Fund Management Monthly Commentary - August Market Update - Margetts Advisers
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Fund Management
Monthly Commentary
Covering the month of August 2021
August Market Update
Margetts’ monthly diary discusses major economic and market developments that occur over the month.
It is written by the Fund Management team.
August saw the strongest sector performance from IA UK Smaller Companies (4.59%), IA Japan (4.21%),
and IA Japanese Smaller Companies (3.81%). The weakest performance across the month came from IA
UK Gilts (-0.13%), IA Money Market (0.00%), and IA Short-Term Money Market (0.00%).
The Jackson Hole meeting saw Federal Reserve chairman Jerome Powell carefully position the markets
towards the inevitable eventuality of tapering. The spread of the Delta variant across the US offered the
opportunity to further delay the prospect of quantitative tightening, despite the progress made in the
Federal Reserve’s maximum employment and price stability goals:
“My view is that the "substantial further progress" test has been met for inflation. There has also
been clear progress toward maximum employment. At the FOMC's recent July meeting, I was of the
view, as were most participants, that if the economy evolved broadly as anticipated, it could be
appropriate to start reducing the pace of asset purchases this year. The intervening month has
brought more progress in the form of a strong employment report for July, but also the further spread
of the Delta variant. We will be carefully assessing incoming data and the evolving risks. Even after
our asset purchases end, our elevated holdings of longer-term securities will continue to support
accommodative financial conditions.”1
The possibility of imminent tapering has been dented by the data for US non-farm employment in August
which came in well below expectations, growing by 235,000.2 This was a significant step down from July’s
1.05m growth in jobs, and well below the economist consensus prediction of 733,000. As the data is taken
from the middle of August, this figure does not factor in the major disruption caused by hurricanes in the
latter part of the month and demonstrates the impact that the delta variant is having on the US economy.
As and when the decision is made to taper, the market has been given notice of the gradual process that
will be undertaken, no doubt with the intention to avoid the “taper tantrum” scenario of 2013. With the
sheer scale of the fiscal stimulus put in place during the pandemic, trying to remove the support from
markets will be the financial equivalent of a magician pulling the tablecloth out from under a fully laid table
without smashing everything on it.
The Covid-19 delta variant is proving to be a substantial challenge for many countries. In the Asia Pacific
region, countries that had repelled the initial spread of the virus by the “fortress” method (e.g. Australia
and New Zealand), and via robust test and trace systems (e.g. South Korea), have not been able to isolate
themselves from the more transmissible delta variant in the same manner. Many of these countries are
behind the world average in vaccinations and are vulnerable to rapid spread should their strategy fail to
stop the variant entering their countries. In the UK, the data continues to back up the case for widespread
vaccination, as cases have remained elevated above c.20,000 daily cases through July and August, but with
1 https://www.federalreserve.gov/newsevents/speech/powell20210827a.htm
2 https://www.bbc.co.uk/news/business-58432350
FOR INTERMEDIARY USE ONLY – NOT SUITABLE FOR RETAIL CUSTOMERSa substantially lower impact on deaths and hospital admissions than the increase in daily cases seen in the
first and second waves.3 The likelihood is that vulnerable people will require a subsequent booster jab for
the winter season, and government discussions are ongoing as to whether to offer this option to all adults
in the UK.
China showed no sign of heavy-handed Government regulatory intervention slowing down, with an edict
that under 18s should not play more than 3 hours of video games a week.4 The concern of the Government
that video games represent a “spiritual opium” is not new, but these updated rules again took a toll on
Tencent and related companies in terms of share price.
Inflation remains a concern, with many signs of increasing costs which are likely to be passed on to
consumers. US CPI remained elevated at 5.4% on a year-on-year basis in August, although UK CPI fell to
2% over the same period. Supply chains in the UK appear badly strained, with restaurants and shops
running out of products. The shortage of HGV drivers due to Brexit and Covid-19 is proving particularly
problematic and has impacted many businesses. Qualified drivers have been able to command increased
wages as a result, with many companies offering joining bonuses and increased salaries to attract and
retain drivers.5 A survey from the Road Haulage Association stated that c.63% of respondents have asked
for additional rate increases to cover increased driver costs, and c.64% of respondents stated it took over
a month to fill their latest HGV driver vacancy, with c.30% of those taking over 8 weeks.6
The US Senate voted to pass a c.$1tn infrastructure bill and it was notably a bipartisan success, with 19
Republican senators voting along with the Democrats. The bill will head to the House for consideration
when it returns from summer recess. It is some way short of President Biden’s initial c.$2.4tn proposal,
but a considerable achievement given how previous recent attempts have inevitably not gotten off the
ground. Infrastructure has long been a concern on the political agenda in the US, with the quadrennial
American Society of Civil Engineers report card this year scoring a “C-” (an improvement over 2017’s “D+”
score) but with decades of underinvestment to reverse.7 Bridges and roads are in poor condition, with 42%
of bridges across the US over 50 years old and 7.5% structurally deficient. 43% of roads are in a poor or
mediocre condition.8 This bill would allocate $550bn to transport networks and upgrading the power grid.
