We’ve had a very strong start to the year as vaccine roll outs continue to pave the way for economies to ease restrictions, businesses to start spending (hiring and implementing the plans put on hold throughout 2020) and consumers to start spending (housing, cars and travel).
Equity markets buoyed by this confidence have had a strong quarter, commodity prices continued their rise as consumption increases and we’re finally seeing some inflation filter through – more on this later.
A new theme for our quarterly reviews will be PFW Investment Committee Notes where we aim to capture a summary of what we’ve talked about on the committee this quarter and any changes across our strategies. Be sure to read to the bottom where you’ll find this.
My Quarterly Review to you is divided into two parts. First is my perspective on the current situation; second is a brief recap of our shared investment philosophy. As always, I welcome your questions/comments.
With all that in mind, here’s my review of the last quarter:
Quarter by Numbers
It’s been a strong quarter across the board, with the S&P 500 (USA) +8.5%, MSCI Europe ex-UK +7.1%, UK FTSE All-Share +5.6%, MSCI EM (Emerging Markets) +5.1%, and MSCI Asia ex-Japan +3.7%.
Commodity prices returned 13.3% over the quarter and are 21.1% up YTD.
There has been a turn back to growth stocks (companies that seek higher earnings but generally have lower dividends), which are +11% for the quarter. While value stocks (companies that are perceived as undervalued in the market with higher dividends) are +4.9% over Q2.
Bonds have also picked up with US government bonds +1.7%, UK Gilts +1.8%, and Global corporate bonds +2.7% (Global Investment Grade). Eurozone government bonds fell -0.6% as investors appeared to favour the higher yields found outside of the negative interest world in the EU.
In summary, the post-pandemic market is quite the performer…
Source: FTSE, MSCI, Refinitiv Datastream, Standard & Poor’s, TOPIX, J.P. Morgan Asset Management. Bloomberg Barclays, FTSE, MSCI, Refinitiv Datastream, J.P. Morgan Asset Management. DM Equities: MSCI World; REITs: FTSE NAREIT Global Real Estate Investment Trusts; Cmdty: Bloomberg Commodity Index; Global Agg: Barclays Global Aggregate; Growth: MSCI World Growth; Value: MSCI World Value; Small cap: MSCI World Small Cap. US Treas: Barclays US Aggregate Government – Treasury, Bloomberg Barclays benchmark government indices. Global IG: Barclays Global Aggregate – Corporates
All indices are total return in local currency, except for MSCI Asia ex-Japan and MSCI EM, which are in US dollars. Past performance is not a reliable indicator of current and future results. Data as of 30 June 2021.
The Recovery – Has it Been Too Quick?
For the last 7 years, and still today, we have continued to reach new market highs in the US stock market. Pundits and economists alike have repeatedly called the top of the market, quoting statistics such as the market (USA) returning 17% p.a. since March 2009. Better still the S&P 500 is up 90% since the bottom of the market last year – the market must be overbought! Right?!
Well, first we should recall a statement from one of the most revered economists of all time, John Kenneth Galbraith, that “the sole function of economic forecasting is to make astrology look respectable” and then we should look at history.
Yes, from March 2009 to today the US market has delivered roughly 17% p.a. – way over its historical average suggesting a prolonged slump must be inevitable – but go back a further 9 years to the very start of the 21st century and a very different picture emerges.
From the bursting of the Dot Com bubble (which peaked in March 2000), to the nadir of the Global Financial Crisis (March 2009) over the first 9 years and 3 months of the 21st century the S&P 500 returned -5% annually.
Yes, negative 5% per year!
So, when we look at the totality of the 21st Century and combine those periods – nearly a decade of wild underperformance followed by more than a decade of wild out-performance – we arrive at an average annual compound return of the S&P 500 of 7%.
This is well below the long-term average of the S&P 500 of 10% p.a. suggesting that the US market at least has a way to go before it gets back on track.
Maybe it will be the “Roaring Twenties” once again.
We don’t believe that economies nor markets can be accurately predicted by anyone. In fact, we believe that it is dangerous to even try. But we do believe in learning lessons from history, and we share this perspective with you to demonstrate that there is arguably just as much reason to be positive about the markets as there is to be negative, if not more.
