Multi Asset Webinar - The COVID Crisis in Three Acts

5 November 2020



Watch the latest Multi Asset webinar with Trevor Greetham, Head of Multi Asset at Royal London Asset Management

Webinar talking points:

  • The latest tactical positions across the Governed Range.
  • Views on US election.
  • Trade deals and the prospect of higher inflation once we emerge from COVID.

Trevor also shares some details on the latest strategic asset allocation review and our direction of travel as we aim to improve risk adjusted returns for customers invested in the portfolio.

Adam Vaites:             

Hello and welcome to the latest webinar from Royal London Asset Management.  To introduce myself I'm Adam Vaites, part of the wholesale team here.  Here's my colleague Trevor Greetham, head of Multi Asset at RLAM with over 25 years' experience.  So yeah, I just want to thank everyone for joining us today.  We appreciate your time and also the huge support with the fund [range].

In terms of the title of today's webinar, The COVID Crisis in Three Acts.  So, Trevor I'm intrigued on what you're going to talk about here and clearly there is a lot to talk about.  We’ve got what?  Talk of negative interest rates, US election on the horizon very, very soon.  Trade deals, inflation.

[Over speaking]  

Adam Vaites:           

So, I think on that point I think it's a good time to hand over to you Trevor and we'll then move into a Q&A at the end of that's okay.

Trevor Greetham:   

Fantastic.  Thanks Adam, thanks everyone for listening.  So just to kick off in terms of structure.  We'll say a bit about the portfolios and then we’ll have the main show if you like, The COVID Crisis in Three Acts.  The deflationary onset of the crisis, what we think could be a surprisingly inflationary long term recovery and then what to do in the meantime.  The two-way risk we’re facing.

Then we’re going to talk a bit about a strategic review that we’re going through at the moment to improve diversification and returns in the governed portfolios and in the GMAP funds.

So just to expand on all of that a little bit here.  You know our funds are designed to beat inflation over the long run.  So each of them is optimised to be an efficient portfolio maximising the return after UK inflation over the long run and they're actively managed. 

We are very conscious of the fact that our asset mix has lagged behind in performance terms versus portfolios that are less diversified.  So we’ve got an asset mix including things like commercial property, a bigger weighting in UK equities. 

There are good reasons for all of those things but that has underperformed this year relative to a simple balanced fund with global equities and gilts.  But we think the future is likely to be more inflationary than 2020 so we’re comfortable with the asset mix that we’ve got. 

We see two-way risk in the short term.  We are broadly neutral on equities but we’ve maintained a strong position in high yield bonds.  We’re overweighting emerging markets where China's doing pretty well.  We've been overweight the US technology sector and underweight the UK equity market for quite some time.

 The strategic review, I’ll come to more details on that at the end.  But the basic idea there is to improve diversification further and seek higher risk adjusted returns by increasing exposure to faster growing regions and sectors of the world.  So increasing emerging market exposure and the rest of the world equity exposure out of the UK.  Also adding to the high yield bond positions we’ve got in our strategic asset mix out of property.  So more on that later.

So the portfolios.  You’re aware of the nine governed portfolios each with long term risk targets.  Launched in January 2009, each of them aiming to maximise the real long term return at these levels of expected volatility. 

Then in 2016 we took four of those funds and we launched them as global multi asset portfolios, [OEICs], available on a range of platforms.  You can see the range of the GMAP funds there starting with the Conservative Fund which is pure fixed income.  

Moving through four progressively position multi asset funds out to GMAP Dynamic which is pure equity.

This is the long term track record of these portfolios.  This is looking at a particular governed portfolio, GP6 that maps up to GMAP balanced.  The point being here it's a long track record.  You can see how the GMAP funds are very consistent with the governed portfolios they map against.

You can also see the hit that we suffered from the markets in the first quarter of the year.  Only a partial bounce back, still a pretty good bounce back.  But only partial because of the exposures that we have in the fund that we think will do better when we start to get a real COVID recovery underway.

Let's look at the deflationary onset.  If you like Act 1 of the COVID Crisis.  Our investment clock model that helps guide our asset allocation has really captured extraordinary behaviour in 2020.  So the way this diagram works, it helps you position portfolios as growth and inflation cycles evolve.

