Q4 was a very strong quarter for equity markets globally as the announcement from Pfizer on 9th November that their vaccine was effective against COVID-19 triggered a sharp re-rating of stocks around the globe.
There were a number of notable themes worthy of discussion.
The vaccine announcement provided much needed ‘light at the end of the tunnel’, enabling the world to at last begin to contemplate an end to the pandemic and a return to ‘normality’. This triggered both an overall upwards re-rating of stock markets and a large reversal of the market trends that had previously been present during the year.
Chart 1 shows the extent of the outperformance of more cyclical, ‘value’ orientated sectors, such as banking, travel and leisure and commodities since the Pfizer announcement.
Chart 2 illustrates the reversal in performance, showing the outperformance of a basket of ‘stay at home’ beneficiaries such as technology businesses such as those that facilitate remote working and food delivery, between February and November. Since the vaccine announcement, this trend has reversed sharply as discussed.
Past Performance is not a guide to future performance and may not be repeated.
In the Trust, positive performance effects largely came from those companies expected to be strong beneficiaries of the anticipated economic recovery such as the UK’s market leading ten pin bowling alley operator Hollywood Bowl and Premier Inn owner Whitbread.
The largest detractors to performance included some of our recent largest positive contributors such as retailer Pets At Home. Our underweight positioning in the banking and oil & gas sectors was also a drag on performance as both sectors rallied on the positive vaccine news.
The fund has exposure to a blend of these pandemic ’winners’ such as Pets at Home, which is set to benefit from a structural shift in consumer behaviour. We also hold a number of pandemic ‘losers’ such as Whitbread, where we see significant share price upside in the event of an economic recovery/return to ‘normality’. We see potential for these market leading businesses to gain market share in the medium term as weaker competitors under financial strain may exit the market.
The resolution of these geopolitical uncertainties in the period also helped sentiment towards equities and risk appetite more broadly. The UK and European Union agreeing terms of a trade deal averted a potentially damaging ‘no deal’ scenario following the expiration of a standstill/transition arrangement at the end of 2020. This provided a boost to UK equities in particular, with domestically-focused areas of the market outperforming.
Brexit risks have been well aired over the past four years and to us appear well discounted in valuations. This valuation appeal of quoted UK companies continues to attract private equity interest with several further approaches for businesses being made in this quarter (RSA, Signature Aviation, Elementis, McCarthy & Stone and Calisen) and we would expect this corporate activity to continue into 2021.
On this note, in the portfolio security services firm G4S continued its strong performance as it received competing bids from the Canadian security group, GardaWorld, and from US firm Allied Universal. The G4S board recommended the Allied Universal approach and we await further developments. We had significantly increased our position size during share price weakness earlier in the year. During the period we pared our holding back as the shares are currently trading above the recommended Allied Universal offer price of 245p.
The portfolio consists of a blend of attractively positioned and valued domestic stocks (Tesco, Whitbread and Hollywood Bowl, and financials Assura, Unite Student Property, Legal & General and M&G), and international UK companies (industrials such as Johnson Matthey, Bunzl, Bae Systems, luxury goods producer Burberry, education publisher Pearson, insurer Prudential and alternatives asset manager Intermediate Capital). The portfolio also has a number of stock positions set to benefit from increased spend on infrastructure globally such as mining companies Anglo American and Rio Tinto, construction company Balfour Beatty, and infrastructure investor and developer John Laing Group.
The impact of the Covid pandemic has had a greater negative effect than that of the Global Financial Crisis on UK dividends as two thirds of companies cut or cancelled dividends at some point during the year.
With an economic recovery emerging during 2021 as vaccination rollout covers the more vulnerable in society, allowing the lifting of restrictions and the resumption of more normal life, companies are likely to have greater confidence to reinstate guidance, resume investment activities and make dividend payments.
We are seeing signs of this already, with 60 companies having already reinstated payments. In the Trust we have benefitted from reinstatements at BAE Systems, QinetiQ, Bunzl, Direct Line and Johnson Matthey.
At the overall Fund level, income has been less severely impacted by the pandemic than the market as a whole. In employing a barbell approach to income, we look at both yield today and growth in the future. Concentrating on the greatest dividend payers alone can leave a strategy more vulnerable to prominent income stocks cutting dividends.
While it would appear that the worst is over, the latest lockdown in the UK has somewhat subdued the outlook for UK dividends for 2021. In terms of the best-case scenario, Link Asset Services forecast an increase of 8.1% for underlying dividends (to £66bn) in 2021. The worst case being a fall by 0.6% to £60.7bn.
|Q1/2016 - Q4/2016||Q1/2017 - Q4/2017||Q1/2018 - Q4/2018||Q1/2019 - Q4/2019||Q1/2020 - Q4/2020|
|Net Asset Value||11.7||12.6||-11.8||23.3||-9.5|
|FTSE All Share Total||16.8||13.1||-9.5||19.2||-9.8|
Source: Morningstar, net income reinvested, net of ongoing charges and portfolio costs and where applicable, performance fees, in GBP.
The value of investments and the income from them may go down as well as up and investors may not get back the amount originally invested. Past performance is not a guide to future performance and may not be repeated.
Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amount originally invested.
Companies that invest in a smaller number of stocks carry more risk than funds spread across a larger number of companies.
The Company will invest solely in the companies of one country or region. This can carry more risk than investments spread over a number of countries or regions.
As a result of the fees and finance costs being charged partially to capital, the distributable income of the Company may be higher, but the capital value of the Company may be eroded.
The Company may borrow money to invest in further investments, this is known as gearing. Gearing will increase returns if the value of the investments purchased increase in value by more than the cost of borrowing, or reduce returns if they fail to do so.