Which asset class surprised most in 2020?
2020 has been a year full of surprises and the world has changed rapidly in ways that we couldn’t...
With inflationary pressures gradually increasing and even recently exceeding the 2% target in the eurozone, UK and US, investors have been sensing that, in developed markets, interest rates may have bottomed. The risk of higher interest rates in the future is reflected in higher bond yields, the outcome of which is that bond prices fall.
This has a knock-on effect for those shares often termed ‘bond proxies’ (e.g. utilities, consumer staples etc, which tend to pay a steady return via dividends), whose valuations have been pushed up significantly beyond historic norms, as investors have broadened their hunt for reliable sources of income.
As these shares have become more expensive, investors have sought opportunities in ‘value’ sectors such as mining, energy, industrials and financials. Over the past year, they have been rewarded, as these sectors experienced a significant recovery.
We too responded to this ‘value rotation’ in the Jupiter Merlin Growth portfolio, with a gentle nudge towards fund managers with a more value-based style.
Notable changes included selling our holding in Majedie UK Income and, in Europe, selling out of Odey European Focus. We added Schroder European Alpha Income, while more broadly adding to our existing holding in M&G Global Dividend.
We made a similar move in the Jupiter Merlin Balanced portfolio, selling the holdings in the Odey European Focus and Odey Allegra Developed Markets funds. The European exposure was replaced with Schroder European Alpha Income. Among global funds, we opened a new position in Jupiter Global Equities managed by Ben Whitmore, a value manager we know well through owning his Jupiter Income Trust also in this portfolio. The eagle-eyed will note that we have switched Jupiter Dynamic Bond in to Jupiter Strategic Bond; both funds are run by Ariel Bezalel following a similar strategy, the advantage of the switch as we see it is to allow a slightly better yield for sterling investors.
In both portfolios, we continue to monitor how much is exposed to different currencies and will take steps to make them more focused on either overseas currencies or sterling if we think it prudent. We can achieve this by investing in alternative unit classes of some of the portfolios’ overseas funds. For example, in the last six months, the portfolios have held the alternative unit classes of both a Japanese fund and a US fund. However, at the end of February, we switched back into the sterling unit classes as we anticipated that sterling would come under renewed pressure.
Fewer changes have been made in the Jupiter Merlin Income portfolio. The risk of higher interest rates has reinforced our view that we should maintain the portfolio’s maximum exposure allowed to equities and keep to the lower end of the range in bonds, given that cash currently yields very little and therefore has quite an expensive “opportunity cost” to hold. While we made no switches of funds over the past year, we did take the opportunity to alter some weightings between constituent holdings to reflect our convictions.
Markets have been volatile these past two years, nevertheless we have confidence in the fund managers within our portfolios to be able to cope with such conditions. They share our core philosophy towards capital preservation, trying to capture performance in the good times while seeking to concede less than the market in more challenging conditions.