Over the week, we have had a few questions from clients asking why our portfolios have not continued the fantastic returns we had in 2020 despite the indices YTD being positive. As such, we thought we would shake it up a bit this week and spend time reviewing and answering that specific question.
Model Portfolios, Indices & Benchmarks
Before we explain what is going on, we can illustrate the point below by looking at what the model portfolios and indices have done YTD, and observe the underperformance against indices and comparable performance against the benchmarks. This tells you that while we have underperformed equity indices (that are not that relevant, but it is what everyone looks at), we have achieved comparable performance to our peers. That is good and bad. Please note when reviewing, the lower the model number, the less we have invested directly in equities so for OBI 3 for example, the performance of the indices is largely irrelevant as this portfolio is more impacted by the performance of non-equity assets that are not detailed. In contrast, OBI Active 7 has 75% invested in Equities and these are diversified globally, and why therefore has OBI 7 not delivered significant equity upside in 2021 so far, when the indices have risen in all areas bar China.
Performance Against the Indices
When we look at the performance of the portfolios against the global indices, the underperformance can be explained by the fact that the models are not invested in indices and are not 100% equity, and we therefore have an interaction between the type of equities we are invested in and non-equity assets in the model portfolio that have in the last few months declined. As far as equities go, and where we are invested, given the current positioning within the cycle, while the indices tend to focus on larger, mega cap growth orientated companies, our portfolios tend to focus on smaller, growth orientated companies (with attractive valuations relative to their mega cap friends) which are better placed to perform well on the recovery expected as the global economy reopens.
As there is a perception in the last six weeks that the reopening of the global economy has been delayed, some of our positions have not rallied as much as the indices. That means as we observe those positions today, they are not problematic, they are just undervalued. When the confidence in the global economy reopening comes back (which could be tomorrow, in a week or a few months), our positions will rally and outperform the mega caps again as we did at the end of last year. Additionally, the sustainable asset exposure has been a detractor over the month against the large cap, traditional indices, as sustainable assets which have performed extremely strongly in the second half of 2020 experienced some profit taking. The Asian exposure also added to this underperformance versus the wider indices as there is concern around fiscal tightening in China as their markets normalise. In summary therefore, our equity exposure that remains the same as it was in Q4 2020 has underperformed the indices in Q1 2021, which is quite normal after such a rapid period of expansion and fears over the sustainability and speed of the global economy reopening.
Another and equally valid point to note is the non-equity exposure has had a negative period due to debt instruments normalising in price YTD as yields have increased on the back of the global economy showing very strong signs of a recovery. The strength of the recovery which is fantastic news has raised fears over inflation and interest rates rising and those fears have caused non equity assets to temporarily fall in value. These assets have acted as drag on the positive equity performance and therefore pulled the performance of the equity back, so returns are YTD are even lower when compared to the indices.
Overall, trying to map the model against any index is hard and never a perfect science, but the key theme is that we understand what is happening and we do not see anything about where we are positioned today as a problem. It is normal to have a period of reflection after such a strong rally. All of the assets that contributed to the outstanding performance in 2021 are still in the portfolios and although we may want to make a few changes as we transition through 2021, we are confident that our underlying fund managers are best placed to continue to generate strong returns as we transition through recession to recovery and then finally expansion.
Performance Against the Benchmark
Looking at the performance against the benchmarks, we can see that the portfolios have underperformed slightly over the month but are still comparable on the YTD and remain ahead over six months. Looking at the 12 month figure, the benchmarks appear to have outperformed, however this is because the benchmarks fell further at the start of 2020 and therefore had a bigger bounce as they rode the full roller coaster, so the 12 month picture distorts the view. If we look at the last column which looks at the performance since Jan 1st 2020, this shows the whole story, and you can see how we have outperformed over the whole volatile period significantly across the board.
Therefore, in summary, over the short term (YTD) what OCM and you as a client are experiencing is not something specific to us, it is something everyone that runs model portfolios is experiencing, but rest assured we continue to evaluate, assess, and watch, but today we do not have any concerns and continue to be delighted with our teams performance since Jan 2020 and how we have managed the pandemic and continue to do so.
Key Events We Are Watching This Week:
- Friday: UK Retail Sales for February, US Consumer Confidence data.
- Monday: UK Housing Market data for February
For anyone who wants further data to substantiate the position please review the attached Global Economic Update document.
This Day in History
On this day in 1807, the British Parliament abolished the slave trade throughout the British Empire. The bill to outlaw the practice passed through the House with an overwhelming vote of 283 votes to 16, before being signed into law by King George III.
Have a great week,
Jason, Gina & Ben
