From coping to hoping - 2021 beckons as a year of recoveryFriday, 11 December 2020
It is a cliché, albeit true, to describe 2020 as a rollercoaster year. The pandemic upended all personal plans and economic forecasts early in the year and reminded us that humankind, even though apparently the dominant species on the planet, can be humbled by one of the smallest (rather like the wizards’ duel between Merlin and Madam Mim in Walt Disney’s The Sword in the Stone).
For many, the costs of Covid have been severe and sometimes, at the human level, irreversible, but many peoples’ livelihoods have also suffered from the unforeseen events of 2020. Developments in public health and improved treatments have enabled societies to cope up to a point but it is the extraordinary speed with which modern science has developed effective vaccines that gives hope for 2021 to be a new start for damaged economies and our quality of life.
Although Witan’s portfolio was adversely affected by the economic shock following the first lockdown, for reasons we explained in detail in our June update and our Half Year Report in August, since then performance has significantly improved. We made a number of changes to our manager list and our incumbent managers themselves adapted, where appropriate, to the new circumstances. In absolute terms, our NAV return is currently up year-to-date, and the majority of the earlier underperformance has been recouped, with outperformance in each of the past six months, though there is more to do. We have also actively bought back shares in the market, to take advantage of periods of wider discounts to benefit our shareholders’ NAV per share. Our monthly factsheets (which can be accessed at www.witan.com) record these changes and our progress in more detail.
A further feature of 2020 was the number of companies that cut their dividends, because they ran out of cash, or a regulator told them to, or “just in case”. This has led to an unprecedented fall in dividends, especially in the UK. Although some are likely to be reinstated in 2021 and the picture overseas has been less severe, for many investors who depend upon income from their investments this has been a testing year. In Witan’s case, we have stated that we intend to maintain our 45 year record of dividend growth, using revenue reserves as necessary and we expect the dividend for 2020 to show a further year of growth, albeit not at the rapid rates seen in recent years. Our outlook for portfolio dividend growth in 2021 and beyond remains positive, with the caveat that in the words of Mark Twain (or was it Yogi Berra) “It is dangerous to make forecasts, especially about the future”.
2021 is likely to have a subdued start, due to the current lockdown measures, but several tailwinds are expected to accelerate recovery during the year. The progressive immunisation of populations should reduce the spread of the disease, particularly to those most vulnerable, while the advent of warmer weather should also contribute, as more outdoor activity reduces infection rates. Both factors should enable the restrictions on the hospitality, leisure and travel industries to ease. These businesses depend on personal interactions which cannot be replicated from an armchair and they have seen little lasting relief from the depressed conditions of the first lockdown. Secondly, interest rates are at record low levels and seem set to be kept low by central bank easing measures. This is supportive for the housing market and will allow governments to continue to finance economic support programmes at exceptionally low interest costs. Thirdly, increased spending on infrastructure and “green” measures to mitigate carbon emissions and climate change appear to have widespread political support in many countries.
So, one feature of 2021 is likely to be a revival in some cyclical areas that have been worst affected by the short but deep recession in 2020 and, perhaps in anticipation, there have recently been signs of stock market performance broadening out from the technology and quality growth stocks that serenely sailed through the first half of this year.
However, we do not see the stock market as a seesaw. Some cyclical sectors that are currently down may recover but this need not be at the expense of technology and other faster-growing companies, many of which have benefited from an acceleration in the “digitisation” trends of working, shopping and viewing entertainment from home. The rapid underlying growth of this year’s “winners” remains an enduring positive factor, even if this year’s gains mean that PE ratings have little scope to go higher. However, we believe that greater selectivity is required by both growth and value style investors. Technology stocks may have to surrender, or share, the limelight for a while but there is attractive non-cyclical substance in many emerging businesses, for which timing entry levels is only a part of the investment process.
Witan aims to have a balance between managers who specialise in identifying long term winners (whether in emerging technologies or companies with established and growing global brands) and managers who are also willing to look at undervalued growth in depressed parts of the market. Consequently, in normal times we expect our returns to come from the fortunes of individual companies rather than from political events or the economic cycle. 2020 has reminded us that life is a box of chocolates with unknown fillings, so in Forrest Gump’s words “you never know what you’re gonna get”. Having lost some fillings to stone-filled confectionery this year, we have adapted appropriately and currently the vast majority of our portfolio is invested in high-quality and well financed companies which are well placed to benefit from a return to economic normality. Some are companies with enduring cash-flows, some with underestimated growth prospects and some are depressed and overdue a cyclical recovery. 2021 is sure to provide its own surprises but we approach the New Year with watchful optimism.
Chief Executive, Witan Investment Trust plc
11th December 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.
Discrete performance (%) †
|Net Asset Value‡||25.0||19.2||9.6||1.4||-6.3|
† Source: Morningstar / Witan, total return includes the notional reinvestment of dividends.
‡ The Net Asset Value figures value debt at fair value and include the notional reinvestment of dividends.
# Witan's benchmark is a composite of 85% Global (MSCI All Country World Index) and 15% UK (MSCI UK IMI Index). From 01.01.2017 to 31.12.2019 the benchmark was 30% UK, 25% North America, 20% Asia Pacific, 20% Europe (ex UK), 5% Emerging Markets. From 01.10.2007 to 31.12.2016 the benchmark was 40% UK, 20% North America, 20% Europe (ex UK) and 20% Asia Pacific. With effect from August 2020, the source for benchmark index performance changed to MSCI International, replacing the previous FTSE source. For more information go to www.witan.com/support/legal-information.