Insights

May 2020 Update – From Gloom to Glimmers?

Thursday, 21 May 2020

The world has felt on fast forward this year, so rapid have been the public health developments arising from the Covid-19 epidemic and the effects on daily life. Two months of lockdown have passed and (without wishing to tempt providence) seem to have brought the outbreak under control, averting even worse human tragedy. Now, attention is shifting to the how quickly normal life can be restored and how much normality will have changed as a result of what we have experienced.

Lack of precedent, lack of knowledge about the virus itself and (so far) the absence of a cure or a vaccine render all predictions conditional. The inability to forecast how the outbreak would develop, the length of the economic shutdown or the effectiveness of measures to insulate individuals and companies from the effects of the measures taken by politicians for the common good have contributed to exceptional volatility in financial markets. Volatility is caused by people reacting not thinking. Although hard to keep in mind when it is happening, fear and opportunity tend to move in tandem in financial markets. So the rally in equity markets since March has occurred despite dire economic numbers, as investors try to form a view on the post-crisis world. At least there now seems scope for hope.

As noted in our fact sheets and update since the crisis began in February, Witan’s performance has been unusually poor since then, affected by exposure to industrial and financial stocks that were better suited to how the world looked in January than how events panned out. Amongst our global managers, the two worst hit were Pzena and Lansdowne, both with significant cyclical exposure. The former is a value investor by style and conviction, while the latter had positioned itself for a continued rally in cheaply rated stocks that went into reverse as the global shutdown spread. Its investments in airlines have been especially badly affected. By contrast, Lindsell Train and Veritas substantially outperformed the falls in markets owing to their more growth-oriented and defensively positioned portfolios. The UK market was another laggard, with our overweight exposure so far proving to be a headwind, intensified by being underweight in the US.

During recent months, we have continued the process of aligning our selection of managers to the more global benchmark we adopted in January. We have sold both of the Europe ex-UK regional portfolios, while increasing allocations to our global managers. We repaid our 2025 Secured Bond borrowings in early May, to give ourselves more tactical flexibility in varying gearing according to investment conditions, at significantly lower rates of interest. We are holding some funds in equity index futures and ETFs, as low cost ways of adjusting gearing and maintaining market exposure while we conclude a search for an additional global manager.

Whilst many sectors (e.g. retail, tourism, transportation, oil, banks) have been adversely affected by the shutdown of economic activity, some have benefited significantly. Greater dependence on communications (whether for working from home, on-line shopping, television viewing or gaming) has delivered a boost to “new economy” technology companies and companies adopting new ways to deliver goods and services. The effect has been to accelerate existing opportunities for the digital economy at the same time as the old economy has been clobbered. Some of this is likely to endure – being at home may be a poor substitute for a foreign holiday or seeing friends and family but “Zoom” video calls can easily replace a lot of business trips and home shopping is already well-established. Many will have “de-bugged” their systems for working from home, which has the attraction of saving time commuting every day and requiring less office space.

Fuelled by these trends, there has been a widening gap between the share price performance of the winners and losers from the shutdown. This has worked particularly to the advantage of the US market, with leading technology companies forming a substantial proportion of its market index. It is possible that the relative benefit has become exaggerated in immediate share price terms but life is going to become harder for traditional value managers.

It is easy to forecast the future – it will definitely come. Forecasting about the future is another matter. However, it seems likely that greater government involvement in the economy will outlast the crisis. Fiscal action to cushion the effects of the pandemic will be followed by fiscal action to stimulate recovery from the deepest recession in living memory. In order to keep these policies affordable, official actions will continue to suppress interest rates for years to come. This sort of environment, allied to the existing trends of technological disruption and an increased emphasis on climate change avoidance and mitigation will force companies and investors to be more adaptable. Business plans and investment processes will have to take account of (sometimes unpredictable) change, as the recent Covid-19 crisis has illustrated. In the memorable words of Mike Tyson “Everyone has a plan until they get punched in the face.” In the softer words of Charles Darwin “those who learned to collaborate and improvise most effectively have prevailed.” In that spirit, we shall continue to encourage free thinking and adaptability in our managers as we seek to recover this year’s lost ground and grow into the future.

Andrew Bell
Chief Executive
21st May 2020

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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