The OBI portfolios posted a fantastic set of returns this week, with markets continuing to highlight how short-term volatility can impact portfolio performance at this stage of the cycle. This market commentary will focus on the key drivers behind the pickup in performance over the week.
Broadly speaking, we can see that both equity and non-equity indices improved over the week. Focusing on the non-equity sectors, the majority of these still remain heavily down in the year to date, and if the economic recovery meets expectations, we see this moving lower over the next few months. By focusing on the equity indices, we can see a clear pattern with the European indices posting negative returns over the past seven days as a result of the escalating third wave of coronavirus cases. Although this may delay the impending economic recovery, we are not concerned about this exposure within the portfolios for a couple of reasons. Firstly, only 6% to 15% of the core portfolios is allocated to European equities in anticipation of a less sturdy path to recovery when compared to the UK and US. Secondly, as mentioned in previous commentaries, the exposure was previously added at a time when valuations were heavily discounted, meaning greater upside potential as share prices return to their asset values over the long term.
The strongest performer over the week was the FTSE 250, the UK index composing of mid-cap firms. Although it may be too early to tell, investors may again be realising the return potential of more domestically focussed small and mid-cap firms at the beginning of the cycle after relatively weak performance through January and February. As a result, our UK small cap exposure has benefitted from the pickup in performance throughout March, with the UK in a considerably stronger position than most other countries. To the contrary, our European and US small cap exposure has not performed as strongly, impacted by pandemic worries and overvaluation concerns, respectively. Yet, we see these latter risks abating, and the OBI portfolios will be well positioned when this uncertainty clears.
Past performance cannot be used as a guide to future performance and the value of your investment will fall as well as rise in value. You may not get back all of your investment and the final value of your investment will depend on the performance of your portfolio. The actual performance of an individual client’s portfolio may differ due to different funds being used and being restricted in relation to certain asset allocations. Performance figures quoted include fund manager charges but exclude adviser, discretionary, custodian and switch charges and trading spreads. Unless stated, income is reinvested into the portfolio. The information contained in in this document is for information purposes only. It does not constitute advice or a recommendation or an offer or solicitation for investment.
Portfolio and Benchmark Performance
Through the latest dataset above, we have seen the percentage point returns of the portfolios over the past week outpace the benchmark, with all of the OBI portfolios now posting positive returns over the year to date. With this in mind, only OBI 3, 4 and 6 are underperforming their benchmarks so far this year, however if the OBI portfolios continue the exceptional outperformance over the next few weeks, this will likely reverse. When we look towards the higher risk OBI portfolios, the jump in performance is even more stark, which highlights the risk-reward trade-off that investors can experience at this stage of the market cycle. It is our view that the portfolios will come into their own as financial markets continue to react to the improving news flows going forward.
Over the past few weeks, you have been able to see the effect that volatility has on the portfolios in the short-term, and this latest dataset should again illustrate how quickly the returns can flip from downbeat to upbeat when asset exposure has been carefully identified ahead of the economic recovery. We are not saying that the portfolios will not underperform their benchmarks at other times throughout the year, however as we touched upon last week, the well-positioned OBI portfolios should continue to build on recent outperformance as the global economy recovers throughout 2021. This may not consistently happen from one week to the next, but we will look through this short-term volatility and continue to focus on achieving the outcome for each of the portfolios.
Risks to The Outlook
While we remain positive on the outlook, as always, there are a number of factors that we continue to monitor. As the year progresses, we will see varying degrees of virus suppression through vaccination programmes across the globe, which may have a negative impact on cross-border trade. Additionally, central banks and governments will eventually have to scale back their stimulus efforts at some point, and this may or may not catch financial markets off-guard when this happens. That being said, from where we stand today, we are not worried by these factors. While the recovery is likely to be uneven due to varying progress in vaccination efforts, we don’t see this as delivering a shock to markets, and it remains our view that the scaling back of stimulus remains far off given that the economic recovery is still underway. That being said, these events are manageable from a portfolio viewpoint, and we monitor markets constantly to identify any changes in the investment landscape. If our view changes, we will adjust the portfolios accordingly, however we remain very positive on the existing outlook as the global economy continues its recovery.
Key Events We Are Watching This Week:
- Thursday: US Jobless Claims for March.
- Monday: EU Retail Sales for February.
This Day in History
On this day in 1962, Bay of Pigs invaders received thirty years imprisonment in Cuba. The invaders consisted of a number of Cuban exiles assembled by the CIA, however their failure to overturn Fidel Castro’s government simply solidified Castro as a national hero.
Have a great week,
Jason, Gina & Ben