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Creation Monthly - April 2020

UK: Suitable for retail investors

  • April was a good month for the Creation portfolios as both equity and bond markets rallied.
  • Manager selection within our equity holdings was a strong driver of returns.
  • Credit plays an important role and we have a high exposure to investment grade bonds

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 the coronavirus, while the UK 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 shrunk 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. But 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.

 

Performance review

April was overall a good month for the Creation portfolios following a disappointing February and March. Equity markets rallied following the sharp market falls witnessed the previous month, following the large amounts of stimulus released by governments around the world including the US and UK to help offset some of the impact of the coronavirus lockdown measures on their economies. In addition, investment grade bonds (those issued by financially robust companies) also rallied during the month, helped by central bank actions in the UK and US to increase bond purchases to include both government and corporate bonds.

Returns were reasonably strong for the portfolios, driven by the equity allocation with manager selection proving to be a positive. This was particularly the case for some of those managers that we increased our exposure to during the market volatility in March, including the Quilter Investors Equity 1 Fund, managed by Merian Global Investors, and the Quilter Investors UK Equity Opportunities Fund, managed by Artemis.   

Within our fixed income allocation, credit remains an important part of the portfolio and we retain a reasonably high exposure to investment grade bonds, while our exposure to high-yield bonds (those issued by slightly weaker companies) plays a smaller role in the portfolios. High-yield bonds have been the one area of the markets that hasn’t really rallied during the recovery as there remain some concerns about the path of those underlying businesses and the potential prospects for default, where they can’t afford to pay the yield on the bonds.

In terms of portfolio activity, during the month we gradually increased our equity weighting, through the use of equity option contracts – an agreement where you have the ‘option’ to buy or sell an asset at a set date and price – and also through equity future contracts, which are agreements to buy or sell an asset at a set price at a future date.  We also implemented a bond option contract, which will allow us to benefit should government bond prices increase. Elsewhere, we reduced our holding in the Merian CoCos Fund to take profit from recent strong performance, and we removed our holding in the Blackrock Natural Resources Growth and Income Fund due to the uncertain outlook for the natural resources space, due to the lower growth outlook.

 

Outlook

The market rally in April has lightened the mood somewhat and we have seen a reduction in market volatility during the month. We remain cautious on the outlook for the global economy, as there remains a great deal of uncertainty as to the timing and nature of how lockdown measures will be eased. However, economic data was improving before the coronavirus outbreak took hold, and while there is potential for further unexpected market moves – both higher and lower – this will create a number of investment opportunities that we will look to take advantage of as appropriate.

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

Sacha Chorley

Portfolio Manager

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