The red dot, if you can see it is the current reading of our growth and inflation indicators.  That was roughly where we started the year with growth actually looking like it was picking up and inflation beginning to pick up as well.  Then when COVID hit you had this tremendous slump.  You moved very rapidly downwards which is weaker growth and leftwards which is the deflationary shock.  The collapse in commodity prices that we saw.

As you saw, the reopening of the world economy in May, June, July, we’ve retraced our steps.  So an incredible snap downwards in growth and inflation then an equally incredible snap back.  But things are getting a bit trickier from where we are now.  It’s as if the world economy has hit a glass ceiling and it’s going to be a little bit harder.  We'll come on to the two-way risk in a moment.

But looking at the performances over that period you can see a range of different asset classes here and a very wide spectrum of winners and losers.  Most asset classes, the riskier asset classes dropped quite dramatically in March. Some of them have bounced back to new highs.  The highest line of that spectrum there is the US technology sector which is up something like 35 per cent year to date in sterling terms.

Next, quite close behind it there is gold in red.  Then you see further down the line UK equities right at the bottom there having bounced back very little.  They're still suffering quite a big decline.  So, if we look at the numbers for different asset classes on a calendar year to year basis.  You can see this diagram that looks at the different calendar years since 2007 and shows all of the different asset classes with their performance in sterling terms

On the far right hand side of the picture there you see year to date.  Year to date gilts are up about seven per cent and global stocks are up five or six per cent as well.  So, you've had this tremendously strong year for gilts so it shouldn’t be surprising.  Because it was a deflationary shock and interest rates have collapsed down to zero even far out on the yield curve.

Global stocks are being driven mainly by the tremendous bounce back in the technology sector, in particular the big four stocks.  That's because these are bullet proof stocks when it comes to deflation risk.  They’ve got a very strong growth model, they’re big growthy sectors and they perform very strongly.

Looking down the column, the black square is what our more diversified multi asset benchmark looks like and it’s still down a little bit year to date.  With property down, commodities down and then UK equities there down nearly 20 per cent still year to date.  A very big decline. 

So simple balanced funds.  I've mentioned if you had global equities and gilts and that's all you had you've outperformed and diversification has been a negative in 2020.  But I hope to explain to you why I think it won’t be a negative going forwards.

So, let's look at the recovery we’re likely to see from COVID.  I'm aware of my three acts being out of order because I'm starting with Act 1 and I'm jumping straight to Act 3.  I’ll come back and fill in the in the meantime bit - Act 2 - in a moment.

Let’s think longer term.  We’ve had a long-term period here of disinflationary forces at work in the world.  This graph looks at the inflation lead indicator that feeds into our investment clock.  The position where we are in terms of the left to right position on the clock.

The purple bars have been pointing downwards mostly for the last decade.  The red line on this graph is the consensus growth estimates for China.  The reason there's been a deflationary decade since the Great Financial Crisis has been the dramatic slowdown in the Chinese economy.  It was growing at 10 per cent a year and now it’s growing more like five per cent or six per cent a year. 

So, a big deflationary trend, bad for commodities and UK equities over that period and bond yields obviously dropped a lot.  But are things changing?  Well the first thing to say is the Chinese economy has snapped back very quickly from the COVID crisis and they’ve got hardly any cases.  That isn't just data being falsified.  The hospitals aren’t crowded with cases either.  They're managing, as is most of Asia, the infection very efficiently. 

Then you had this massive stimulus in the world.  On the left hand side of the picture showing the decree of fiscal stimulus.  Either in direct measures or in government guarantees.  It’s massive, really massive fiscal stimulus from all the governments, particularly the furlough schemes.

Then the right hand side of the picture you've got the monetary stimulus.  The important thing to remember here central banks have massively expanded their balance sheets and done QE.  Even though this hasn’t been a credit crunch.  In 2008 there was a credit crunch, the banks were calling in loans, the money supply would have contracted without QE.  This time the banks are still lending and the central banks have printed money.   

