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January 2020

graham bentley

Written by Graham Bentley, Avellemy Investment Committee Chairman.

While the investment weather outside was frightful at Christmas in 2018 - completing a depressing year in terms of returns - this past year has reinforced the point that market timers perform their activity at their peril.

Through a very merry 2019 for pretty much every asset class, US equities led the way with a 25% return for sterling investors, despite sterling strengthening significantly in the second half of the year. Technology stocks were at the forefront, with Apple's share price doubling over the year, as the company overtook Microsoft to regain its number one slot as the world's most valuable company, its shares now worth $1,330,000,000,000. That's around $170 for every man, woman and child on the planet, and around 1.6% of global production as measured by planet Earth's GDP.

Despite Brexit worries, the broad FTSE All Share Index of 600 leading companies managed to climb by over 19%. However, this disguises the fact that the market went sideways for 8 months of the year following a fantastic first quarter's advance of 10%. The 4th quarter saw a resurgent market, and an excellent December following the Conservative Party's devastating - at least from opposition parties' perspectives - victory, producing a resilient working majority to support Boris Johnson's manifesto plans.

There were some clear and positive catalysts for equity markets' behaviour in 2019. Two key political uncertainties that weighed on economic sentiment appeared to dissipate. For the global economy, the 'Phase 1' deal between the US and Chinese administrations avoided the increase in tariffs due on 15th December. In the UK of course, the new government now has a clear mandate to complete Brexit negotiations. This does not, however, take No Deal off the table - while the UK will leave the EU on the 31st with a withdrawal deal, we will enter a transition period during which our current trading relationship with the EU will continue while the two sides negotiate not only a free-trade deal, but also our relationship regarding law enforcement, data sharing and security. Boris Johnson has stated there will be no extension to the transition period that ends on 31st December this year; if no deal has been agreed, we will leave the EU without one. Investors will be keeping a close eye on the progress of negotiations.

It is perhaps remarkable that global equities did so well despite weakening economic data. Less surprising is the performance of government bonds; central Banks' response to less-than-positive economic forecasts was to increase their commitment to stimulating economic expansion. This backdrop led to yields falling - and hence bond prices rising - as the threat of interest rate rises receded. Banks' return to stimulus in turn boosted equity investors' belief that expansion would continue for the time being, versus potential recessionary conditions. Consequently, we got a very unusual sweet spot where both equities and bonds did very well - a great boost to balanced investors' returns in 2019.


While predicting markets' behaviour is something of a mug's game, I'd be very surprised if 2020 produced such high returns across the board. Balanced investors' advantage is in diversification - it is very rare that all assets rise in unison, so spreading your investments across a variety of assets allows respective highs and lows to cancel one another out. 2019 was certainly rather more peak than trough.

However, not all was positive for retail investors in 2019. A significant negative was the propensity for some portfolios to be over-exposed to illiquid assets, ie difficult to sell if investors decided to withdraw funds en masse. Portfolios managed by Neil Woodford held excessive amounts of unquoted companies, and more recently some funds investing in commercial properties, had insufficient free cash to satisfy investors' withdrawal requests and were forced to close temporarily in order to have a controlled sale of assets.

Where Property is concerned, anyone who has tried to sell a house knows the process can't be done in a day, unlike selling most large companies' shares. Consequently, exposure to commercial property, should not be used as a source of ready cash, but rather as a useful, but limited, diversification constituent. Our investment committee imposes strict and very robust rules limiting exposure to potentially illiquid funds - indeed our Avellemy portfolios avoided Woodford funds completely. It is likely the UK regulator will introduce new rules regarding the operation of these funds in 2020, however you can in any case be confident that our processes are geared to support the objectives of the widest group of investors' risk profiles, and that illiquidity is a major limiting factor on our fund selections.

Of course, you use a professional financial adviser in order to fulfil your financial ambitions and get on with enjoying the benefits that service produces, rather than worrying about daily price movements. Whatever surprises arrive in 2020, your adviser aims to keep your finances on track.

Happy New Year!

Ascot Lloyd Investment Committee


Cash: The physical value of cash should never go down and a published rate of interest is added to the capital at set intermittent periods. Inflation could run higher than the interest received, therefore the value of the capital held makes a loss in real terms. Charges for investment products such as pensions may be higher than the interest received and therefore eroding capital.

Bonds: This is effectively a loan to a company or government and an interest payment is paid from the borrower to the lender during the life of the bond. At the end of the term, all the original money is repaid to the lender. A default means that a company or government is unable to meet interest payments or repay the initial investment amount at the end of the securities life.

Property: Returns are driven by the property value and rental income. As property is a specialist sector it can be volatile in adverse market conditions, there could be delays in realising the
investment. Property valuation is a matter of judgement by an independent Valuer, therefore it is generally a matter of opinion rather than fact.

Equities: Also known as Stocks and Shares. Each investor participates in a share of the ownership in a company. The risks are that equities can fall if a company fails to perform or the sector in which it operates underperforms due to lowering demand, policy change or recession. If a company folds, the investor may not receive their money back.

Hedging: A method of reducing unnecessary or unintended risk, similar to an insurance policy.