What a week.
The FTSE 100 has fallen more than 1,000 points, the Bank of England has slashed interest rates to emergency levels not seen since after the Brexit referendum, and the first Budget under the new Conservative Government has laid out the biggest spending plans we’ve seen in years.
These really are unprecedented times and while it’s all well and good knowing as an investor that the best thing is to “keep calm and carry on”, doing it is a very different thing.
This is the problem with a decade-long bull run. Many investors in the market cannot remember what it’s like to see the numbers start to go the other way. Indeed, many investors weren’t in the market last time we were in bull run territory, so have never experienced this.
Every crisis is different, of course, so it’s hard to compare. But we’ve looked at how this sell-off is playing out to the most recent one before, which was in the final months of 2018 when markets were fretting about central banks raising interest rates.
We can see from this that there are always areas of safety in the market. Interestingly, this time round the tech sector is holding up pretty well, as many people expect it to benefit from the sudden boom in home working. Gilts and index-linked gilts too see to hold up under the pressure; it’s times like these you’ll be grateful you built a well-diversified portfolio.
But if everything goes to the wall, can your portfolio recover? The answer is yes. How long it takes is a different question.
We have looked at how long it took UK equity funds to bounce back from the depths of the financial crisis and some of the numbers make for heartening reading. The Schroder Recovery fund fell more than 40% at its worst point in 2007 – but it took just seven months to rise back from trough to peak. That’s incredible. And it shows the value of having a value fund – they’ve been hated for years but now could be the time for them to shine.
Will Trackers Fall Out of Favour?
One thing I’ll be keen to monitor over the coming months is the flows in and out of passive funds.
The flood of assets in trackers into recent years has been phenomenal. Part of that is driven by how cheap they are compared to actively managed funds – 0.06% or 0.75%, there’s no comparison is there? But another large part of their success has been the 10-year bull run that stock markets had been enjoying.
While the stock market is soaring, it’s harder for an active manager to outperform and if investors can pay a pittance to follow the index up and up, why would they take a punt on a pricey manager who could miss the mark?
Yet while people have enjoyed following the index up, I wonder if they’ll be so understanding when they have to follow it back down. This is when truly skilled managers can show their worth.
Welcome News for Woodford Investors
A silver lining that investors may have missed this week is that those with money still trapped in the Woodford Equity Income fund are due to get another tranche of their cash back at the end of the month. The £142 million payout represents around 20% of the remaining assets in the fund, so there is a way to go yet, but it’s better than a poke in the eye.
While it’s not clear which holding(s) has been sold to fund the pay out, it would appear that the money may have come from offloading some of the illiquid assets in the fund that Park Hill has been charged with selling given that BlackRock has already dealt with the liquid side of the portfolio. Maybe the current panic situation has made one of those biotech start-ups in the portfolio look more appealing to a buyer? We don’t know.
Interestingly, the update also gives investors an idea of how the portfolio has performed in recent weeks. The current unit price is 19.9p, down another 4.95% from its last valuation – significantly better than the FTSE’s performance this week, some might point out.