There's tremendous amounts of money sloshing around.  Loads of government spending.  That ought to be, you’d have thought, inflationary over the longer term.  Particularly if it’s hard for policymakers to take that stimulus back.  We’ve seen the political 

backlash against winding down the furlough scheme in the UK.  I think that backlash will still be with us next year and possibly even the year after. 

We’ve seen the fact that central banks are really quite nervous about doing anything to reverse their monetary ease.  Particularly because it won’t be very clear that the COVID crisis is over until quite late on.  There could always be another surge,.

Meanwhile, Government debt's really increasing.  This is UK Government debt as a share of GDP.  You can see there in World War II we got up to about 250 per cent of GDP.  We’ve just moved over 100 per cent of GDP.  This graph is from the Office for Budget Responsibility and it always looks pretty terrifying because it assumes no change in policy.  It’s got the sort of welfare time bomb in there and all sorts of other things.

But the starting point of this graph has risen and risen because of COVID and I would argue also because of Brexit.  These are two things that are sapping the UK's ability to grow and therefore to service its debt.  If you look on the right-hand side of the slide there.  What can you do about debt when it’s likely to rise?  Well if you can get growth to be strong that's a really good idea and again the Brexit headwind doesn’t help there. 

Inflation can be part of the mix; you can try austerity but politically that's difficult.  You can raise taxes, you can default but that's not recommended, and you can do financial repression.  Financial repression is where you keep interest rates really low and so savers are effectively transferring their wealth to borrowers, including the Government.

We think you're likely to see a mixture of attempt to get growth growing.  But definitely inflation will be part of the mix and financial repression where interest rates are kept very low.  So, it will be very hard to make a lot of money in Government bonds in those balanced funds.  Then in terms of your other assets you've got to ask yourself how much protection are we getting against UK inflation rising from those assets?

We have a very diversified mix.  Here's a snapshot of what it might look like.  So, we include things like UK equities, overseas equities, commercial property, commodities.  We’ve got index-linked gilts in there as well.  These are elements that should help keep track with inflation.  So, I’ll come back to this later on when we talk about the asset mix, we have strategically and the changes we’re planning to make.

So back to Act 2, the two-way risk in the meantime.  Well the first thing to say is out Tactical Asset Allocation Framework is starting to add value again.  This is the long-term simulation of our investment clock based Tactical Asset Allocation Framework.  We’re trying to add about a per cent a year of return from tactical asset allocation.  This back test would have added, on this simulation, more like two per cent.

If you look closely you can see a pullback in the very top hand - right hand corner of your screen.  That was the underperformance we had in the first quarter of this year tactically.  Because we were overweight equities and high yield when the crisis first hit.  We have started to recoup those - that underperformance.  Particularly through our regional position and our sector positions, which I’ll come back to later.

There are two main scenarios to think about with COVID though.  The V-shaped recovery, things get better and better and the relapse.  Where either there's a new surge in infection or a premature withdrawal of stimulus.  This is a slide I've been using all year and for most of the summer it felt like we were Scenario 1, the V-shaped recovery.  Now it feels very much more like the world's going into Scenario 2 the near-term relapse.  Because of virus numbers picking up.

The good news is that growth has been strong.  The surprise indices and the growth scorecards from out investment clock have been strong.  They're on the left-hand side of your picture and so far we haven’t seen much of that weakness.  The money supply has been growing tremendously, I touched on this when I was talking about central bank balance sheets. 

On the right-hand side, you can see, unlike every other recession that we’ve lived through, there's a tremendous surge of about 40 per cent nearly in the US money supply.  There's lots of stimulus in the system but we’ve got the problem with the virus.

So, on the left-hand side of the screen here you can see daily new cases, seven day moving average per million.  The grey line that's gone vertical unfortunately is the UK and it’s risen quite a bit since we put this chart together as well.  So, the UK at the moment of all the major economies is seeing the most rapid second surge infection in the world.

But Europe's also picking up, you can see there in black, that's the big three European economies.  Italy's picking up very sharply and the US which never really got the virus under control - that's the red line - is actually starting to see an increase as well. 

