Quarter 3 Commentary

23 October 2020

By Mark van Moorsel, Co-Fund Manager DMS Verbatim Portfolio 5 Income Fund

Market Review

In Q3, markets continued to rise, somewhat surprisingly given that COVID cases also increased, with Europe seeing a particularly marked surge in August. Despite this, fewer deaths point to a better understanding of the virus. In general, economic data were positive, with greater momentum seen in regions with fewer restrictions. US consumer spending was surprisingly strong and fiscal support strengthened growth in the euro area and the UK. Tensions between the US and China resurfaced, with threats to ban TikTok from the US over privacy concerns. Equity markets continued to rebound through July and August, with the S&P 500 reaching fresh highs in early September, before retracing. On the fixed income side, gilt yields increased, especially at longer durations, while corporate spreads continued to tighten on continued monetary support. 

DMS Verbatim Portfolio 5 Income Fund Review

Corporate Bond and Equity Markets largely continued their recovery during Q3, though the pace of the acceleration slowed.

Within the worst performers UK Holdings continued to lag, uncertainty surrounding the Brexit vote has resulted in the sector has been an easy one for international investors to avoid. A recent BAML Fund Manager survey placed the UK Sector as even less favoured than Banks or traditional Energy. All of this weighed on Vodafone, L&G, DS Smith and Prudential alongside idiosyncratic challenges for the businesses. Bridgestone (the Japanese Tyre manufacturer) suffered as investors questioned the cyclical nature of the business in the midst of the global recession.

On the positive side, Technology facing companies continued to perform well. TSMC benefitted from a strong demand picture for chips as well as struggles for competitor firm Intel. UPS Performed strongly in light of increased demand for delivery services as we all order from home. Admiral Group bucked the trend for UK Companies in general on the back of results ahead of consensus expectations as customers took time to renew motor insurance through comparison sites. Weyerhaeuser recovered strongly on demand for timber products as locked down homeowners sought to improve their homes and building returned. Investor-AB delivered strong returns as the diversified holding groups underlying companies performed well.

During the quarter, Weyerhaeuser was sold following a period of strong share price performance driven by a rise in the price of timber wood. GlaxoSmithKline Bonds were disposed of during the month on valuation grounds as credit spreads continued to tighten. Cisco, the leading provider of network equipment to service providers and enterprises, with what we believe to be a strong and sustainable dividend of c. 3%.

Market Outlook

Whilst social distancing strategies continue to be modified, economic and market conditions will not return to how they were before. International trade flows and supply chains will have been permanently disrupted in places; balance sheets will be damaged, requiring gradual repair or rights issues; many dividends will be cut and share buybacks will be reduced. Longer term, technology disruption will accelerate; consumer attitudes will be cautious; collectively, governments will be less able to stimulate recovery; weaker economic growth will leave some companies struggling to grow sales and profits; investors will be more aware of ESG factors; affected shares will trade on lower valuation multiples.

For all these reasons, it is a time to remain vigilant and focus on investments that can generate secure and growing cashflows over the long-term. It is the nature of companies to adapt and whilst not all will thrive, our conversations with different management teams bolster our confidence in the longer-term future of most that we own.

Numerous opportunities will be driven by the shift to a more digital world; new automation, climate change mitigation and adaptation, demographic trends and by shifts in consumption patterns in both the emerging and the developed markets. We are re-examining every sub-theme and there may be some changes of emphasis, but the high-level themes will continue to provide a strong underlying investment framework, providing us with the reassurance that the majority of companies in the portfolio have good prospects beyond the current crisis.

The value of investments and any income from them can go down as well as up and is not guaranteed. Your clients could get back less than they originally invested. Past performance is not a guide to future performance. The portfolios' investments are subject to normal fluctuations and other risks inherent when investing in securities. Verbatim Asset Management has taken due care and attention in preparing this document, which is solely for the use of professional advisers. Verbatim cannot be held responsible for any inaccuracies arising out of information detailed within and will not accept liability for any loss arising out of or in connection with its use. The contents of this article should not be construed as advice and is for information only. Individual stock selection should only be performed by suitably qualified advisers.