Darius McDermott, investment adviser to the VT Chelsea Managed Fund range, assesses the current investment environment and how the fund range is being managed with the prevailing pressures and uncertainties in mind.
There was a point when the horrors of 2022 would likely continue throughout last year. In the mid-part of 2023 there were genuine expectations that UK interest rates could peak at 6 per cent as the Bank of England (BoE) sought to tackle stubbornly high levels of inflation.
But things have hopefully started to change for the better. In the third quarter, the BoE decided to bring an end to 14 consecutive rate rises, dating back to December 2021. The US also left rates unchanged giving us the first bit of solid evidence we may be near the end of the rate-rising cycle. Inflation has also started to come down and now stands at a more palatable 3.9 per cent in November 2023* – although it is still above the 2 per cent target set by the BoE.
In addition to this, labour markets are also starting to show signs of weakness. All of this is beginning to take the pressure off central banks – and the potential for rate cuts in 2024 is becoming a reality. There is an element of time pressure within this scenario – as policymakers in the UK look to avoid recession. For example, over one million UK mortgage holders could see their disposable income fall by 20 per cent because of rising rates, according to the Institute for Fiscal Studies (IFS)**.
Nevertheless, 2023 ended with a flourish with global equity markets returning 17 per cent to investors***. But a word of warning – the economy is still in flux and there remain plenty of risks – not least that the breakneck speed at which central banks introduced policy tightening means it may not have been felt by the global economy just yet. There is often a lag between policy tightening and the economic impact.
Positioning of the funds
As a multi-asset manager we are primed to offer as much diversification as possible, but that has been particularly true in 2023. We naturally have exposure across asset classes and geographies but, importantly, also across market-cap and investment style.
We continue to have a bias towards growth and the other theme we have across all of the funds is exposure to longer duration assets – across equities, bonds and investment trusts. That means the funds will benefit should we see a cut in rates.
From the equities side, these are quality growth funds, which are compounders of returns. Names like T. Rowe Price Global Focused Growth Equity, Rathbone Global Opportunities, Guinness Global Income and WS Evenlode Global Equity and Global Income.
The investment trust exposure comes through renewables, infrastructure and selective property – many of which I’ve talked about in this column before. Our fixed income exposure has been fairly high throughout 2023 – duration has been a big issue within this specific asset class (shorter duration bonds were the sensible place to be at the start of 2023), but we have largely delegated this decision to our fixed income managers.
Selectively adding opportunities
There are two main opportunities which have stood out in 2023, and they have both carried on into the final quarter of the year.
The first of these would be the performance of fixed income as an asset class amid a rising rate environment. However, this headwind is starting to turn into a tailwind with inflation falling faster than expected and, importantly, a fall in government bond yields. This has lowered rate expectations and resulted in a bounce back for the asset class.
The second opportunity comes through our exposure to investment trusts – these have been hit especially hard as investors have fled for the safety of government bonds. The discount on the average investment company remained in double figures through the whole of 2023, the only year this has happened since the Global Financial Crisis. The average investment company discount started the year at 11.7 per cent and hit a post-2008 trough of 16.9 per cent at the end of October, before recovering to 9 per cent****.
We heavily reduced our exposure to investment trusts early last year, but have started to rebuild those positions throughout 2023 because of the incredible value on offer. In the final quarter we’ve been adding to names like GCP Infrastructure, Target Healthcare (nursing homes) and Supermarket Income REIT to name a few.
Outlook
The outlook is far from clear. Rate cuts should help riskier assets, but the geopolitical threats are prominent, as is the continued slowdown in growth.
I would argue we are just as wary of markets as we were 12 months ago. There does appear to be some light at the end of the tunnel, but plenty of dangers remain. The need for balance and diversification remains as strong as ever.
*Source: Office for National Statistics, November 2023
**Source: Institute for Fiscal Studies, June 2023
***Source: FE Analytics, MSCI World, figures in pounds sterling, 30 December 2022 to 29 December 2023
****Source: Association of Investment Companies, December 2023
Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Darius’s views are his own and do not constitute financial advice.
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