March 2020: Smart Portfolios outperform benchmarks as markets tumble on growth fears
Stock markets fell at the fastest rate in history last month over fears that Covid-19 will have a large, negative impact on global economic growth. Even though our range of Smart Portfolios lost value during the month, our average outperformance over our benchmarks was an impressive +4.7%.
Quickest market meltdown in history
The actions taken by governments across the world to slow the spread of Covid-19 have effectively brought the world economy to a halt.
As expected, recent economic data are horrendous, with business and consumer confidence indicators across the globe pointing towards a severe recession. In the UK, consumer confidence fell to -34, the same as the lowest level seen during the 2007/08 financial crisis.
But there are signs that the number of daily deaths in Asia and Europe are slowing. America's haphazard response means we expect headlines to get worse before we see an improvement in the number of new daily cases and deaths there.
The predicament that world leaders now have is whether to continue to prioritise the containment of the virus or to ease restrictions on movement to help kick start their economies again.
Comparisons have been drawn between the current crisis and other times of severe market stress such as during the Great Depression, World War II and the 2007-08 financial crisis. We recently wrote that while the size of the stock market drawdown that we have witnessed over the last two month is not extraordinary, it was the pace of the declines which took market participants by surprise.
The table below shows the total returns for different markets during March. All in GBP terms for UK investors.
Figure 1: total returns for financial markets, in GBP terms
|Market||ETF code||March 2020||Q1 2020|
|Europe ex. UK||IEUX||-11.4%||-18.0%|
|Global Corporate Bonds||CRHG||-6.5%||-4.9%|
|Global High Yield||GHYG||-11.3%||-13.7%|
Across equity markets, US stocks fared best while UK stocks were amongst the worst performers. Government bonds rose in value given their safe haven status, but corporate bonds saw equity-like declines. In commodities, gold rose modestly while the price of oil crashed to its lowest level since 2001.
How were our Smart Portfolios positioned going into the crash
In November 2019, we chose to make some adjustments to the portfolios to reduce risk and position the portfolios for a period of economic and political uncertainty. These changes included:
Reducing overall equity exposure in our moderate, balanced and growth portfolios
Impact: positive, given the subsequent decline in stock markets
Increasing the relative amount invested in US stocks, funded by reducing positions in UK and emerging market stocks
Impact: positive, given the outperformance of US stocks relative to other regions
Increased duration in the portfolios by adding a position in long-dated US treasuries
Impact: positive, bond yields are inversely related to bond prices. So given the recent sharp fall in the US yield curve, longer-dated US bonds have risen in price
Increased 'dry powder' in the Moderate and Balanced portfolios by upping our investment in cash-like securities and short-term UK government bonds
Impact: positive, since these are low risk assets and have consequently seen limited changes in value
No corporate bonds in the Moderate, Balanced, Growth and Aggressive portfolios
Impact: positive, credit has seen equity-like declines during the current crisis and so has not helped investors diversify returns
Increased GBP currency hedging
Impact: negative. This was in expectation that the GBP would appreciate, or hold its value against other currencies as Brexit talks advanced (remember Brexit?). But the shock from Covid-19 led investors to seek safe haven assets such as the USD, which subsequently appreciated in value against other major currencies, including the GBP. Increasing the amount of currency hedges in the portfolio has therefore not added value since November 2019.
Smart Portfolios outperformed their benchmarks in Q1 2020
Given our cautious approach, summarised by the actions taken above, we are extremely pleased to confirm that our range of multi-asset Smart Portfolios have proved to be far more resilient in the face of steep market declines compared to the benchmarks which we use to compare our performance against.
The table below shows our outperformance against our benchmarks in both March and during the first quarter (Q1) of the year.
Figure 2: IG Smart Portfolio performance versus benchmarks
|Smart Portfolio||Benchmark||Smart Portfolio||Benchmark||Difference||Smart Portfolio||Benchmark||Difference|
|Conservative||3m Libor +1%||-2.2%||+0.1%||-2.3%||-1.6%||0.4%||-2.0%|
|Balanced||ARC Banalnced Asset||-3.3%||-7.8%||+4.5%||-5.9%||-10.6%||+4.7%|
|Growth||ARC Steady Growth||-4.4%||-10.1%||+5.7%||-8.3%||-14.3%||+6.0%|
|Agressive||ARC Equity Risk||-7.1%||-12.2%||+5.1%||-12.4%||-17.7%||+5.3%|
Source: IG, Asset Risk Consultants
Returns for our Conservative portfolio – our least risky portfolio that solely invests in cash-like and fixed income securities - shows an underperformance against its benchmark over the last three months. This portfolio targets a given level of income and holds small positions in corporate bonds and emerging market bonds, asset classes which have seen declines over the quarter. Since BlackRock first launched this portfolio in July 2014, it has outperformed the benchmark we use by 0.4% per year. We are confident that the portfolio is positioned to continue to outperform over the long term.
In March, the average outperformance across our multi-asset portfolios in March was +4.7%. This is extremely pleasing and shows that we have been able to better protect our clients’ investments compared to the average private wealth manager.
The BlackRock model portfolios, which our Smart Portfolios are based upon, saw similar impressive degrees of outperformance during previous periods of intense market stress. Around the EU referendum result in June 2016, BlackRock’s model portfolios outperformed the ARC benchmarks by +3.9%, on average. Their proven ability to actively manage risk in extremely encouraging.
Recent changes we have made to the Smart Portfolios
We recently wrote to our investors explaining the changes we made to our four multi-asset portfolios: Moderate, Balanced, Growth and Aggressive.
To recap, our portfolios were defensively positioned going into the recent market selloff which helped us outperform our benchmarks.
While we fully expect a large downwards revision to short-term corporate earnings, we have used the recent decline in equity valuations to increase the proportion invested in stocks given our constructive long-run outlook for the asset class. We are not attempting to time the market here, and continued market volatility is almost certain, but we simply believe this is an opportunity to add risk to the portfolios to help deliver positive returns over the long run.
2020/21 tax year gives investors a new £20,000 allowance
The government has maintained the annual ISA allowance for the 2020/21 tax year at £20,000 for the fourth year running.
We’ve written in the past about how investing in a range of asset classes helps to grow your wealth and protect it from the effects of inflation. With the large market fluctuations that we have seen over the previous two months, it is easy to become more cautious the more markets fall. But market selloffs are part and parcel of long-term investing and should instead be used as an opportunity to buy in at lower prices.
Over the previous 100 years equities have returned a real return of 7% per year. Investors are therefore rewarded with higher returns for taking on investment risk.
We help you to determine the amount of investment risk you take by asking a series of questions to help gauge your attitude to risk. You can open a Smart Portfolio by signing up here or by adding a Smart Portfolio in the My IG dashboard area.
We recently reduced our management fee, which is now just 0.50% per year and capped at £250, making an IG Smart Portfolio great value for both beginner investors and those with large investment portfolios.