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Cirilium monthly - April 2020

Suitable for retail clients.

In this month's edition:

 

Market review

April marked the first full month of lockdown for the UK, while elsewhere in the world, some countries began lifting the restrictions on the movement of people as the number of coronavirus deaths continued to fall.

In the UK, Prime Minister Boris Johnson fell seriously ill with coronavirus, while the Labour Party elected Keir Starmer as its new leader, succeeding Jeremy Corbyn. The FTSE All Share index nudged up during the month, returning 4.9%.

The UK government announced it intends to issue £180bn of government debt between May and July this year, a higher volume of issuance than previously confirmed by the UK Debt Management Office. The ICE BofA 1-10 Year UK Gilt index was up just 0.5% by the end of April.

Global stock markets bounced back in April helped by the news that human trials for a coronavirus vaccine were underway, although a working vaccine is still a long way off and social distancing looks set to remain in place in some form throughout 2020, medical officials warned.

European countries began to lift the strict lockdown measures in April, notably Germany and Norway. France and Spain indicated that their lockdowns would remain in place for a while longer, even as the rates of infection began to slow in both countries.

Preliminary estimates from Eurostat showed that GDP shrank 3.8% in the euro area in the first quarter of 2020 and decreased by 3.5% in the EU. The MSCI Europe ex UK index nevertheless posted a return of 4.4% during the month.

Across the Atlantic, the number of unemployed in the US mounted, as jobless claims topped 30 million. President Donald Trump hinted that some US states could reopen and suggested that the coronavirus was past its peak, as he faced growing protests over the lockdown restrictions.

The US Federal Reserve left monetary policy unchanged in April but expanded its bond buying programme to include some riskier bond assets, which was enough to buoy the MSCI USA index, returning 11.2% over the period. Meanwhile, following Bernie Sanders’ decision to step aside, former US vice-president Joe Biden was confirmed as the Democratic nominee for the US Presidential election.

For the first time in history, US oil prices fell below $0 during the month due to concerns over a shortage of storage as demand for the commodity plunged during the coronavirus crisis. The price per barrel of West Texas Intermediate oil was as low as -$40 at one stage, while the price of Brent crude fell below $25 a barrel.

US Treasury yields fell on the back of the tumbling price of oil, having risen earlier in the month. The ICE BofA US High Yield index ended the month up 2% per cent, compared to the ICE BofA US Treasury index, where total returns were down 1.3%.

The collapse in the oil price saw emerging markets clock up another month of outflows as investors continued to flee. But emerging market equities recovered during the period, with the MSCI Emerging Markets index up 7.3%.

By the end of April, the MSCI China index had returned 4.5% as the months-long lockdown was lifted across the country, including in Wuhan, where the coronavirus outbreak started. Although officials in Wuhan raised the death toll by 50% in April as the country released revised figures that suggested the death toll was higher than previously reported.

(All performance figures in sterling terms and rounded to one decimal point, unless otherwise stated.)

 

Performance review

The Cirilium portfolios posted positive returns for the month of April. After the severe shock in March, massive global and fiscal monetary responses fuelled a strong market rebound in April for financial markets despite macroeconomic data that showed the huge economic cost of the coronavirus shutdowns. Volatility declined from extreme levels and technology stocks recorded solid gains, which helped push US equities higher and recover much of its prior decline. Encouragingly, small and mid-cap also joined the party with US small and mid-cap stocks enjoying their best month since 2011. Fixed Income markets also rallied as central banks committed to purchasing more government and corporate bonds.

Regionally, US equities delivered the largest gains driven by the strong performance of technology stocks, whereas the UK lagged far behind given its high exposure to energy, financials and resources, which are more sensitive to global growth. That being said, small and mid-cap UK equities, which have a lower exposure to those weaker sectors, enjoyed much stronger performance. This dynamic allowed our active managers to achieve returns that were significantly higher than the FTSE 100 index. Some strong performers included the Merian UK Alpha, LF Miton UK Value Opportunities, and Montanaro UK Income Funds.

The appreciation of the pound versus most other currencies did pare back gains for overseas assets, but our active managers were able to achieve returns that were ahead of a respective passive index. It is also positive to report strong gains from active managers across the portfolio rather than just within the US. This included the Sands Capital Global Leaders, Montanaro European Income, LF Miton European Opportunities, and Fidelity Asia Pacific Opportunities Funds. However, it was within the US that we saw the largest gains including a near 30% gain for the recently added Granahan US SMID Select Fund and around a 23% gain for the Wells Fargo US Select Equity Fund.

Within the alternative holdings, there was little contribution to overall performance from our hedge fund and property strategies, but there was a positive contribution from listed private equity, although this was dominated by the roughly 19% gain in Pantheon International.

Within fixed income, government bonds eked out small returns over the month, but it was exposure to corporate credit that provided the strongest returns, including the Hermes Unconstrained Credit Fund and the Merian Corporate Bond. In addition, our flexible bond managers also performed well including the Allianz Strategic Bond and Janus Henderson Strategic Bond Funds.

Investment activity was dominated by general portfolio maintenance. However, we did make a few changes within the equity and fixed income portfolios. Specifically, within the equity component we sold our holding in the Merian Asian Equity Income Fund and reinvested the proceeds into the Fidelity Asia Pacific Opportunities and Fidelity China Consumer Funds.  The rationale being to switch from a quantitatively managed fund into actively managed funds, where we believe a wider dispersion of returns will provide for a greater number of opportunities. Within fixed income, we reduced our exposure to the Ashmore Emerging Market Total Return and Merian Strategic Absolute Return Funds in favour of credit and flexible mandates, including the Allianz Strategic Bond, the Merian Corporate Bond, and Wells Fargo US Investment Grade Funds. The rationale here being a move to a better combination of risk management and yield attraction.

As you would expect in this risk-on environment, the Adventurous portfolio provided the strongest gains, while the Conservative achieved the smallest gains during the month given the lower weighting in equities.

 

Outlook

Considerable uncertainty remains over the trajectory of global growth over coming quarters, and a lot will depend on the extent to which economies can successfully reopen. Massive global fiscal and monetary responses fuelled a strong market rebound in April despite macroeconomic data that showed the huge economic cost of the coronavirus shutdowns.

Analysts have revised down their 2020 earnings estimates, which are now expected to decline by over 15% in the US and Europe. Dividends are also suffering cuts as companies prioritise balance sheet protection over profit distribution.

However, times of uncertainty are precisely when market rallies can be most powerful. Some of the biggest market rises have occurred when markets have been at their most volatile, with sudden items of positive news sparking substantial bounce backs. It is therefore important for investors to remain patient.

Paul Craig

Portfolio Manager

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