So basically, in the US and Europe, the northern hemisphere going into northern hemisphere winter that we’ve got a definite problem with the virus.  We don’t yet have a vaccine and we don’t yet have very much immunity.  Again, the most recent Office for National Statistics survey, it was from September, did a random sampling of UK citizens.  Just over six per cent had antibodies for COVID, which suggests there's a long road ahead waiting to get immunity up or waiting for a vaccine.

As a result, what we’re seeing is what I've described as the square root symbol recovery.  If you look on the right-hand side of the picture there, Google mobility data.  It dipped down, it went up and now it’s going flat and flat to down because you're starting to see social distancing come into force again.

So, lots of risks out there.  There's the US election, Brexit, geopolitical risk generally.  Risks about an early withdrawal of stimulus or the fact the Americans haven’t yet got their act together to extend stimulus, and COVID-19. 

One of the things that makes us nervous near term, despite all the stimulus in the system, is that investor sentiment if anything looks a bit complacent.  So regular followers of our work will know we 

look very closely, in fact on a daily basis, at investor sentiment.  We like to buy when other people are panicking.  You saw in March of 2020 the most depressed sentiment reading ever on our measure.  More than four standard deviations of panic.

At the moment you're at plus one, plus 1.2 on this scale.  So, a fair degree of complacency, private investors are generally pretty bullish at the moment.  Company directors in the US for the last couple of weeks have been really quite strong sellers of shares in their own companies and that's a bad sign.

So, we would like to wait for dips to buy.  Either because of bad COVID news of something to do with the election or Brexit, we don’t know what.  But we're in the mood where we’d like to buy dips or wait to see signs of more positive trends, particularly on the virus, reasserting themselves.  At the moment we’re broadly neutral on equity risk.

But I mentioned that the tactical asset allocation has been adding value again.  In particular it’s been the sector strategy and the regional equity strategy that's been working well.  So within equities, technology on the left hand side has been outperforming.  The purple line is the relative price performance, the red line is the relative earnings performance.

So, this isn’t pie in the sky, this is actually earnings being upgraded relative to other sectors for technology, for obvious reasons.  On the right-hand side, you've got the UK underperforming on the back of a negative earnings trend.  There had been a period of stabilisation for UK earnings, but you’ve seen that underperformance again recently.

That's more to do with the structure of the large cap index in the UK.  There's a very heavy weighting on things like industrials, financials and energy.  So, we are overweight technology, we’re underweight UK equity and those sorts of positions that have been paying off.

We’ve also maintained quite a large overweight in both short dated and long dated global high yield.  We think that's a very good sort of muddle through investment during this period where there's another potential downturn in activity.  Because the credit markets are receiving very special treatment from the central banks. 

One of the most eye-catching things about the Federal Reserve's stimulus programme earlier this year was that they very quickly earmarked $1 trillion to buy investment grade bonds in the US.  And if necessary, to by the high yield exchange traded fund.

The reason they stepped into credit markets so quickly is the banks had withdrawn from lending after the financial crisis 10 years ago.  Whereas the banks are too big to fail in 2008 and they got bailed out, this time the credit markets were too big to fail and they got bailed out by the Fed. 

They haven’t actually had to buy very much because news that they could buy allowed spread to come in quite dramatically.  We think high yield will weather the storm pretty well here.  Because people know that the Fed will buy it if necessary, to prevent a health crisis turning into a financial crisis.

These are our current positions.  So, you can see the big overweight in high yield there.  Pretty neutral position, slightly overweight stocks and commodities, underweight commercial property.  We think that will probably drop out sometime in the middle of next year.  Underweight cash.  Then regional overweight the US and particularly emerging markets where I mentioned the strength of the Chinese economy.  Underweight the UK, Europe and Asia Pacific.

Elsewhere on this we’re also underweight the US dollar, we have a slightly underweight sterling position on the Brexit risk.  We’re overweight technology versus energy in our sector strategies.  So we’re still being very active even though we’ve got a fairly neutral equity position right now.

So, let’s move on to the Strategic Review.  What we’re talking about here is making changes as part of a normal three-year cycle of reviews in our portfolios.  So, what we normally do is with the governed range and also with the GMAPs.  On a three yearly cycle 

we review the strategic asset allocation in order to ensure that the portfolios are still efficient, they're still in the right level of risk for the different risk buckets they're targeting. 

