For March’s Investor Update Kat Mann, our savings & investment specialist and head of PR here at Nutmeg spoke virtually with our chief investment officer, James McManus. They covered the state of the markets, bond yields and inflation, as well as diving into some core changes to Nutmeg’s strategic asset allocation.
February seemed to be a mixed month for markets, with a few challenges for tech stocks in particular during the last week. How did global stocks perform during February?
That’s right, we did witness some volatility towards the end of the month in stock markets – notably in US technology stocks that ended the month weaker than the wider US stock market as bond yields rose. But February on the whole was not a bad month for equity investors, with developed markets ending the month in positive territory, with gains of around 2.6%; and emerging markets delivering returns of around 1% (source: MacroBond, Bloomberg, Nutmeg). Similar to January, it was a tale of two halves: equity markets rising in the first half of the month before giving up some of those gains in the latter two weeks.
But while technology-heavy indices such as the Nasdaq 100 ended the month flat, and our favoured US stocks delivered muted gains of 2.6%, European and Japanese shares fared much better and delivered 3.6% and 3.3% respectively. Closer to home the FTSE 100 – still one of our largest underweights – was one of the worst performers in developed markets with gains of 1.6%, yet the FTSE 250 – a segment of the market we have preferred of late – performed relatively strongly: up 3.5% in February.
What were the main drivers behind market movements in the month?
In February we’ve seen continued broad strength in macroeconomic and earnings’ data, particularly in the US, where the new Biden administration also passed the latest Fiscal stimulus package in the final days of the month. This added another $1.9 trillion of stimulus, on top of the +15% of GDP that has already been committed. That positive data trajectory is also echoed in global trade data and in continually buoyant activity data across the global economic complex, as lockdowns ease and vaccine rollouts accelerate.
Higher activity, continued momentum in macro data and the associated rise in broad commodity prices in recent months has led investors to reassess expectations of a key issue: inflation. In February, we have seen bond investors become much more concerned about the outlook for inflation and what this means for the medium-term removal of some support measures by central banks.
Government bonds in particular bore the brunt of investors’ fears, with yields rising across the government bond spectrum. That causes prices to fall and inflicts losses on bond investors. The potential for higher bond yields is something we have been concerned with for some time, which is why we currently hold fewer bonds in our portfolios than we would typically expect to do so over the long-term. This has helped protect from losses in recent weeks as government bonds have fallen.
From an inflation standpoint, we remain relatively cautious on our outlook. Central banks have become more relaxed in their indicated approach and tolerance to inflation, while the US economy is far from full employment and there is a lot of slack (unemployment resources) to make up.
We hold some inflation protection on our portfolios through assets such as gold and, of course, equities but given the extreme level of government spending in the previous 12 months and emerging economic recovery, we see much of the recent move in bonds as returning a necessary and more sensible risk premium to these assets and reflecting a more positive outlook on growth.
Against this backdrop how did the Nutmeg fully managed portfolios perform during February?
Well, as you might expect, it was another month where higher risk portfolios delivered positive performance due to gains in equity markets, but lower risk portfolios fell due to losses in bond markets. That meant returns ranging from -1.4% in our lowest risk portfolios, to gains of +1.6% in our highest risk portfolios (fees & commission included).
Given everything that’s happened lately, have you made any changes to the Nutmeg fully managed portfolios?
In February there have actually been a number of changes to portfolios. Firstly, we increased our overall weighting to equities at the beginning of the month as we continue to see positive signs that a consolidated recovery can take hold. That has been buoyed not only by vaccine progress but also by the continued strength of economic data in the US – seen in high frequency data from January but also better than expected activity data from the final quarter of 2020.
We also reduced our exposure to investment grade corporate bonds. These are high quality corporate bonds but the spread – or compensation – that investors gain over government bonds had eroded to all-time lows towards the end of January. So, we took that opportunity to reduce our holdings here given we didn’t feel the rewards were significant enough to remain overweighted.
Finally, in our higher risk portfolios, we also exited our clean energy investment at the beginning of the month. Here, we actually still believe the clean energy theme is attractive in the long-term, but the flow of money into a very narrow universe of stocks in recent months, post the US election in particular, has been extreme. This has raised concerns about overcrowding and thus we no longer felt the approach employed met our standards on diversification, so, we chose to exit at a healthy profit. For anyone interested in further details on this we have written a blog explaining the decision on Nutmegonomics.
