It’s now been over three years since the Covid-19 pandemic sent risk assets – like equities - into a tailspin in March 2020
Thankfully, financial markets have now regained much of their equilibrium. The pandemic was unprecedented in our lifetimes and facing the unknown, investors flocked to safe assets such as government bonds, despite their negative yields.
In the days immediately after the emergence of Covid, portfolios across the CT MM Navigator Range experienced a challenging time from a performance perspective. It was a genuine outlier within our longer-term track record and one my colleague Rob Burdett calls “a pig in python”. At the time we were proactive in explaining what was going on across financial markets and the impacts being felt across the range. It was also important to reiterate that we stood by an approach that had proven so successful in the past. Appropriately diversify your portfolio, make sensible tactical asset allocation decisions, and allocate capital to a range of carefully selected talented managers. Over time you should be well placed to outperform.
It’s been pleasing therefore to see how our ranges have returned to form in the three years since Covid’s emergence. The CT MM Navigator Distribution Fund – our income solution – sits back in the top quartile of the Investment Association Mixed Asset 20-60% sector over the same period. And crucially, with client defined outcomes in mind, it is delivering a top decile yield.
Navigator - Distribution
Figure 1: A globally diversified income fund
Source: Columbia Threadneedle Investments. Lipper for Investment Management (LIM) as at 31 March 2023. Rolling periods to calendar quarter end. The discrete periods are to the end of the respective month of each year.
Consistency is one of our key mantras – it’s a characteristic we look for in our underlying managers both in terms of the approach they deploy when investing and as a result, in the performance potential they offer. We recognise however, that market themes and drivers come and go which in turn means that any investment team will have challenging periods. We’re no different and short periods of underperformance inevitably occur. What’s important during these times is keeping the faith. Assuming a manager’s approach remains consistently applied they’ll likely be well placed to outperform when near term headwinds ease. Indeed, we often see the most outperformance generated in these recovery periods – both for our underlying managers and our broader portfolios.
The chart below shows how the CT MM Navigator Cautious Fund has bounced back following a 12-month period of 4th quartile performance. Of course, past performance is no guarantee of future returns, but the way performance has recovered strongly in the three years post challenging periods supports our conviction in maintaining our discipline and approach to deliver over the timescale that really matters – the longer-term one. Interestingly, performance recovery trends improve further over five years.
A track record of strong bounce back
Figure 2: Following 12 month 4th quartile performance, our Navigator Cautious has bounced back well over the following 3 years, and even better over 5 years
Source: Columbia Threadneedle Investments. Lipper for Investment Management (LIM) as at date: 12 years to 31 December 2022. Charts are showing data for Fund share class: C Accumulation
Do our portfolios have more to give in terms of potential post Covid? We certainly think so.
The ABCs of manager selection
What has driven the past three years’ recovery? It has not been aggressive asset allocation calls and it’s important to note that our portfolios have been underweight risk assets (like equities) for much of the recovery period. As always, it has been chiefly the selection of talented portfolio managers. When selecting the best investment talent, we always do so through the lens of what we call the ABCs – standing for respectively alignment of interest, benchmark unconstrained and capacity control. This sometimes means sticking and adding to managers that in short term may be facing market headwinds.
Within our CT MM Navigator Cautious and Distribution portfolios for instance, Prusik Asia Equity Income Fund has been held throughout the post-covid period. It meets all three of our ABC requirements. In terms of alignment, Prusik Investment Management run just two funds, meaning the management team has every incentive to focus on the performance of this strategy. What’s more, the fund has an active share of more than 90%, so its holdings are not tied to the benchmark. Finally, Prusik has capped the fund’s size at US$750 million.
Sometimes you need to change underlying holdings – an example being the Man GLG Sterling Corporate Bond Fund. We invested at its launch in 2021, following portfolio manager Jonathan Golan who had previously run the Schroder Sterling Corporate Bond fund that we allocated capital to at the depth of the Covid Crisis in 2020. He outperformed following the credit recovery and when he left for pastures new, we backed him again to do something similar. As a firm, Man GLG’s ethos is in line with the ABCs: the portfolio managers are incentivised to deliver superior returns and take a high-conviction approach to investing.
Along with equities and fixed income, we also look to tap-into the potential of alternatives where again manager selection is key. LXI REIT endured a painful fall during the pandemic. Firm in our belief in the management’s ability to add value from their property portfolio however, we added to positions. Post strong performance we exited as the risk/reward balance became less compelling. It’s also worthwhile highlighting how our fund of funds structure gives us the opportunity to invest in listed investment trusts like LXI REIT. They are vehicles that can be better suited to less liquid asset classes – like property – and offer additional returns potential should shares be trading at a discount to where we believe them to be.
Figure 3: LXI - strong outperformance, and no liquidity issues
Source: Columbia Threadneedle Investments 12 October 2018 to 12 September 2022
Disciplined portfolio construction
Sticking to our portfolio construction approach is another reason for the recovery. With an awareness of manager styles, we work to blend underlying holdings in a complementary way. Our portfolios have tended to be overweight in value managers over the last three years, resulting in a relatively high exposure to cyclical companies. However, our cautiously underweight position in equities has provided balance to this stance.
While manager selection is the primary driver of our performance, we also make tactical asset allocation shifts. This happened in the second half of 2022, when we moved overweight in corporate bonds, which were offering high historical yields at the time. The ability to be active in volatile times with both manager selection and asset allocation and not be constrained by limited fund availability or tax implications has been vital.
Three forward-looking themes
Looking forward there are three areas that we are excited about. While we remain underweight equities, these are areas where we are happy to take more risk:
- Firstly, we believe now is a good time for active managers, as the new era of higher inflation and quantitative tightening will give them more opportunity. Data we have seen shows that during the 14 years of quantitative easing, only 20% of active US equity managers outperformed the S&P 500 Index; yet during 2021’s quantitative tightening 55-60% did. Consequently, we have a heavy bias to active managers and a corresponding low weighting in passive.
- We’re also still believers in value funds. Value stocks have underperformed growth for so long that, even after their strong performance last year, they still have a long way to catch up. For that reason, our portfolios have a healthy exposure to value managers.
- Finally, we judge that there’s an opportunity in small capitalisation managers. Concerns about recession led to a huge sell-off in small caps last year, but they tend to outperform as economies recover. Taking a long-term view, we believe this is a good entry point and are looking to selectively add to small cap managers.
Figure 4: Discrete performance 12 month rolling (GBP, net of fees)