If we want to add additional asset classes or make changes to try and improve things, that's when we do it.  That's been going on in the background and what we are doing here is increasing diversification. 

So, when the GMAP portfolios were launched back in 2016 we increased diversification in the governed portfolios.  So, we added at that time commodities and we added high yield bonds and we also added gilts - it says credit there it should say gilts.  Within the equity mix we decreased UK equities from 55 per cent to 50 per cent and increased overseas equities. 

We’re doing the same kind of thing at the moment; we’re increasing diversification further.  So, we’re raising exposure to faster growing countries and sectors by increasing emerging markets and rest of world relative to the UK.  I can’t give you the numbers at the moment.  There'll be more information on this later but basically, it’s another move in that direction.

We’ve also been slightly reducing property.  The portfolio weight in property has dropped anyway over the last six months.  We’re bringing the benchmark weights down a little bit to add more to global high yield bonds.  Again, to get more diversification from the funds.  Very key to point out though we remain very committed to our approach which is tailored for UK investors to help them beat UK inflation over the long run.

So final few thoughts on that.  You can see here a particular governed portfolio, GP6 or GMAP Balanced.  What I've done here is I've shown the asset allocation.  I've split on the right-hand side the different asset classes into those linked to UK inflation over the long run.  Those linked to global inflation and those which are a nominal store of value in sterling terms.

You can see that we’ve got UK stocks, UK property and index-linked gilts which are all asset classes with a direct or an indirect  

link to UK inflation.  So, a reasonable exposure there in that sort of balanced portfolio to UK inflation linked asset classes.  Now that hurt us in 2020 relative to this kind of portfolio which is a sort of a simulated global balanced fund.  This is a fund with 50 per cent in global equities and 50 per cent in UK aggregate bonds.

But you can see again highlighted in yellow there, the only asset class in that global balanced fund with a link to UK inflation is UK equities.  These days because they've underperformed so much, UK equities are only about five per cent of the global benchmark.  So only two and a half per cent of this portfolio. 

So, it’s done really well in 2020.  But how much protection have you really got against a particular risk over the medium to long term of UK inflation picking up?  Another way to look at the same thing is to look at income.  I guess because I'm an actuary I'm quite old fashioned about these things and we used to value pension funds off their income.  So, we’d look at their dividends, their rents, their coupons and work out what multiple they should be valued at. 

So, if you look at the income coming into a governed portfolio or a GMAP.  On the left-hand side, you can see this pie chart, 72 per cent of the income coming in in that portfolio is either UK dividends, UK rents or Government paid index-linked gilt coupons.  All of which you’d expect over the long run to keep pace with inflation.  If you look at the global balanced fund it’s only seven per cent on an income basis. 

Also, to make the point that the income coming into that GMAP, particularly from UK equities, is from an asset class that's really quite undervalued in the market at the moment.  This is quite small on your screens, so I’ll describe what’s going on here.  This looks at long term valuations of different equity markets.  I believe this is the best way to think about equities.

Rather than their current price to earnings ratio, I like to compare price to the 10-year average of earnings.  That's something the economist Robert Shiller in the US popularised with the US.  So, the red line in the top left hand picture there is what’s known as the 

Shiller Price Earnings Ratio.  So, it’s the US price divided by 10-year average of earnings.

It shows you the US market's fairly expensive on this timescale going back to the 1970s.  In fact, it’s the most expensive it’s been outside of the dotcom bubble.  Also, on there in light purple is UK equities long term Shiller Price Earnings Ratio.  The UK is actually at its cheapest rating in the last 30 years.  So big, big different there.

On the bottom of the page there there's a scatter plot looking at UK valuations versus future returns.  Where we are at the moment, something like 15 times long term earnings in the UK correlates with something like five per cent to 10 per cent annual returns.  Which for equity markets at the moment is pretty decent.  So, there's good value in the assets we’ve got in the portfolio as well as their direct link to UK inflation.

