Deep Dive – July 2024

Scores on the doors

As advertised, I thought it would be useful to take a look at the first half of 2024 and, after the UK election results which are the most significant ‘macro’ event for UK investors at this time, put out some ideas about asset allocation, where to re-invest those hefty tech fund gains and in general assist readers who are undertaking regular portfolio reviews, or maybe are even still building up their asset base from cash.

The elections in France have also been the subject of much media interest, but I am not sure the result will have much impact on European markets, and as I write this article, it is not really clear how a new French government will be formed. The significance is perhaps more about confidence in the Euro, but I never forget an old, only half jesting, comment that the Euro is only the New Deutschmark!

Some data to kick off

This table covers as many asset class categorisations as I think are relevant to my subscribers and in offering benchmark return data, I have not resticted example returns to a published market index or tracker ETFs, but in many cases shown an actual fund that I know is owned by many readers and would be considered a good market example, widely owned by many retail investors.

If you are interested in only what the main global indices would have returned, your data is in fact encapsulated in a ready made mix in the Vanguard Lifestrategy fund information supplied.

I have also this time added the results from the AFI model portfolios, which are maintained by a panel of the larger IFA/wealth manager groups in conjunction with Financial Express (the company behind Trustnet), the FTSE benchmarks that discretionary fund managers ought to be supplying to clients and also my own GIA account results. I have even left space for you put in yours, which you can get from a portfolio X-Ray!

Asset Category	Example Fund	2024 return to 30/6/24
Commodities	Wisdom Tree Physical Gold ETF	14.84%
Fixed Income	Rathbone Ethical Bond	2.6%
	M&G Strategic Bond	1.0%
Global Unconstrained	Fundsmith Equity	9.1%
	Blue Whale Growth	23%
Global Asset Allocated	Vanguard Lifestrategy 100	12.1%
	Vanguard Life Strategy 60	6.6%
European Growth	Man GLG Continental European	14%
North America	L&G US Index Fund	17.65%
Asia Pacific Growth	Fidelity Asian	12.8%
Asia Pacific Equity Income	Jupiter Asian Income	13.77%
UK Mixed Size	Fidelity Special Situations	13%
UK Small Cap	Artemis UK Smaller Companies	15.1%
Global ESG Constrained	M&G Global Sustain Paris Algnd GBP I Acc	10.8%
Multi Asset Adviser Selected	AFI Aggressive	9.1%
(returns from Trustnet to 5/7/24)	AFI Balanced	7.2%
	AFI Cautious	5.6%
Private Investor Benchmark	FTSE UK Private Investor Balanced	8.3%
Mark Potter GIA Portfolio	GIA – balanced, 70% equity	8.59%
YOUR PORTFOLIOS	SIPP	?
	GIA	?

A short list of observations

Firstly, I must remind readers that we are looking at 6 months data to see what it tells it about recent global investor sentiment and in the case of the asset allocated portfolios (Vanguard/AFI/FTSE Index/MDP) how the selected asset mix performed. We are NOT seeking to extrapolate future performance or rank funds and the funds chosen are most certainly not intended to be recommendations.

