2019 - The year ahead

Written by JohnNewton, 23 November 2018

Here, Vincent Ropers and Tony Yarrow give their views for 2019 and the challenges we face amidst different global economic conditions.

TB Wise Multi-Asset Growth 2019 outlook

Vincent Ropers – Co-Portfolio Manager

As another year draws to a close, it is customary for fund managers, strategists and commentators to publish their outlook for the year ahead. While this is an arbitrary exercise -economic cycles don’t follow calendar years and active management shouldn’t be restricted to annual reviews-, it is nonetheless a useful one, allowing us and readers to reflect on the important drivers of markets at a given point in time.

2018 has certainly not been the easiest year to navigate for investors, us included. While the era of easy liquidity is coming to an end, adjustments have to take place for investors to take the new reality into account. These periods of transition are rarely smooth. When combined with the rise of populism, trade tensions, political risks and concerns about slowing growth, the transition gets even rockier. This explains the increased volatility we are currently experiencing. In this environment, the most crowded investments, the ones where complacency had set in and thus the ones where valuations stopped mattering are the ones with the most to lose. This is true of the technology sector, which is currently suffering the brunt of the selling pressure, rightly so, given how disconnected from reality some of these shares prices were. Unlike during the dot-com bubble however, most of these companies remain highly relevant, are fully embedded in our lives and have profitable business models. What we are currently seeing is more akin to a healthy reality check and adjustment than the burst of a bubble. Also, while technology takes the lion’s share of the headlines, most growth sectors are also re-rating. For months now, we have been struck by the fact that, although earnings of global growth companies haven’t grown any faster than earnings of global value companies, their prices have continued to outperform, having created their own momentum. One can only defy the laws of gravity for so long.

So where does that leave us? Volatility is likely to stay elevated for the year ahead as we keep working through the transition above. As active managers, we see this as a positive because it will create opportunities for us. There are many areas we find attractive in this environment. Such areas include value and recovery managers, Asian equities -domestic Chinese companies in particular- or the mining sector to name but a few. We already have exposure to these sectors in the TB Multi-Asset Growth fund but are likely to increase our allocation further. Not only do we find them cheap in absolute and relative terms, but we are able to invest in them via investment trusts that, themselves, are trading at attractive discounts. This gives the fund an additional margin of safety.

With an increasingly volatile environment, it is also critical to retain a blend of exposures in our portfolio. In addition to the areas mentioned above, the TB Multi-Asset Growth fund is also exposed to diversifying asset classes such as private equity and infrastructure, idiosyncratic risks such as corporate governance improvements in emerging markets or Japan, and absolute return strategies. All of these are attractive in their own rights and we believe should perform well. They also help us manage our portfolio risk more efficiently which will prove essential in the months ahead.

TB Wise Multi-Asset Income 2019 outlook

Tony Yarrow – Co-Portfolio Manager

As 2018 draws to a close, stock markets round the world are falling, but for different reasons. The US FAANG stocks are collapsing as the realities of slower growth, tighter regulation, and higher taxes become clearer to investors. The FAANGs are coming from a bad place, where unrealistically high expectations were priced in. China’s stock market is falling because growth is slowing there, and the trade war with the US is intensifying. Here in the UK, the already cheap stock market declines further as political uncertainty surrounding Brexit reaches its zenith.

TB Wise Multi-Asset Income has no exposure to US technology shares, and almost none to China. Both of these underweights have helped us in the last few weeks.

As TB Wise Multi-Asset Income enters its 14th year, we are comfortable in the knowledge that all the assets we own are properly cheap, in other words near the bottom of or even below their ‘fair value’ ranges. Investor revulsion towards UK companies serving the domestic market is reaching an extreme level. This trend may not have fully run its course just yet, but our fund is well positioned when it does. The UK economy continues to perform surprisingly well, with employment at record levels, low unemployment, and wages growing at their fastest rate for three years. The amount of consumer debt is lower than it was ten years ago, while assets in the personal sector have risen substantially - facts often overlooked by pessimistic commentators.

Our overseas holdings look cheap too – Asian markets in particular are inexpensive, both relative to history, and to the rest of the world, which is all the more remarkable in view of the secular growth which continues in most of the region.

Our main investment trust holdings are at big discounts to the already low market prices of their assets, which gives our fund-holders a further layer of comfort. Our Asian investment trust is at an 11% discount, our mining trust 14%, our utilities trust 11%, our Canadian/US trust 10%, and our private equity trusts at 11% and 19% respectively. We can own good, cheap assets at a price that’s around 10% below market value. Can it get any better than this?

Well, maybe it can! Last year, we had to sell our growth stocks – companies such as Renishaw, XP Power and Alliance Pharma, because their prices simply ran away from us. In the last few weeks the share prices of these companies have collapsed, bringing them nearer levels where we would be happy to own them again. Companies such as Cranswick, Hilton Foods and even Halma, which we have not been able to own for many years, might also become investable again too.

We have used recent weakness to reduce our holdings in the ‘steady eddies’ and add to areas where we see real growth. If each holding in the current portfolio were to return to its highest level of the last twelve months, the fund price would rise by 25.4% from its current level, and we believe that many of our holdings are capable of doing a lot more than that.

TB Wise MAI’s dividend yield is an attractive 5.5%. This yield is well covered by solid cash-flows. Many of the cash-flows that support our dividend are contractual in nature, such as rent, and the payment of utility bills. Some income derives from necessary infrastructure maintenance and investment, and some from everyday activities such as grocery shopping and drinking in pubs.

The managers of the assets the fund holds are as committed to maintaining and growing their dividends as we are.

Students of history will remember that investor returns in years ending with an 8 have been disappointing -1988, 1998, and in particular 2008, whereas years ending in a 9 have been vintage ones. This pattern has held true in 2018, and we do not expect it to be broken in 2019.

23rd November 2018 Please note, these views represent the opinions of Tony Yarrow and Vincent Ropers as at 23rd November 2018 and do not constitute investment advice

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