Other funding would aid in broadband rollout and drinking water.
20 years of de facto occupation in Afghanistan came to a shuddering halt as Joe Biden followed through
with Donald Trump’s intention to withdraw all US forces. Within days, the Taliban swept the Afghan army
(ostensibly numerically superior and better armed) from the whole country, taking the capital Kabul and
encountering minimal resistance. Kabul airport remained the only defended area, as the west sought to
evacuate their citizens by air, echoing the fall of Saigon in the Vietnam War. The withdrawal of the US and
its allies from the strategic region leaves the area open to influence from China and Russia, and further
destabilises an already volatile geopolitical hotspot, as well as increasing the likelihood of future terrorist
attacks. America can be added to the ignominious list of great powers who met their match in Afghanistan,
alongside Alexander the Great’s Macedonians, the British Empire, and the Soviet Union.
3 https://coronavirus.data.gov.uk/
4 https://www.nytimes.com/2021/08/30/business/media/china-online-games.html
5 https://www.bbc.co.uk/news/57810729
6 https://www.rha.uk.net/LinkClick.aspx?fileticket=ICI0C-FWmVo%3d&portalid=0×tamp=1627564639720
7 https://infrastructurereportcard.org/
8 https://infrastructurereportcard.org/wp-content/uploads/2020/12/National_IRC_2021-report.pdf
FOR INTERMEDIARY USE ONLY – NOT SUITABLE FOR RETAIL CUSTOMERSStrategy
The appeal of bonds in the current environment is diminished. The inevitability of the Federal Reserve
slowing or reducing bond purchases at the current scale, along with the flattened yield curves that have
resulted from central bank intervention, make investment at the long end of duration at risk of losses. This
is because the sensitivity to market changes increases the further away from maturity the bond is. The risk
of capital losses as central banks pull their support is a plausible outcome. Our positioning in short-dated
corporate bonds produces an above inflation yield with reduced duration and credit risk, and ought to
outperform in a rising yield environment.
Our UK overweight positioning across the Risk Rated range is based on attractive valuation relative to other
developed markets. Despite recent outperformance, particularly in the mid and small cap space, there is
still a substantial discount on a historical basis, with scope for further relative outperformance.
The US appears to be the most likely victim of a market correction. Inflation remains at its highest figures
since 2008, and the recent non-farm employment data is disconcerting. Our underweight allocation to the
US across the range reflects the concern at expensive valuation ratios and possibility of the reversal of
recent market trends.
Our Asia Pacific and Emerging Markets positions are broadly underweight to China exposure, which
continues to underperform as the Government intervenes heavily in regulation. This should help to
insulate the portfolios from this continued fallout.
FOR INTERMEDIARY USE ONLY – NOT SUITABLE FOR RETAIL CUSTOMERSMargetts Risk Rated Funds
The below charts show the current positions of the funds, the tactical (short term) targets, and the strategic
(long term) allocations. We aim to keep the current positions in line with the tactical targets from week to
week. The differences between the tactical and strategic targets reflect the views and convictions of the
Margetts Investment Committee.
Providence
60.0%
50.0%
40.0%
30.0%
20.0%
10.0%
0.0%
Bonds Cash UK Equities Europe ex North Asia Pacific Emerging Japanese Global
UK Equities American ex Japan Markets Equities Equities
Equities Equities Equities
Current Position Tactical Targets Strategic Targets
There were no changes made to asset allocation and/or fund selection in August.
Providence slightly lagged the IA Mixed Investments 20-60% Shares sector during August.
All bond strategies within the portfolio returned in line with their respective strategies during the month.
Within the UK strategies, the Allianz UK Equity Income fund was the strongest performer during the month,
returning c.2.3% against the IA UK Equity Income sector. Most of the underlying UK holdings in the
portfolio returned ahead of or in line with the sector during August.
The Schroder Asian Income strategy lagged the IA Asia Pacific ex Japan sector by c.0.8% during August.