Once a year the investment team and yourself review the strategic asset allocation framework that underpins the investment philosophy at Nutmeg. Can you tell us a little more about what the strategic asset allocation is? And what changes you’ve made?
Absolutely. A strategic asset allocation is a framework used by investors to determine their target long-term weightings across different investment assets, for a given level of risk. It could simply be interpreted as a ‘base camp’ – the mix of assets that, all things considered, we believe is appropriate over the long-term to achieve the optimal mix of risk and return. Each year we review this allocation to ensure it remains best placed to guide our portfolios in the future and we adjust it were required.
This year we have made a number of adjustments. Firstly, we have embedded environmental, social and governance (ESG) integrated funds within these allocations, seeking to improve their long-term risk and return characteristics. We already have a range of socially responsible exposures in our managed portfolios, but this further enhances our recognition of ESG factors in the management of our investment strategies.
Alongside the use of some ESG funds, we have also made a number of other changes to the allocations as part of the annual review, including to the long-term currency mix and the level of UK home equity bias. This means higher risk portfolios now hold greater foreign currency and have a lower UK equity allocation. These adjustments have already taken place and are designed to ensure the portfolios remain best placed to deliver risk adjusted returns in the years ahead.
We’ve had a look back, now I’d like to turn your attention to what’s coming up. We’re currently still remote working, although the UK government has now set out its roadmap out of lockdown – hopefully for the final time. Does this mean Covid is going to be less front of mind for UK investors going forward?
Well, I think Covid will certainly be embedded in the minds of investors for some time to come! But clearly the news of late has been on a positive trajectory – I mentioned in last month’s update the interesting dynamic around the differing vaccine approaches being taken by different countries and how this will affect their ability to reopen their economies. We’re clearly beginning to see the fruits of the UK strategy, but normalisation will take time and there are sure to be road bumps: emerging variants being the obvious one.
But, as the bond market moves show, there is confidence that we may be now in a consolidated economic recovery stage and that society will move forward and adjust. The emergence of topics such as vaccine passports shows just how quickly the world will adapt to a new way of operating.
As for the UK progress, we are more positive than we have been for some time on the UK stock market given the potential for a strong rebound in economic growth in the remainder of the year, particularly as the service sector comes back to life. As mentioned earlier, we are currently favouring the smaller and more service orientated FTSE 250 stocks here, rather than their large cap counterparts. We have also remained overweighted to sterling of late as vaccine progress and higher bond yields have driven a higher pound value.
This month’s customer question comes via social media, where we’ve been asked ‘can I hold a stocks and shares ISA as well as a cash ISA?’
Thanks, good question! The short answer is yes. Provided you don’t exceed the annual allowance of £20,000 per tax year and you don’t contribute to more than one of the same type of ISA in a tax year. You can contribute to a stocks and shares ISA, a cash ISA, a Lifetime ISA, and an Innovative Finance ISA in a tax year.
You may, of course, be wondering why would you want to? The Bank of England interest rate is currently at 0.1%: a historic low. This rate is the one used by banks to determine what interest rate they’ll offer you on your cash savings accounts – including on a cash ISA.
Now, despite the historically low interest rates, you may want to keep some money in a cash account. At Nutmeg, we recommend you invest for at least three years and ideally longer – this gives you more opportunity to ride out any short-term market volatility. If you’re keeping a pot of money aside that you might need in the shorter term, then a cash option might be right for you. However, if you have a longer timeframe and you’re comfortable taking some investment risk, then a stocks and shares ISA may present you with the potential for better returns that keep pace with inflation.
If you have any questions for James or the investment team, or something you’d like answered in next month’s investor update – you can contact us via social media or by email. We look forward to seeing you next month.
About this update: This update was filmed on 02 March 2021. All figures, unless otherwise stated, relate to the month of February 2021. Sources: MacroBond, Nutmeg and Bloomberg.
Risk warning: As with all investing, your capital is at risk. The value of your portfolio with Nutmeg can go down as well as up and you may get back less than you invest. Past performance and forecasts are not reliable indicators of future performance. A stocks and shares ISA may not be right for everyone. If you are unsure if an ISA is the right choice for you, please seek financial advice. Tax treatments depend on your individual circumstances and may change in the future.