Firstly, I hope that you and your family remain well and that you are coping with the current restrictions. Although our staff have been working from home for a month, our business continues to operate without interruption, so please do contact us as normal.
I thought it might be helpful to provide an update further to my communication of 24th March.
Equity markets have rallied in recent weeks, and now appear to be pricing in a relatively swift economic recovery later this year. This appears to be a fairly optimistic prognosis and the reality may fall somewhat short. We are continuously monitoring the resilience of companies held in portfolios, assessing both their ability to withstand current challenges and their future growth prospects. While this is an ongoing task, we are greatly reassured by the financial strength of the companies in which we invest – this is a characteristic we have always emphasised.
Balanced portfolios include a 35% allocation to a combination of high quality government bonds, gold and a limited level of cash. This mix protected the capital values of portfolios from the worst of the original falls in equity markets, but at the same time has enabled portfolios to participate in the more recent recovery.
We are also spending some time debating the longer-term consequences of the current situation. Will there be the same demand for office space when people realise how effectively it is possible to work from home? How quickly will people be prepared to return to eating out and mingling in large groups? How dependent do we all want to be upon online delivery; or would we rather return to shopping for locally produced products where provenance is known? Will lockdown increase the impetus towards much more widespread automation? How is all the debt that has been created going to be paid back? Will we see a huge pick-up in inflation, or will the present economic slump lead to a deflationary spiral? These questions are but a few raised by this crisis. As always, there will be grave risks for some companies and enormous opportunities for others. The investment team is continuously considering the wider ramifications of this ghastly situation and has been working on generating new investment ideas in recent weeks, some of which have already been added to portfolios.
Some of our clients rely, to a greater or lesser extent, upon the income provided by their portfolios. In normal times it is reasonably straightforward to predict future income with a degree of confidence. Income generated by the interest from government bond holdings will continue to be paid. However, bond yields are exceptionally low at present, and it is impossible to sustain the level of income clients require from this source alone. Meanwhile, dividends paid by companies are being reduced, deferred or cancelled, and income forecasts have become very uncertain as a result. Businesses around the world are increasingly conserving cash as demand collapses for their goods and services. To put this in some context, FTSE 100 companies are currently predicted to cut their dividends on average by nearly two thirds this year. It is still too early to try to second guess the intentions of those companies held in portfolios, but we will keep you informed as the position becomes clearer. It seems certain that equity income will fall materially this year, and this will impact the income payments from portfolios. In most cases, income shortfalls can be supplemented by transfers from capital, but this is a decision for individual investors to be comfortable with. Please do contact your investment manager should you wish to discuss the implications for your own income position with them.
With continuing best wishes to you and your families.
Tim Wood CFA
30th April 2020
Investment markets continue to be volatile, but our highly experienced investment team have seen many material market downturns during their working careers. Our disciplined investment process ensures that we will continue to make proactive decisions to help meet your investment objectives. Although it may take some time for the world to restore a semblance of normality, we are confident that the strong companies in which we invest will continue to prosper in the future.
McInroy & Wood has always been conservatively managed. We have never been acquisitive and have no debt on our balance sheet. The group maintains cash balances well in excess of any regulatory requirements, and these are designed to sustain the firm throughout this type of situation. We are therefore fortunate to be in a strong financial position which I hope will be of reassurance to you. To put this in some context, we can cover all our existing annual expenses from current cash reserves for over a year.
Our employees are working from home and our technology allows us to work as if we were in the office. Accordingly, we continue to operate as normal. We have invested much time and effort over the years in our business ‘resilience’ plans, and that work is now of material benefit. You can contact the same telephone numbers and email addresses as you would normally.
I am becoming increasingly concerned that it might only be a matter of time until the post is stopped. Should those circumstances arise, and you wish to instruct a transaction, we would encourage you to contact us either by phone or by email and we will advise you on how to proceed.
There are always those who try to take advantage of others during testing times. We therefore ask you to be particularly vigilant of any attempted fraud or scams. If you are at all unsure about something you have received from us, then please feel free to call us on 01620 825867 to confirm its validity. We may also call you if we have received any instructions purporting to come from you to confirm they are genuine. If you are unsure the person calling is from McInroy & Wood, hang up and call us on the number above.
With our best wishes to you and your families at this difficult time.
Tim Wood CFA
24th March 2020