• The most obvious observation is that this was a period when equities led the way. The huge enthusiasm for AI and businesses that will benefit if the assumed potential is realised drove a handful of shares sky high and they were mainly listed in the US and feature heavily in the thematic funds and the asset mixes with a big chunk of US exposure listed above.
• Delays in expected interest rate cuts meant that fixed income funds performed no better than cash but the potential gains from bonds are only deferred a few months. Gold soared, most likely due to central bank buying, especially from China. As any balanced portfolio is highly likely to have had some fixed income exposure since the interest rate rises cycle peaked, that will have been a brake on returns, but probably only in the short term.
• In Asia, the news coming out of China is almost continuously bad (although the Chinese government buying shares in the market must be a positive for valuations) and the runaway India market tested new highs, although volatility there is beginning to look worrying with what might be a tremor ahead of an earthquake happening in mid June. China’s bad news is in a way India’s good news and India being able to buy Russian energy as huge discounts must also be a windfall that will not last forever, Of course, some great technology companies are also listed in Asia.
• One of my all time favourite holdings, which has had periods of weak performance as all highly focused funds do, the Blue Whale Growth fund, benefited hugely from the bias that the manager does not like being called ‘tech’ but ‘digital economy’. That must be seen as a possible ‘one off’ but nice if you own the fund, and by the way, advisers still do not widely use it for their clients.
• Investing in a decent ESG fund delivered returns that were in no way embarrassing, in fact outperforming all AFI Indices over the period. Only the Vanguard Lifestrategy 100 did better of the portfolio type results shown here, and maybe your own portfolio?!
• My portfolio performed slightly less well than the AFI Aggressive portfolio which is a benchmark I would hope to beat, but I was taking profits over the period and therefore the base for my X-Ray, from which the returns are taken had lower weightings in some very successful holdings, simply because I had sold units to take cash. I had about 7% cash in the asset mix at the month end. I am more than satisfied with my result.
• That last explantion is a good example of why one has to view retrospective performance measurement with care if there has been portfolio trading – the withdrawal of profits will mean you have done well and got the money, but the remaining portfolio is bereft of some of the best performing funds! Bear that in mind when inserting your own data and also remember that the individual funds that have done the best will almost always have the highest levels of volatility. For most investors, returns above the AFI Balanced portfolio, repeated regularly, would demonstrate some serious skill as a portfolio builder and manager.
• As we have just had election results in two of the world’s largest economies and both signify political change, 2024 is going to definitely be a game of 2 halves when it comes to asset allocation pointers, with some judgments required about the UK and Europe, both in terms of potential currency movements and global investor sentiment. That is what I will next discuss.

What might now be different?

Main points

Here is a sort of ‘executive summary’ of my own thinking;

• The US market is expensive, especially those elements that have been directly boosted by enthusiasm for AI. like semiconductor makers
• European and Asia Pacific/Emerging Markets are cheaper. Within Europe (the wider Europe measured by international investors – EMEA) the UK is all of sudden the safe haven market with a currency supported by higher interest rates..
• Within geographical regions, the recently out of fashion and therefore better value sectors are consumer cyclical and utilities, with financials and consumer defensives still looking to be possible ‘buys.
• Qualifiers to the above, based on Morningstar data for the first half of 2024 are that the luxury goods segment of consumer stocks has moved to fully valued on their measures and that although tech stocks are overvalued, they are not massively over-expensive.
• The Indian market looks hugely overdue a correction to me and Mr Modi’s cosying up to Russia may have unpredictable effects. India has more of less so far avoided the inconvenience of Western sanctions and in any case its economy is less dependant on exports than China’s, but when a market has delivered 25% or so per annum compound returns for 3 years in a row, the slightest justification for a sell off will often result in a rout.
• Fixed income markets gave back some of the gains from a year or so ago when it became clear that central banks were not going to cut rates as fast as expected, although most bond funds have made money over 12 months (if not over 6 months). The gains that will come from falling rates are a near certainty and remain in effect, latent. On a risk/reward basis, buying fixed income at the moment looks to me like one of the easiest investment calls for a near certain decent if not spactacular return that I have ever had to make. Not to say that returns are guaranteed, of course.

Some supporting commentary

Within markets, there are some obvious new opportunities as significant macro changes work through. For example, with interest rates at last starting to actually come down and a new Labour goverment comitted to a serious house building programme, house builders, businesses that feature well in the UK indices, are likely beneficiaries.

Another reported change is that manufactures and suppliers have been called out for ‘greedflation’ and in reality some input costs have fallen, so there is scope for retail prices to stabilise and even for discounting. Morningstar report that in Europe ‘own brand’ products are taking an ever increasing share of the shopper’s basket and that ought to be good for family budgets.

Although interest rates are now actually falling in Europe and will begin to fall in the US and UK, banks and other financial services suppliers have benefited from and will continue to benefit from the higher margins they have compared to when interest rates were near zero.

Utility stocks have underperformed for a long time, quite likely because their business model makes them a sort of bond substitute and as we well know, high interest rates are not good news for bonds. In Europe, we would have to wait and see how France is going to be governed before going heavily into their utilities (who are big European players), given that a really left wing administration might be very negative for shareholders.