Focus on the history, not the headlines.
Mid quarter we wrote to you about inflation (rising prices) as we continued to hear client concern over this – Rising Inflation What Should You Do .
I gave the usual summary of what we are seeing, how we are not concerned by this (echoed by many, but most of all the Fed who can play the puppet master with inflation), and to stick to the plan and your investments as your goals haven’t changed and your investments have been built with higher periods of inflation already factored in.
What do I mean on that final point, ‘already factored in?’
Inflation is the reason we hold equities in your portfolio. And why the majority of you reading this are mostly invested in these.
Harking back to the 1926-2020 Ibbotson data I referenced earlier, the US equity market has returned compound 10% annually. Inflation, CPI, has compounded at just over 3%.
Put simply when we see inflation, the rising costs get put onto consumers which in turn goes back to companies, if you are a purchaser of these companies (through broad diversification of thousands of global equities) your investments go up.
There is no better asset class to hold in inflationary times and higher inflation is the indicator to continue to hold equities, not to jump out of the market.
PFW Investment Committee Notes
This quarter on the committee we;
- Reviewed the underperformance of the Fundsmith Equity position relative to the global Vanguard passive fund. Concluding the underperformance appears temporary and a continuation to hold the Fundsmith Equity fund, with the same weighting across our overseas strategies.
- Switched out of Vanguard Lifestrategy to Vanguard FTSE All-World in our GBP overseas strategies. Reasoning: 20% exposure to the UK is too concentrated, increasing US allocation is more representative of the US’s position in the global stock market.
- Reviewed Vanguard ESG Dev Mkt GBP (w/o EM) Vs (incumbent) UBS MSCI ACWI SRI GBP Hedged (w/EM): Prefer the hedged UBS strategy. No change will be made.
- US based strategies were underweight in their active element relative to our overseas strategies, the change has been made to increase this.
- Review of share classes resulted in a cheaper share class being identified in our ESG US strategy, the change has been made and affected clients notified.
- UK Reporting Funds – For clients who are returning, or are already in the UK with investments in a US trading or brokerage account we now have nine risk-adjusted strategies holding UK Reporting Funds. There are tax inefficiencies by holding US funds as a UK resident. These strategies aim to reduce this exposure.
We do not act with discretion over client accounts, any changes mentioned above will be discussed prior to any action being taken.
- You and I are long-term, goal-focused, planning-driven equity investors. We’ve found that the best course for us is to formulate a financial plan—and to build portfolios—based not on a view of the economy or the markets, but on our most important lifetime financial goals.
- Since 1960, the Standard & Poor’s 500-Stock Index has appreciated approximately 70 times; the cash dividend of the Index has gone up about 30 times. Over the same period, the Consumer Price Index has increased by a factor of nine. At least historically, then, mainstream equities have functioned as an extremely efficient hedge against long-term inflation and a generator of real wealth over time. We believe this is more likely than not to continue in the long run, hence our investment policy of owning successful companies rather than lending to them.
- We believe that acting continuously on a rational plan—as distinctly opposed to reacting to current events—offers us the best chance for long-term investment success. Simply stated: unless our goals change, we see little reason to alter our financial plan. And if our portfolio is well-suited to that plan, we don’t often make significant changes to that, either.
- We do not believe the economy can be consistently forecast, nor the markets consistently timed. We’re therefore convinced that the most reliable way to capture the long-term return of equities is to ride out their frequent but ultimately temporary declines (“The key to making money in stocks is to not get scared out of them” Peter Lynch).
- The news cycle reinforces uncertainty. We believe that uncertainty – in the markets and indeed the World – is the only certainty. We don’t seem to move from periods of uncertainty to periods of certainty; rather we move from one uncertainty to the next. Thus, we encourage our clients to embrace “rationality under uncertainty”
- The performance of our equity portfolios relative to their benchmark(s) is irrelevant to investment success as we define it. (It is also a variable over which we ultimately have no control.) The only benchmark we care about is the one that indicates whether you are on track to achieve your financial goals.
By all means, please be in touch with any and all questions and concerns. In the meantime, thank you—as always—for being clients of Plan First Wealth.
Plan First Wealth is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.