FOR INTERMEDIARY USE ONLY – NOT SUITABLE FOR RETAIL CUSTOMERSSelect
50.0%
45.0%
40.0%
35.0%
30.0%
25.0%
20.0%
15.0%
10.0%
5.0%
0.0%
Bonds Cash UK Equities Europe ex North Asia Pacific Emerging Japanese Global
UK Equities American ex Japan Markets Equities Equities
Equities Equities Equities
Current Position Tactical Targets Strategic Targets
There were no changes made to asset allocation and/or fund selection in August.
Select slightly lagged the IA Mixed Investments 40-85% Shares sector during August.
All bond strategies held within the portfolio returned in line with their respective sectors during the month.
Both European strategies held in the portfolio outperformed the IA Europe ex UK sector during August.
The SLI Emerging Markets strategy substantially outperformed the IA Global Emerging Markets sector
through August, returning ahead by c.1.5 percentage points.
All underlying North American strategies in the portfolio outperformed the IA North America sector during
August.
Both Asia Pacific holdings lagged the IA Asia Pacific ex Japan sector through the month.
The UK holdings in the portfolio returned a mixed performance, with the SVM UK Growth and Allianz UK
Equity Income funds emerging as the strongest performers.
FOR INTERMEDIARY USE ONLY – NOT SUITABLE FOR RETAIL CUSTOMERSInternational
60.0%
50.0%
40.0%
30.0%
20.0%
10.0%
0.0%
Bonds Cash UK Equities Europe ex North Asia Pacific Emerging Japanese Global
UK Equities American ex Japan Markets Equities Equities
Equities Equities Equities
Current Position Tactical Targets Strategic Targets
There were no changes made to asset allocation and/or fund selection in August.
International lagged the IA Global sector by c.1 percentage point during August.
Both Japanese strategies held within the portfolio lagged the IA Japan sector during August.
All European holdings within the portfolio returned in line with or ahead of the IA Europe ex UK sector
through the month.
The two Emerging Markets strategies offset one another’s performance throughout August.
All US strategies held within the portfolio returned ahead of the IA North America sector during August.
The L&G UK Mid Cap Index fund was the strongest performer in the UK space, returning c.2.5% ahead of
the IA UK All Companies sector during the month.
FOR INTERMEDIARY USE ONLY – NOT SUITABLE FOR RETAIL CUSTOMERSVenture
40.0%
35.0%
30.0%
25.0%
20.0%
15.0%
10.0%
5.0%
0.0%
Bonds Cash UK Equities Europe ex North Asia Pacific Emerging Japanese Global
UK Equities American ex Japan Markets Equities Equities
Equities Equities Equities
Current Position Tactical Targets Strategic Targets
There were no changes made to asset allocation and/or fund selection in August.
Venture slightly lagged the IA Flexible Investment sector during August.
At c.5.4 percentage points ahead of the IA Asia Pacific ex Japan sector over the month, the strong
performance of the Stewart Investors Asia Pacific Leaders strategy helped to offset some the weaker
relative performance of underlying Asia Pacific holdings during August.
The majority of Emerging Markets strategies within the portfolio outperformed or returned in line with
the IA Global Emerging Markets sector throughout the month.
The performance across the US equity strategies was mixed for August, with both offsetting one another’s
performance.
In the UK holdings, the L&G Mid Cap index was the standout performer in August, as seen within the
International portfolio.
FOR INTERMEDIARY USE ONLY – NOT SUITABLE FOR RETAIL CUSTOMERSImportant Information
Please note that the contents are based on the author’s opinion and are not intended as investment
advice. This information is aimed at professional advisers and should not be relied upon by any other
persons.
Any research is for information only, does not constitute financial advice or necessarily reflect the views
of the author and is subject to change. It remains the responsibility of the financial adviser to verify the
accuracy of the information and assess whether the fund is suitable and appropriate for their customer.
Past performance is not a reliable indicator of future performance. The value of investments and the
income derived from them can fall as well as rise and investors may get back less than they invested
especially in the early years.
Important information about the funds can be found in the Supplementary Information Document and
NURS-KII Document which are available on our website or on request.
Issued by Margetts Fund Management Ltd
Margetts Fund Management Limited is authorised and regulated by the Financial Conduct Authority
For any information about the company or for a copy of the company's Terms of Business, please contact
the company on 0121 236 2380 or at 1 Sovereign Court, Graham Street, Birmingham B1 3JR
You can e-mail us at admin@margetts.com
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