therefore imperative that investors do the research needed to identify the funds in the sector most likely to provide smooth returns. These are the funds that start from a base of capital preservation rather than ‘cash plus’, and those which have historically delivered a smooth path of growth and consistent income across market cycles rather than a volatile growth curve inappropriate for retirees looking for consistency in returns.
Absolute return funds adhering to the core, original principles of the concept are actually an ideal option for retirees looking for a consistent annual income while minimising the risk that they will deplete capital over time.
First seen in Professional Adviser online.