Happy New Year to you and your family.
In this first blog of 2021 we’ll be looking at how our client portfolios performed in 2020.
Last year was a scary year for a multitude of reasons and when it comes to the performance of your portfolio, you could be forgiven for steeling yourself for bad news. However, in reality you may be pleasantly surprised. Our investment portfolios all delivered positive returns over the year and did an exceptional job, despite some very tough trading conditions and one of the shortest and sharpest market crashes on record.
This blog is a little longer than most as I wanted to go into detail and give you a refresher on how investment portfolios work. For those of you who already have a good grasp of this and just want to cut to the chase, you’ll find a chart summarising last year’s performance nearer the bottom. For the rest of you, if you’d like to reacquaint yourself with the key fundamentals of how your investments work, read on!
So, let’s start with a refresher on how our investment service works. Tatton Asset Management are our appointed investment partners. They have built and maintain a set of six risk rated portfolios which we make available to our clients. Part of our role as financial planners is to ensure we invest your money into the portfolio that is best-suited to your goals, timelines and feelings about risk. We are in regular communication with Tatton and monitor the performance and positioning of the portfolios on an ongoing basis, to ensure they are performing as we expect. Every three years we carry out a root and branch review of the market, assessing Tatton versus their competitors in areas such as performance, charges, investment philosophy and technology to ensure that – in our view – they remain the best partner for our business and our clients.
When it comes to investing we talk a lot about risk and return. Money kept in the bank might be low risk and secure, but returns over the past decade have been paltry and once inflation is taken into account, cash deposits actually lose value in real terms over time.
Investing money gives the potential for greater returns, but when you take money out of the bank and put it into an investment portfolio, you have to accept that your money is going to fluctuate, i.e. fall as well as rise in value. This brings the risk that if you needed to access the investment at a bad time, you might get back less than you invest. This is the risk you take in order to achieve a return better than you get on your cash savings.
The risk and return element relates to what securities an investment portfolio holds. A portfolio that has a high exposure to stock markets is likely to deliver a higher return overall longer term. However, you’ll have to cope with a bumpy ride along the way. When conditions are good, you’ll likely see high returns, However, it can also fluctuate in value a lot over short time periods, including short sharp drops when markets crash. This type of portfolio has a high risk and return profile.
A portfolio with a lower exposure to stock markets, that holds more money in safer assets such as fixed interest securities and cash, fluctuates less in value. It is better protected from falls in tough market conditions, but will deliver more modest returns longer term and won’t benefit so much in good trading conditions. This is what we would call a lower risk and return profile.
We offer six different risk rated portfolios, each of which has it’s own risk and return profile. They range from defensive, cautious, balanced, active, aggressive and global equity. The chart below shows how each one is made up. The green part of the bar is stock market exposure (a.k.a. equities). The blue, yellow and red parts are safer assets, such as corporate bonds, government bonds and cash deposits.
Our job as financial planners is to ensure that you’re in the right portfolio at the right time. Someone who has retired and needs stability might be invested in the cautious portfolio, whilst someone with a long time horizon, such as a younger pension investor, might be in the aggressive portfolio. So how did these different portfolios behave in 2020?
Whilst you could be forgiven for steeling yourself for bad news, portfolio returns for 2020 were actually positive for each of our Tatton portfolios. The chart above shows what your experience of 2020 would have been, depending on which portfolio you were invested in. Because of the magnitude of the stock market crash in February and March, it was a bumpy ride for everyone, even those in the cautious and defensive portfolios. All of you will have received ‘market drop’ letters around that time, which are triggered when a portfolio falls by more than 10% in a three month period.
However, as government stimulus measures kicked in and a vaccine homed into view, portfolios recovered much of their losses quite quickly, boosting returns and giving a positive performance overall. We need to deduct around 0.75% from the stated return as the software doesn’t account for adviser and platform charges, but this means that even if you were in the lowest performing portfolio, you still made over 3% over the year. So what can we take from these numbers?
1. Keep Calm and Carry On
When a market crash situation strikes, keep your cool. When you hold a globally diversified portfolio, losses are invariably temporary and some of the best investment returns often follow a market crash. We will have already ensured that you are invested in the right portfolio for your goals and timelines before the storm hit, so relax, be patient and let the situation unfold. Speculators may be losing their heads as they try to dive in and out of the market crystallising losses, but for long term investors like us, patience is rewarded and ups and downs are all part of the plan.
2. Buy While Stocks Last
If you have some spare cash when a crash strikes, consider topping up your investments or pension. It might seem like a mad thing to do when the media is proclaiming the apocalypse and negative investment news abounds. However, for a long term investor, a market crash is simply a sale event when you can buy more of the things you want, at cut down prices, if you have the spare capital to do so.
3. Disciplined Savers Hit Pay Dirt
For those of you who are yet to retire and are making regular savings into pensions and investments, a short term market crash can actually be quite convenient. Each month that markets remain depressed, your regular contributions buy more cheap securities. This helps your fund recover sharply when the storm passes, potentially delivering better returns overall.
4. Risk vs Reward Meets Expectations (almost)
Whilst all portfolios delivered growth, in most cases the more cautious portfolios performed best. Twelve months is a very short time period in investing however. The ability of the lower risk portfolios to protect on the downside during February and March, led to better returns overall during this period; albeit not by much. The outlier was the Global Equity portfolio, which bucked the trend completely, delivering huge outperformance. This was partly due to it’s 100% equity exposure and partly due to the unfettered nature of the portfolio, which allowed the managers more freedom to invest in certain areas. Their larger allocation to the US stock market, whilst potentially increasing risk, paid off overall.
So in summary, we’re pleased with the performance of client portfolios during 2020. Despite a year of unprecedented uncertainty and tough trading conditions, we saw positive growth across the board. The Coronavirus tale is still in the telling and there will no doubt be more twists and turns before normality returns, which could mean more spikes in volatility. However, you can rest assured that your money is in safe hands and invested in a way that is tailored to your circumstances.
As we enter the year ahead we are working on a new project that has the potential to reduce ongoing investment charges without any expected drop in performance. Once this is in place, it should mean that on average our total ongoing investment charges will be around 50% of those of many of our competitors. We’ll be releasing a future bulletin to tell you more, whilst giving a detailed explanation at your next annual review. In the meantime we are continually seeking ways to maximise performance and minimise costs.
If you’d like to discuss the contents of this bulletin please feel free to get in touch, otherwise I look forward to catching up in due course.
