Insights

COVID-19 update from CEO Andrew Bell

Monday, 30 March 2020

An unsettling period of unprecedented volatility

Since the original outbreak in the Chinese city of Wuhan, the COVID-19 epidemic has spread to more than 100 countries worldwide, with the World Health Organisation recording over 630,000 reported cases and many thousands of deaths. Aside from the humanitarian tragedy, the steps taken to reduce the spread of infection have profoundly affected day to day life, with citizens confined to their homes and many businesses having to stop operating for an indefinite period.

The resulting disruption to the economy has led to extremely abrupt falls in global stock markets, many of which fell by over 30% between mid-February and mid-March, before staging a limited recovery. Noting that fear and opportunity tend to move in tandem in financial markets, such periods often generate the best scope for future gains, once the dust has settled. However, in the near-term, the almost immediate shut-down of broad swathes of the economy has led to a sharp recession, the duration of which is dependent upon the epidemic coming under control and upon government policies successfully cushioning the near-term evaporation of incomes experienced by many businesses and households.

Witan’s portfolio performance has been adversely affected by the turn of events, as our managers’ portfolios were mostly structured in anticipation of an improvement in global economic growth after 2019’s slowdown and we began February with 12% gearing in place, anticipating a confirmation of the more optimistic expectations in the UK and other markets that had taken hold in late 2019. These expectations have not been met, indeed they have been reversed and, as a result, Witan’s net asset value total return to 26 March fell 24%, compared with a 23% fall in the poorly-performing UK market and a 15% fall in our global benchmark. This is clearly very disappointing, however surprising the rapid change in economic conditions and the unprecedented government measures (rightly) introduced to bring the epidemic under control.

Witan’s level of gearing was reduced during the market declines and stood at under 8% at 20th March. Although markets appear lowly valued after the recent falls, the absence of any proven framework for predicting how the epidemic will develop currently warrants taking a more cautious view than on valuation alone. This can be expected to vary as information emerges on the epidemic, the effect on corporate earnings and the prospects for the economy to emerge from the current lock-down.

In the wake of the falls, the portfolio has been reviewed in detail, with updates from all our managers. In some instances, portfolios have been adapted to reflect changed valuations or a changed outlook, in others positions have been maintained. The portfolio is widely diversified across global equity markets, with over 350 holdings and our expectation is that when normal conditions return the portfolio will deliver value for shareholders.

The current squeeze on companies is putting unusual pressure on dividends, with some portfolio companies having suspended dividends temporarily in order to conserve cash during these exceptional times. It is worth emphasising that one of the benefits of investment trusts is the ability to use revenue reserves to fund dividends and dividend growth during lean periods. The Board has added to revenue reserves in each of the past nine years and, as recorded in the 2019 Annual Report, Witan’s revenue reserves are more than one and a half times its annual dividend which is a valuable source of flexibility in the event that revenue earnings come under pressure in 2020.

Although the current state of civic life in the UK is unprecedented, the Bank of England and the Government have introduced radical policy measures aimed at ensuring that the economy is able to bounce back once the restrictions on activity can be lifted. Similar measures have been introduced in Europe, the US and elsewhere. So, beyond the immediate uncertainties, the pace of economic activity seems likely to start to normalise later in the year. In the meanwhile Witan and its managers have implemented contingency plans to be able to carry on operations, working from home and using video conferencing and phone calls to replace seeing each other every day. We plan to produce regular commentary on developments while the crisis persists but, meanwhile, hope you remain safe during this period of “social distancing” designed to bring the outbreak under control.

Issued and approved by Witan Investment Services Limited. Witan Investment Trust is an equity investment. Please remember that past performance is not a guide to future performance. The value of an investment and the income from it can fall as well as rise as a result of currency and market fluctuations and you may not get back the amount originally invested. Investment trusts can borrow money to make additional investments on top of shareholders’ funds (gearing). If the value of these investments falls gearing will magnify the negative impact on performance. If an investment trust incorporates a large amount of gearing the value of its shares may be subject to sudden and large falls in value and you could get back nothing at all.

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