“Pingdependence” Day… Still Some Way Off

For all of those who assumed (and hoped?) that the world would get back to normal rapidly after the arrival of the vaccines – there continues to be disappointments aplenty. It was a phrase that was used quite early in the Pandemic; that the virus is “playing a game of cat and mouse with us, and we’re not the cat”! This still seems to be the case. There now appear to have been more ‘pings’ coming out of the British Open than came out of the competitors’ golf bags!

The shape of the recovery is causing some puzzlement amongst the investor fraternity. 10 Year Treasury yields are not doing what many wanted them to. Commentators have become obsessed with inflation. Barely a day passes without forecasts of lasting or transitory inflation and speculation over when interest rates are set to rise. Treasury yields spiked to nearly 1.8% in February, which immediately triggered forecasts that they would go above 2% or even 3%.

My co-manager, Tom McGrath, and I mulled it over and considered that it was unlikely that they’d breach 2% as, at that level, they would become very attractive in comparison to other Developed Market bonds in Europe, the UK, and Japan which were yielding virtually nothing in comparison and so an apparent self-capping level appeared to be feasible. Now, I’m not claiming that this judgment wasn’t founded in luck, but with yields now hovering around 1.3% it appears we indeed got lucky.

Some strategists think that US Treasury yields will ultimately move into line with other bonds yielding comfortably less than 1% but these remain in the minority. One of my pet hates is hearing the word “normalisation” when used in terms of interest rates – if, after 13 years since the Great Financial Crisis of 2008 those waiting for rates to “normalise” back to their normal quite frankly haven’t quite got to grips the new era – but we feel much the same about rates as we do bond yields.

It is difficult to see how rates can rise with any significance without severely disrupting the global real estate market which dwarfs the global equity markets in value, and a crash in one sector probably equals a crash in the other. Such a crash would precipitate a dash to safety, most likely in the form of a dash to Treasuries. So a path downwards in yield will probably need a market riot beforehand, but then we’re getting used to the odd “that’ll never happen” crisis scenario in recent years.

So how best to approach what comes next?

Our view remains the same. Overweight The Future, Underweight The Past:

I was asked by a journalist recently what I thought the portfolio of the future would look like. It was a good question and I found myself looking back 25 years to try to answer. If you were around back then you may remember a programme aired at lunchtime on Channel 4 called Show Me The Money which was reflective of the time. It was built around the assumption that making money from owning the next dot.com stock was easy and, in the words of Derek Trotter, “this time next teatime Rodney, we’ll be milly-yon-aires”. The crash of 2000 saw the programme disappear along with many a dream.

There are similarities between the Gamestop frenzy earlier this year and then but there are many important differences too. One thing that can not be denied is that the internet was a “theme” to follow back then but it took a while to take shape. Microsoft was Number 7 in the S&P 500 in the year 2000 and sits at Number 2 today, but not one other of the top ten constituents that year remains in 2021. I’ve not checked, but I’d guess that at least a couple of today’s Top 10 didn’t even exist 21 years ago. The point being, in order to be a successful investor it pays to remain flexible, prepare to adapt to the conditions of the time, and invest in what the world wants and needs as opposed to what it has wanted and needed in the past.

Twenty years ago a well-known fund manager who no longer is one was a strong advocate of holding tobacco stocks for the long term. Others saw the future inevitably including major oil and gas companies and High Street banks. After all, we’d always need those, wouldn’t we? The answer in 2000 was, of course, we would. 21 years later, with a Financial Crisis and a Pandemic behind us, the world is shaping up to behave a little differently.

It is truly fascinating to wonder which companies will be in the Top 10 of the S&P 500 in 2042 that we have not heard of yet, but they are what today’s investors should be trying to invest in, surely?

That’s what we are aiming to do with the Future Wealth Fund. We don’t know which companies will be dominant in a few years but we know the pools in which we want to fish. Twenty years ago we knew the internet was a thing, but we did not know the astonishing array of “add ons” that it would throw up. Artificial Intelligence and Robotics were found in science fiction films while State-sponsored cyberattacks were more like James Bond than real life. Not having to go to the shops and having everything delivered to your door was just a pipedream while driverless cars were beyond fanciful.

Paddle Battle was the cutting edge of computer games while the cloud was where your head was as if you thought that any of these were going to happen in your lifetime. Yet here we are, and these are the themes that we invest in, usually through the passive vehicles of ETFs as in this way we invest in everything in the sector, ensuring that we capture the growth of tomorrow’s winning companies.

It can be a bumpy ride and there will be times as in February when the past catches up a bit. Overall though, our strategy of overweighting the future and underweighting the past will be one that we’re happy to stick with.

Andy Merricks
Portfolio Manager