What was that all about?

So much has happened since the launch of the Premier Miton Diversified Cautious Growth, Balanced Growth and Dynamic Growth Funds, to sit alongside the Premier Miton Diversified Growth Fund, it would not be possible to include it all in a note such as this, even if I could remember it.

It would be easy to just stick to thoughts on economies and financial markets, but that would ignore massive societal change. The impact of COVID on the lives of ourselves and our descendants is significant, it is likely to be everlasting and I doubt very much that we have seen the full impact yet.

What has changed?

Industries that have fundamentally changed as a result of COVID include; anything office based, technology, logistics, travel, leisure, retail and financial services.

The invasion of Ukraine by Russia has also had a profound impact on the world and industry. We went through decades of globalisation which has gone into reverse, with manufacturing, agriculture and energy all changing tack as a result.

Then we have had our climate go to the top of an already packed agenda bringing yet more important changes to how we think about things and our behaviours.

It’s been quite a challenging time.

All of that has caused turmoil in economies and financial markets. I think I ran out of adjectives and superlatives to describe the situation at some point in 2022 and have just been on repeat ever since. Furthermore, the data we have seen has been record breaking for good and for bad, whether it be the depth of recessions, the spike in inflation, the jump in interest rates or in financial assets, the move in bond yields or the price of Bitcoin. We are still living it; the moves we are seeing and the impact on indices of the share prices of the Magnificent 7 are eye-watering.

 Staying focused

One thing I learnt over the years as a fund manager is to stay focused on the goal, whether that be capital growth, income, absolute return or risk adjusted total return and to remember, the long term is the timescale, not the short term. Short term market moves can be violent, evermore so, and expensive if you get them wrong, you need to be able to look through them. Clearly, taking short term action is not something to be ignored, but it is something to be undertaken on a thoughtful basis.

Having the 4 growth funds has been a good discipline over the last 5 years, it has meant the investment team has had to consider each fund in its own right and manage it to achieve the desired risk / return profile. However, very importantly, we have to think about each one relative to the others, when it comes to asset allocation. I think that has been crucial in producing the investment outcomes that we have over that period.

Putting it into practice

This could be a very long missive, so I think it is worth reading what the investment team have to say, so I’ll leave to the experts to give their reflections. They, after all, are the ones making the day to day decisions on the funds.

Firstly, Simon Prior on fixed income markets;

It is usually the much-maligned national rail where I hear the words “ALL CHANGE, ALL CHANGE”, but that phrase could not be more appropriate over the five years in what we have seen in the fixed income markets too.  At the time of the funds’ launch, UK base rates were at a paltry 0.75%, 5 years later, one pandemic, Trussonomics and destabilising geopolitical events and base rates in the UK currently sit at 5.25%, and there has been a hell of a ride in between for the fixed income markets.

 Subsequent to the pandemic, rates were initially cut to a low of 0.1% and UK 10 year gilt yields went as low as 0.07% in August 2020! The influx of both fiscal and monetary stimulus prompted a demand surge at the very time when supply chains were keeling over – inevitably leading to periods of inflation unseen for decades across the western world. On top of that, globalisation, the catalyst of the last 30 years of disinflation, appears to be unwinding.  Remilitarisation, climate change, and food scarcity are likely to be continuing themes over the next 5 years too, likely leading to stickier inflation with consequences in the fixed income markets. Past performance is not a reliable indicator of future returns.

Fund manager, Duncan Goodwin is very experienced in global equity investing, but learnt more lessons during the 5 years;

The most significant lesson to us in looking back at global equity markets over the last five years is in the futility of making major macro predictions and attempting to invest based on such predictions. Not only have the events themselves often been wholly unexpected, but the equity market reaction to them has often been surprising, or at least seen as such at the time. The outbreak of war in Europe, the speed and extent of interest rate rises around the world – Japan excluded – and a banking crisis in the US are all events that can been seen as exceptional in isolation, let alone in the context of the same five-year period. It is with this in mind that we look to the next five years, not with a crystal ball, but with a focus on investing in companies that do what they do well, are well rewarded for their efforts and are aligned with shareholders in sharing returns. Finally, we look forward to the next five years with a sense of optimism. Innovation in areas such as healthcare and technology look as exiting now as ever and while wider global uncertainty remains, that does not in our view detract from the potential we see for growth at the company level.