So, let me finish with just a reminder that over the long run all of these asset classes have performed actually quite similarly to each other.  The growth assets.  So, on this picture you can see dark purple there, UK equity returns since the late 1980s.  In light grey you can see global equity returns since the late 1980s.  So, both have returned pretty much the same over this period. 

In the early half of it the UK was outperforming.  That was to do with China buildings its cities and commodity prices rising and that helping the resource sectors.  In the second half of it the UK's been underperforming.  The red line is property and the property market has returned pretty much the same as UK or global equities over this long run period. 

So, we’ve got this diversification, we’ve got the greater link to UK rents and dividends and that's very deliberate.  So, while we’re making these changes at the moment to increase diversification which will increase the exposure we've got to the US and to emerging markets.  We're doing that at the margin.  We still very much believe in the approach that we're taking, and we hope that people invested with us appreciate the reason that we do the things the way we do.

Let me stop there and thanks for your time. Very happy to take questions that I know Adam's been gathering from lots of his customer contacts.

Adam Vaites:           

Thanks Trevor, that's great.  Yeah, I'm just going to ask you a few questions on what we’ve been getting from the markets and clients over the past few weeks.  I think a good place to start - obviously talking about that review of the property side.  COVID, obviously different ways of working and we’ve seen obviously FCA restrictions on property funds this year.

What’s the future of the asset class?

Trevor Greetham:   

Well it’s a very good question.  Obviously at the moment there are some question marks around property.  But it’s not all property sectors that are suffering in the same way.  So, I've got a slide in here actually on property.  If you look at the right-hand side of the picture there, it shows you UK property returns by sector.

In just the same way there's been this massive divergence between growth and value sectors in equity markets.  You’ve had this massive divergence in property between industrial properties, and that includes things like out of town distribution centres for Amazon, and retail.  Retail was already in trouble; we all know it was in trouble prior to COVID. 

The trend in online shopping has been really bad for the high street in particular, has been exaggerated by COVID but it was already happening.  Meanwhile you've got quite a lot of strength still in industrial.  You can see the industrial sector actually began to pick up again.

On the right hand of the picture you've got the sector weightings.  What we think of when we think of property is high street shops.  High street shops outside of central London are this darkest purple element, it’s a tiny, tiny percentage.  It’s something like three per cent of the commercial property benchmark is high street shops outside of central London.  In aggregate, all of the shops outside of central London are now worth less than the central London shops.  

So, there's been this massive shrinking of the value of high street retail. 

But the other sectors are doing relatively well.  Industrial has been still pretty strong.  Offices we don’t really know what's going to happen in terms of the degree to which people go back to work.  But they will go back into offices to one degree or another.  Talking to property experts on this and using our own analysis as well. 

We’re expecting the property markets probably to start flattening out and picking up again sometime middle of next year I would guess.  We’ve got to get through this next COVID surge first.  After that there should be fairly decent returns, particularly if you're then starting from a lower valuation basis.

So, it’s definitely a diversifying asset class.  It performs differently from equities as we’ve seen this year and it is linked to long term inflation.  So, I think it very much has a place in portfolios.  But it is an asset class that brings its own challenges with liquidity.  Which is one of the reasons why we’re reducing the weightings in the portfolio in favour of high yield bonds.

Adam Vaites:           

Thanks Trevor.  Yeah, very comprehensive.  I think - and let's stick with the theme I suppose of the asset classes and what’s happening.  You talked about commodities in the market and there is a lot of talk about commodities.  Just some thoughts on gold specifically.

Trevor Greetham:   

Yeah, well gold's been doing really well.  So, there was a slide earlier on, I won't go back to it because I'll probably mess it up.  But there was a slide very early on that showed techs and gold as being the best two performers year to date of the asset classes I was looking at.

Gold does well when real interest rates are dropping.  Obviously, the drop in bond yields we’ve seen around the world has seen US real interest rates go negative.  So, the minus one per cent real yield on inflation protected securities in the US, minus three per cent in the UK.  That big negative real yield out there means that people think that basically bonds won’t keep pace with inflation.  

So why not own something like gold that is alternative to financial investments?

