Adapting and taking stock
In the year after the coronavirus pandemic changed the world, Paul Craig, portfolio manager of the Cirilium Portfolios, looks back at what lessons and considerations can be gleaned from last year’s unprecedented volatility, and how it helps Cirilium to continue its evolution.
As long-term active managers our investment decisions are based on our extensive analysis and modelling expertise, including our experience of managing portfolios through unexpected and unprecedented events.
It is unrealistic to expect long-term investors to manage portfolios on a daily basis in anticipation of the next so-called ‘Black Swan’ event, be it the aftermath of the Global Financial Crisis of 2008-09 or the significant impact created by the coronavirus pandemic.
The very nature of these types of events makes them difficult to predict, but how we adapt to these situations and use the experience to continually improve and evolve our process and portfolios, while staying true to our convictions, is highlighted by our strong track record of outperformance over the longer-term.
As a portfolio manager you are always discovering something new and adapting to change, which means that portfolio management is a constant learning experience, whether that’s celebrating the successes or evaluating the losses.
For example, at the end of 2019, the Cirilium Portfolios were positioned to take advantage of the expected pick-up in the global economy following the macroeconomic slowdown of 2018-2019. This was based on a number of factors, including among others, an improving, or at least less fractious, US-China trade relationship; the de-risking of the UK investment case following the 2019 general election; and signs of a return in corporate spending.
This approach was well rewarded in the final months of 2019 as we saw a broader rally, and it remained an effective strategy as late as mid-February 2020, when markets continued to hit new highs. However, as we all now know, the rapid spread of the global pandemic soon resulted in unprecedented government restrictions that hit economies around the world and led to an outpouring of monetary and fiscal stimulus and increased uncertainty as to what would come next.
Not standing still
Despite being positioned for a different outcome, it is important not to anchor yourselves to decisions based on a different set of circumstances. As active managers we are continually assessing and monitoring the portfolios to position them for the environment, and based on our previous experiences the team were making changes before the crisis began. We then continued to reposition the strategy during the maelstrom of volatility we witnessed a year ago and beyond.
Active managers, despite how it sometimes seems, are never standing still. There are meetings with underlying managers, the undertaking of in-depth research, and monitoring of the economic data and performance of various asset classes and regions. There are numerous inputs being considered on a daily basis that informs our view of how to position the portfolios, and which are sometimes overshadowed by the headline purchases and sales.
However, with the opportunity to take a breath and look back at the scale of the shock to the economy, financial markets and the portfolios, the coronavirus crisis has provided us with some important learning opportunities that we have acted upon to allow the Cirilium Portfolios to continue to evolve to meet your clients’ needs.
An evolutionary process
The key aim has always been to ensure that the portfolios are fit for purpose and meet their objectives but without making knee-jerk reactions and causing catastrophic damage to the long-term relationships and investments that have been the bedrock of our success so far.
Evolution, not revolution, has been our mantra, including gradual adjustments to the asset allocation so that the client experience continues to be as expected, depending on the chosen portfolio.
One of the main adjustments over the past year has been to redefine how we view the different asset classes, particularly as to whether an investment has a greater sensitivity to growth or defensive characteristics, which in turn allows us to better assess the level of risk that they pose to the overall portfolios.
For example, the recent crisis resulted in the discount to net asset value of certain investment trusts to temporarily expand in times of market stress. This experience encouraged us to re-assess this type of investment in the lower-risk portfolios, such as the Cirilium Conservative and Balanced Portfolios, and gradually reduce exposure to investment trusts to half the levels seen at the start of 2020.
We are always mindful of your clients’ expectations and the journey they experience within our portfolios, but at the same time there will always be a risk-reward judgement to be made.
Investing with conviction
As long-term investors we have selected funds and managers in whom we have high levels of conviction, and while we are acutely aware of the impact of short-term market shocks we aim to balance the need to adapt to a rapidly changing environment, with keeping the bigger picture in sight.
Derivatives are a key tool that we have deployed over the past year to help us manage risk in the portfolios without disrupting our important long-term underlying holdings. These temporary positions, used across asset classes, allow us to take a view on the markets to try and protect against potential falls or capture additional market gains without increasing the portfolio turnover, which can impact returns and create additional charges.
That’s not to say we won’t change our managers. Throughout the year we have sought out better opportunities, switching managers where it is in the best interests of the portfolio and also reducing our holdings so that we are concentrated in those funds and managers that we believe can help deliver the desired outcomes for your clients.
This includes reducing the overall exposure across the portfolios to the ‘riskier’ end of the fixed-income market, such as emerging market debt, and high-yield bonds, in favour of corporate investment-grade credit. We have also sought to increase our exposure to more flexible fixed-income strategies, as these ‘go anywhere’ portfolios can be nimble in taking advantage of new opportunities.
This combination of reducing risk through derivatives, updated asset allocation and concentration of holdings into appropriate risk-reward positions with good performance, has meant the lower-risk portfolios in the range are likely to experience a journey even more in-line with our expectations, and those of your clients. The lessons we’ve learnt from our recent experiences means, for example, that the current asset allocation for the Cirilium Conservative Portfolio would now produce a 20% lower drawdown than that experienced in March 2020.
Taking charge of the future
The changes we have made over the last year is just one more positive step in our long-term evolutionary journey. As active managers our decisions can sometimes result in deviations from our peers, however, our track record shows our success at looking at the bigger picture.
In addition, the benefits of our ongoing process of enhancing, reviewing and reconsidering the Cirilium Portfolios can also be felt in the short-term, as highlighted by the continued improvement in performance throughout 2020.
Investors understand that there will always be dips in performance, but that shouldn’t, and will not, stop us from taking active views and sticking to our convictions. Instead, we make use of all the tools at our disposal to help maintain the risk at levels appropriate to the portfolios.
These are volatile times, but instead of being reactive and short-term, we continue to aim for long-term consistency and structure, and we are always seeking out new and better ways to evolve the portfolios to better deliver on your clients’ expectations.
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