As we reflect on the year, our thoughts are with those who lost loved ones or found themselves in difficult circumstances.
2020 will be a year that lives in infamy. The UK suffered its biggest peacetime fall in GDP and the FTSE 100 had its worst year since the 2008 financial crisis. Many companies struggled under what were unprecedented circumstances and some payed the ultimate price. The year ended with redundancies at record highs but also with a glimmer of positivity as the vaccine role out began.
At FE Investments, we see ourselves primarily as a risk manager, aiming to optimize diversification and avoid unwarranted risks within our portfolios. It’s therefore helpful to look back at 2020 and review how our philosophy and process stood up in difficult market and economic conditions.
- Conviction market calls: We don’t make conviction market calls. Many large investment firms with significant resources try to call the direction of markets. Very few are consistent. In 2020 we saw the global economy fall off a precipice and deliver the worst economic performance since World War Two. Who called the virus driven catastrophe and the divergence in the economy and financial markets? Not us. But our risk focused philosophy and process helped keep our portfolios within their targeted risk parameters.
- Gilts: The asset class still has a purpose. Despite questions about the asset class and its use in portfolios, Gilts have provided a combination of moderate but steady returns over the years. Even if rates and returns are low, they can provide important diversification when markets fall. During the February sell off, we saw Gilts support our portfolios in the low to middle end of the risk spectrum, aiding capital preservation.
- Risk: We see funds as a collection of risks. Our powerful tools and processes allow us to “x-ray” underlying risk factors, helping us avoid over exposure to any particular event. The Brexit trade deal negotiations were impossible to call and could have conceivably ended with or without a deal. By using our technology, we were able to balance the large cap versus small and medium cap investment in our portfolios so regardless of the outcome we had confidence in the balance of risk.
- Stress testing: This has now been an important factor in our annual review for two years in a row. Our technology has enabled us to test portfolios through difficult economic and market scenarios prior to an extreme event. These events have either occurred before, or could reasonably be foreseen. So when the oil price crashed in February or when markets fell due to the Coronavirus, we were confident that our portfolios had been positioned for extreme events regardless of the trigger.
- Communication: In the February sell off we made a conscious decision to step up on our strong client communication by increasing the frequency and depth of our reporting to IFAs. This support was unreservedly appreciated by our clients and we were able to deliver a steady flow of information on performance, risk and market events via our IFA client portal. Retail clients run the risk of selling out in times of market stress but regular, trusted communication can help calm investors so they are less inclined to sell out before markets recover
The last year has been the biggest test since the Global Financial Crisis. Our investment decisions are the result of an extensive process based on risk management and diversification and our robust performance in 2020 was thanks to the hard work of an experienced team that has a sound understanding of investment risks.
In the coming months we hope to see a sustained recovery and in order for portfolios to benefit we will need to balance the risk to capture the upside, whilst also protecting against falls in the market. A risk manager’s job is never complete, regardless of the prospects for markets.
Since launching our Discretionary Managed Portfolios in 2015, we have become a multi-award-winning Discretionary Fund Manager and been named as one of the fastest growing DFMs on platform, with more than £3bn of assets under management.
Click here to learn more about FE Investments and our award-winning Manged Portfolio Service. You can also get in touch with one of our experts to arrange a web demonstration.
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