So, gold's been very strong.  Generally negative real interest rates, a weak dollar and systemic risk all of things boost gold.  The dollar's not been so weak lately it’s sort of stabilised a little bit and that's why I think gold has stabilised for the time being.  But really in an environment where central banks are basically operating financial repression, inflation wants to rise, bond yields want to rise but they sit on them, things like gold could do very well.

But I think you know it’s about a quarter now of the commodity benchmark we invest in.  I think actually gold has got a pretty good outlook.  If central banks do financial repression, keep interest rates very low and inflation needs to get expressed somewhere, it will get expressed through gold.

Adam Vaites:           

No, thank you.  Again, sticking with the themes of the asset classes.  UK equities at the bottom of the patchwork quilt there on one of the earlier slides.  Some thoughts around that?  Optimism maybe for 2021 for this asset class?

Trevor Greetham:   

Well, it’s a funny one this one because I'm defending the role of UK equities in the strategic asset mix because of the link to UK inflation.  Much more direct than through global equities.  They are a cheap asset class compared to global equities.  But valuation doesn't necessarily get triggered very quickly.  At the moment we're tactically underweight the UK. 

So, this reduction we’re doing strategically in the UK is in the direction of our current tactical conviction.  So, if you like it’s expressing them with more conviction by moving the benchmark weight of the UK down.  So, I think kind of not yet for the UK.  It's suffered from the sector make up, it's very much a value driven market and a growth driven recovery.  It’s suffered from the Brexit concerns and it’s also suffered from COVID.  

We’ve been hurt much more by COVID than other economies.  Partly because we haven’t managed to control the virus as well as countries in Asia.  Partly because we have a much more service driven economy which involves much more face to face interaction than say Germany.  All of those things have really hurt.  So, it’s kind of been a terrible year for the UK. 

The UK has underperformed, US equities by 40 per cent year to day - four zero.  Well 25 per cent actually.  The US has outperformed the UK by 40 per cent.  I did it the other way around.  The UK has underperformed by 25 per cent, that's the way the maths works.  But this is a shocking underperformance, the worst you've seen in the year going back to the early '70s. 

I don’t think it will be as bad next year.  I can say that, you know I think that particularly when you start to get that COVID recovery coming through and you start to get commodity prices picking up and activity recovering.  I think people won't want to pay up for tech and they’ll look for value that can still raise prices because of more generalised inflation.  When that comes through, I think the UK will be a big outperformer.  I just think it’s not quite yet.

Adam Vaites:           

Yes, certainly a tough year for UK, I think.  Yeah, talking about the US then.  I suppose it’s probably a good time to talk about US election and talk about what’s happening there.  So tech and we’re overweight US.  Given Biden now has a substantial lead in the polls post the debate and everything that's been going on.  Is there an argument to move away from tech?

Adam Vaites:           

In favour of Europe and value?

Trevor Greetham:   

I don’t think so because I think the bigger trend with tech at the moment is the fact that it’s a growth sector at a time when we’re going back into lockdown.  I think that will be the big driver of tech over the next sort of three to six months.  So, I don’t think it’s just about Biden.  It’s interesting, the consensus wisdom is the Democrats are bad for stock markets because the Republicans like to cut taxes.

But at the moment the markets are actually quite happen that Biden's got quite a large lead.  Because the thing they're most worried about is that Trump loses narrowly and then refuses to leave The White House.  People are talking about rather than election night it could be election month.

I think it was in the year 2000 they didn’t have a firm result until December.  So, it could easily be a month of rancorous, bitter disputes and the Supreme Court being involved and are mail in ballots fraudulent and all this kind of stuff.  That would be really bad.  So that's another thing to bear in mind, if the race really narrows, the markets won’t really like it. 

So yeah, I mean I think Biden would involve more regulation, probably fairly light touch regulation of technology.  He'll maybe have to cut spending or raise taxes, but you know that would be true of anyone.  There's such a fiscal mess for whoever takes over next time.

Adam Vaites:           

Thanks Trevor.  Yeah, I suppose if Trump does lose what do you think he's going to do?

Trevor Greetham:   

[Laughs] He's going to leave the country.  There's rumours that he’ll actually move to Scotland and expand his golf course up there in Aberdeenshire so watch out.

