Verbatim Fund Oversight and the Coronavirus Crisis

02 June 2020

Peter Hugh Smith, Deputy Chairperson, Verbatim Independent Investment Committee We are living through very challenging times which were unforeseeable only months ago. As the pandemic spread in February markets started to fall with the FTSE 100 reaching an intraday low of 4,898 and a closing low of 4,993.89 on 23rd March. Markets have since then recovered some of their losses though volatility remains high. We won’t know the depth or the length of the global recession resulting from measures to tackle the virus, though the Bank of England is forecasting GDP will fall 14% for the whole of 2020, the sharpest annual contraction since 1706.

The DMS Verbatim Growth Portfolio Funds were launched 10 years ago to help advisors consistently meet their clients’ expectations through a range of investment solutions that can be utilised to implement a recommended financial plan. Today the range has expanded from the original riskmanaged multi-asset funds to also include the DMS Verbatim Multi-Index Funds and a Managed Model Portfolio Service. All the Verbatim investment solutions are designed as all-weather solutions that can navigate all market conditions, whether expected or not.

The Verbatim investment solutions are monitored by an Independent Investment Committee that is mandated to monitor how Verbatims’ investment philosophy is implemented and to provide guidance to Verbatim on its ongoing evolution. In addition, during times of market dislocation the Investment Committee provides an additional level of challenge to the managers of the solutions. Since the Coronavirus crisis broke in March the Committee has been meeting, virtually of course, every two weeks to receive reports and to discuss the progress of the funds. 

One area that the Committee has discussed is the ongoing Strategic Asset Allocation adopted by the funds. The asset allocations themselves are a central component of SimplyBiz’s end to end advice system Centra, utilising input from Hymans Roberston using long term capital market assumptions.

The Investment Committee has questioned if these asset allocations remain valid given recent events and will continue to raise questions as events unfold in coming months. One particular concern has been around bond holdings as many would argue that bond prices and yields are being controlled by central banks and governments rather than markets and there remains a risk that bonds may not provide the level of diversification or income that has been provided historically. Furthermore, the credit risk of UK corporate bonds, a material component of the Centra strategic asset allocation, needs careful monitoring given the damage to many companies’ balance sheets. The video in the link below gives an insight into the ongoing monitoring of the strategic asset allocation.

Income is also a concern, and the Investment Committee has discussed the DMS Verbatim Portfolio 5 Income Fund that sources a proportion of its target yield of 3.75% from company dividends. To date we have seen a large number of UK and global companies cut or pass on their dividends as a result of measure to combat COVID-19. This may be a temporary issue with dividends returning to 2019 levels in subsequent years, or potentially UK dividends may be reset to levels more normal in other markets making the 3.75% target income yield difficult and unlikely. With bonds, historically the alternative source of income also yielding very low rates, it may be very challenging for Sarasin & Partners, the appointed fund managers of this fund, to meet the income target within the prescribed risk profile. The committee will continue to monitor the fund and make recommendations to Verbatim if necessary.

The Investment Committee also monitors the financial strength of the various organisations used to both manage and support the funds and solutions. Many firms in the financial sector are experiencing considerable challenges at this time and investors need to have comfort that the firms looking after their affairs are well financed and robust.

So whatever happens next with COVID-19, the economic impacts and their subsequent impact on capital markets, you and your clients can rest assured that the Verbatim investment solutions are being continually monitored with both Verbatim and the selected investment managers being challenged and held to account, allowing you to focus on your client’s wider financial requirements at this challenging and worrying time for us all.

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. This article is for information only and should not be deemed as advice.