Benji Dawes manages the UK equity portfolio with Jon Hudson and likes what he sees as we look ahead rather than back;

For us as UK equity investors with a preference for medium and smaller sized companies, it’s been a period we are unlikely to forget in a hurry. Brexit uncertainty, trade barriers, supply chain snarls, gas price spikes, not-so-transitory inflation, interest rate hikes, war in Europe, flight to safety. Is that it? Oh yes, and a global pandemic. Despite all the turbulence, we have ground out returns through sticking to a disciplined process and thanks to our companies delivering growth through gaining ground against their competitors, in tough markets. While investors increasingly shun the UK, we see an increasingly attractive opportunity set.

Investing in property companies is a cyclical business. Fund manager, Kirsty Riddle-Turner has experienced a very condensed cycle this time round and sees the possibility of a new age for property investing;

It’s certainly been a bit of a rollercoaster for property since the launch of the funds – we’ve battled Brexit, pandemics, geopolitics, and wars – and at times questioned (and tested!) whether we need or want certain property subsectors such as offices and shops, all whilst trying to understand how the operation and construction of real estate, as one of the leading contributors to global carbon emissions, can be improved to help avoid a climate catastrophe. Over this time, the sector has had a fairly decent track record of bouncing back from such challenges as it has demonstrated an ability to adapt to changing requirements, but the recent interest rate hiking cycle has been less about adaptation and more of a major transition; over the last decade or so returns could be driven by external growth using financial engineering in “winning” sectors, but now growth will be more sector agnostic and reliant on skilled management teams actively generating growth through asset management, and this is where the listed sector – with access to leading management teams – should thrive. The transition has been somewhat painful, but with interest rates having peaked, focus can return to exciting opportunities that lie ahead…

Dan Hughes is the team’s derivatives expert, using them to implement the hedging strategy and also to build strategies within the alternatives portfolio, that are aimed at being lowly correlated to bonds and equities. Dan explains how the derivatives market has expanded and how that has helped us manage the funds;

The events over the last five years have redefined parts of the derivative complex, we’ve seen significant innovation and new products launched such as zero-day-to-expiry options.  Derivative usage has become more mainstream as increasingly platforms have made derivative investments available to a retail audience, which has contributed to financial markets being more reactive to daily events and developments.  Within the Diversified funds, the experience of 2020 and the years since has been a test of our approach to risk management and a ‘proof of concept’ of the defensive and hedging strategies employed.  We have looked to adapt the strategy over time and incorporate new derivative investments where we believe they could improve the risk management strategy, such as incorporating Over The Counter derivatives. This has enabled a more precise risk management framework that is not reliant on historic correlations to mitigate risk, something the experience of 2022 validated.

Robin Willis manages an alternatives portfolio that utilises investment trusts. It has been a challenging asset class that is providing some amazing opportunities now;

Just like all other asset classes, alternatives have experienced a bumpy ride over the last 5 years. When volatility spikes, correlations tend to increase and that has been prevalent over the period. However, overall, the diversification that comes with investing in a broad range of underlying assets such as hedge funds, private equity, renewable energy infrastructure, music streaming and shipping, has been of real benefit to the Diversified funds in stressed market conditions. . Furthermore, the share price volatility around robust underlying NAVs can provide the opportunity to buy great assets at depressed prices.

 Until recently the low returns offered by bonds had led to a high demand for portfolio diversification from alternatives. While the steep rise in interest rates over the last 2 years has reversed this trend, it has provided a very attractive buying opportunity. Meanwhile, we believe that continuing to maintain exposure to assets with inflation linkage and alternative revenue streams will be important in the current market environment.

The sum of the parts 

Any actively manged investment product is only as good as its constituent parts and they are only as good as the people who select them.

The last 5 years have provided a more challenging economic and market environment than I have ever experienced. The investment team has coped well, even thrived, through it and the Diversified fund range has benefitted as a result.

But that is only history, the next 5 years are more important and we will continue to enhance the investment process and play what we see.

Thank you for supporting the fund range through the period.