Adam Vaites:           

[Laughs] I see, yes.  This talk about obviously a lot of talk in the market about ESG integration.  How do you see things going forward with the governed range and GMAPs and [grips] and how we integrate that into the portfolios?

Trevor Greetham:   

Yeah, so it’s a journey.  So responsible investing is something that integrate into all of our actively managed portfolios.  Something we're thinking about is whether we can do something within the governed range or GMAPs to tilt exposures in the direction of ESG factors.  So that's something we're looking at.

The benchmark change that we’re working on at the moment will introduce a specific emerging market allocation which will be ESG filtered.  So, we’ve been managing an ESG filtered emerging market equity tracker for quite some time.  We'll be using that.

 So, we’re making steps in that direction all the time and it comes in you know gradually, bits and pieces that we can announce at any particular point in time.  But the intention is very much to embed responsible investing and ESG principles across the governed range.

Adam Vaites:           

Thanks Trevor.  Yeah, just a final question here that we’ve been getting from clients is obviously things have been quieter from a Brexit perspective.  Obviously with everything going on in the States and COVID.  What do you think the likely outcome is now sort of three months on from when we last spoke?

Trevor Greethama: 

[Laughs] [Unclear] fortune question depending on when you look into this forecast because it could be announced any day.

Adam Vaites:           


Trevor Greetham:   

I think there's still a lot of concern.  So, sterling's not moving very much but it’s - the volatility is actually quite high.  I think if there were a free trade deal announced the pound ought to go up.  If there's a no deal Brexit, particularly given the Internal Markets Bill and the threat of a court case from the EU and you know a pretty rancorous environment.  I think the pound would go down quite a lot.  So, I think there's still a lot of risk there. 

It’s worth bearing in mind that Brexit, although it seems like a sideshow now compared to COVID, if you look at the estimated damage over the long run from doing a no deal Brexit.  Or even the free trade agreement relative to being in the EU.  The original estimates back in February of 2018 were a free trade agreement would be a six per cent hit to GDP over 15 years.  No deal would be nine per cent.

So, to put that into context, current estimates of what COVID will do in terms of permanent damage, it’s more like three per cent or four percent.  So, Brexit is still two or three times bigger than COVID, economically speaking.  That's assuming obviously we don’t get a much worse outcome from COVID than we already know about. 

So, this really, really does matter and I think all you can really do as investors is have diversification.  Where you've got asset classes like commercial property that will do better in an environment where we have a free trade agreement and the pound's a bit stronger.  And you've got asset classes like overseas equities and commodities that if the pound goes down, they’ll go up.  So that's all I'll say really. 

Within your growth seeking asset classes it’s really good to have that balance between domestic and overseas investments.  If you’re in that sort of straw man of the global balanced fund and the pound goes up a lot.  So, if there is a deal and it’s treated positively by the markets, all of your overseas equities get marked down and that's a loss.

Adam Vaites:           

Thanks Trevor.  A lot to think about there as always.  So, I appreciate your time and thank you to everyone for listening to our webinar, we appreciate your support with the funds.  If you do have any further questions, please do get in touch with your usual business development manager for Royal London.  Or please get in contact with Scott, Christian, Oliver of Charlotte on the slide there.  Or please email 

Thank you very much.

Trevor Greetham:   

Thanks everybody, thanks Adam.

Adam Vaites:           

Thank you.

About the author

Trevor Greetham

Head of Multi Asset at Royal London Asset Management

Trevor Greetham is a portfolio manager at Royal London Asset Management. Prior to joining Royal London in 2015, Trevor was asset allocation director for Fidelity Worldwide Investment, where he was responsible for implementing tactical investment decisions across a wide range of institutional and retail funds including the Fidelity Multi Asset Strategic Fund.

This website is intended for financial advisers only and shouldn't be relied upon by any other person. If you are not an adviser please visit

The Royal London Mutual Insurance Society Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. The firm is on the Financial Services Register, registration number 117672. It provides life assurance and pensions. Registered in England and Wales number 99064. Registered office: 55 Gracechurch Street, London, EC3V 0RL.