On the topic of energy related stocks, in the UK, Labour’s energy policy seems reasonably balanced and in fact probably positive for the wind power generation industry. It remains to be seen what the impact of the proposed GBE green energy business will be. Perhaps more interesting is that OFWAT will this week publish a draft of its next 5-year plan that commences in 2025. If you are investing in green/eco funds, make sure you look out for news on that. My intuition is that the potential hazards for investors in France, combined with the relative clarity of new policy in the UK, will be good news for the UK clean energy sector of the stock market and even some of the traditional names like SSE, who are more invested into wind energy than many people are aware.

Finally on energy, an interesting aside is that the enthusiasm for AI is already creating a significant increase in demand for electricity to power the massive servers that process the large language models and so on. That is bad in the sense that it might increase fossil fuel burning, but if it increases demand for green energy that is an obvious tail wind for that sector and makes it a way of indirectly investing in AI using the ‘picks and shovels’ methodology. In essence it matters not if AI is of much use if you are just making money out the electricity consumption that is a necessary element of finding out!

How to apply these trends to portfolio validation/modification?

Concluding that maybe there is a case for investing at this time in SSE or Tesco, or taking profits from the tech rich North American biased elements of your portfolio and allocating the money to the UK on the basis of desk-based research is one thing, but implementing that judgement call is not necessarily simple.

For example, if you researched the UK market for funds without too much thought, you might end up with something that looks contrarian (ish) but is actually heavily biased to the FTSE 100, obviously that part of the market with the greatest capitalisation, dominated by financial stocks (20%) and with a large slug of energy companies (13%), which may not be what you wanted, or at least not what you want ALL the time.

In my opinion, it would make more sense to look for funds where the manager can work without market capitalisation restraints, no particular bias to growth or value and where there is evidence that the fund is already positioned to take advantage of the facts outlined above, because a good fund manager ought to be investing on the basis of what is likely to happen, not what has just happened (although the latter may be a successful call that will work through for a while!).

Here is an up to date top 10 holdings list for a fund that has a great track record in doing exactly what I have attempted to condense into a few sentences.

1	Imperial Brands PLC	–	United Kingdom	4.05
2	DCC PLC	–	United Kingdom	3.28
3	Roche Holding AG	–	Switzerland	3.20
4	CFD on AIB Group PLC	–	Ireland	3.03
5	Aviva PLC	–	United Kingdom	2.91
6	Standard Chartered PLC	–	United Kingdom	2.79
7	MITIE Group PLC	–	United Kingdom	2.74
8	Reckitt Benckiser Group PLC	–	United Kingdom	2.67
9	Cairn Homes PLC	–	Ireland	2.50
10	Barclays PLC	–	United Kingdom	2.34

The reason I selected it was because I anticipated it would own the sort of stocks that the latest research as explored above suggests are the right ones to own own.

There will be other funds that will have the same current biases that look right, so if you already own them, that’s great and maybe you don’t need to do much to react to recent macro changes. If not, you can direct your research into finding funds like this in both the UK and Europe.

To conclude, I should remind investors that long term asset allocation targets are there to give your portfolio the diversity needed to manage risk at the level you personally are comfortable with. You know what your objectives are (I hope!) and the portfolio is like a carefully designed ocean liner heading towards your port of choice, delivering whatever level of sustenance you require on the way.

Major course alterations are usually only necessary when unforeseen hazards are come upon or newly predicted. Tactical changes of course are best seen as ways of shortening the journey time, improving efficiency and minimising future risk, even taking in an extra port after an unexpected burst of speed.

I see a generally benign climate for investors at present with equity markets other than US growth stocks looking interesting. India looks risky to me and that will require thinking about when looking at Asia Pacific exposure. Geo-political risks abound, but mostly are already ‘in the market’. Black swans may well be out there, so the insurance policies of diversification and cash reserves need maintaining, as ever. Nonetheless, a little re-allocation of profits or cash to UK and European markets might enhance returns over the next 2 or 3 years.