Marlborough fund performance and the COVID pandemic

For Professional Clients only. Not for distribution to or to be relied upon by Retail Clients.

Marlborough funds have seen a remarkable rebound in performance since the bottom of the COVID-driven global market collapse in March this year, as the table demonstrates:

The Marlborough fund of funds team have been running their portfolios for an average of 20 years. Their combination of deep knowledge and long experience has helped them to be patient when many others were (and still are) losing their heads.

‘Advisers who withdrew client funds after the collapse will be under severe pressure as their clients question the justification for that decision. Missing the rebound will only accentuate any sense of loss.’

We are leading exponents of what is commonly described as ‘active management’ and also strong believers in ‘time in the market’ being more important than ‘timing the market’. This has always been one of our mantras. Many other fund management firms might purport to share that view and it is a philosophy that is easily adopted when market volatility is within ‘normal’ bounds, where share prices move in an almost random manner daily, but in a generally upward direction over time.

COVID has been a prime example of an ‘exogenous shock’ – or what Donald Rumsfeld called an ‘unknown unknown’ – that was not taken into account by economists, analysts and fund managers when making predictions about the nearto-medium-term market outlook. Market shocks like COVID hit us when we least expect them. The depth of a market fall is based on news rather than fundamentals, while recoveries often happen so quickly we do not recognise them as such until they are over.

This has been the experience with COVID. Even as the death toll rose in China during February, the S&P 500 and Nasdaq indices were hitting record highs and the virus was still being seen as a problem for China rather than an obvious threat to the global economy. However, February 24th saw a thousand-point drop on the Dow Jones; only four weeks later global equities had fallen by around 30%.

Despite this, Marlborough’s managers stuck to their faith in the resilience of the companies featuring in the portfolios, and this has borne fruit.

Where we are now

The COVID pandemic has produced over 25 million confirmed infections as I write this note, with related deaths approaching 900,000. In those parts of the world where COVID arrived late, e.g. Latin America, infection and death rates naturally appear much higher; however, the European and Asian pattern of accelerated early infections and rapidly falling transmission post-lockdown is likely to be repeated.

More positively, reported new cases around the world seem to have peaked at the end of July at around 290,000 per day. Most importantly, the death rate has plummeted. In the UK, for example, at this time of year around 9,000 deaths are typically recorded each week. In April, that figure averaged just under 20,000. August is back to normal, averaging 9,100 per week with less than 140 deaths associated with COVID, according to the Office for National Statistics.

Lockdowns seem to have worked. However, we have seen steps to ease lockdown strategies despite a resurgence of cases, e.g. in the US, that have been entirely motivated by economic concerns and political imperatives. This underlines the current dilemma faced by governments: honouring a duty to protect the short-term health of a relative minority of citizens, versus managing the longer-term impacts of lockdown and economic recession on society as a whole. Economies around the world have been in various degrees of shutdown for over five months, and corporate earnings (with some significant exceptions like Apple, Netflix and Amazon) and economic growth figures for the first half of the year are going to be dreadful. UK GDP has collapsed by 22% since Q4 2019, yet the UK government’s Job Retention Scheme has managed to limit ‘official’ unemployment to less than 4% in the UK, roughly where it was at the end of 2019.

Given a litany of reported disasters over the past five months, readers could be forgiven for imagining the worst about the performance of their portfolios. If these were hypothetical conditions, observers betting on a bull market might have had their sanity questioned. Yet anyone taking a perceived ‘common sense’ view amid this political and economic mayhem and taking to cash in late March will now be feeling a deep sense of regret. Despite unprecedented negative economic conditions, equity markets, particularly those in the US, have shown an astonishing pace of recovery.

What is more, positive signals on recovering economies are now coming through strongly. In the UK, new company incorporations have recovered and are above the levels seen in Q3 2019. Footfall on retail shopping parks has recovered to 90% of the total in the same week in 2019; given increased online shopping and the fact that non-essential shops only reopened in mid-June, that is a remarkable figure. Similarly, light commercial and heavy goods vehicle traffic is back to the same level it was in February, before the COVID outbreak took hold.

However easily pessimists might argue that this lightning recovery makes no sense given the gloomy outlook, yet again ‘time in’ the market has mattered more than ‘timing’ the market. As venerated economist John Maynard Keynes is said to have opined: “The market can stay irrational longer than you can stay solvent”. So, what is driving these gains? Is this exuberance irrational, and will it all end in tears?

Certainly, explaining market performance is easier than predicting it. Long-term, rising markets simply reflect the ‘triumph of the optimists’. COVID has not been as virulent (outside large urban population centres) as feared; and however unpalatable the facts, 98% of COVID-related deaths have been among those over age 50. The ‘whatever it takes’ mentality of governments and central banks has seen trillions of dollars, pounds and euros pumped into the economic system. Cash on deposit has an absolute return of virtually zero, so any reversal of the severe risk aversion that dominated investors’ thinking in March is likely to find some cash reallocated to riskier assets. There is also a ‘value’ tradition that buying equities when all seems lost generates higher returns than buying at a record high.

As for ‘experts’, take economists’ and others’ forecasts with rather more than a shovel-full of salt. Economists like to use models of the world to predict likely outcomes – and if we ask economists for decimal-point precision they will provide it – but predictive models are always wrong. They may be useful for explaining the past or pointing out potential unintended consequences of otherwise well-meaning financial initiatives, but no economic forecast can perform the feats its users have come to expect.

No one can forecast the future, but economists are especially useless at it. As the months pass, actual numbers will be revealed as companies publish their accounts, particularly at the year-end where the full impact will have become clear. That may not be pretty, but as the rebound in April demonstrates, ‘time in’ the market is more advantageous than ‘timing’ the market.

Our firm belief is that patience will remain a virtue however events unfold.

Long-term investors should be no more concerned with analysis or justification for rising asset prices, than fearing falling ones. To paraphrase Kipling, meet with Triumph and Disaster, and treat those two impostors just the same.

Graham Bentley 01/09/2020

Risk Warnings

The following is a summary only of some key items in the Prospectus. Investors in Protected Cell Company (PCC) must have the financial expertise and willingness to accept the risks inherent in this investment. Capital is at risk. These are the author’s views at the time of writing and may be subject to change. These opinions should not be construed as investment advice. The value and income from investments can go down as well as up and are not guaranteed. An investor may get back significantly less than they invest. Past performance is not a reliable indicator of current or future performance and should not be the sole factor considered when selecting funds. Our fund of funds range invests for the long-term and may not be appropriate for investors who plan to take money out within five years. The funds will be exposed to stock markets. Stock market prices can move irrationally and be affected unpredictably by diverse factors, including political and economic events. The funds have significant exposure to bonds, the prices of which will be impacted by factors including; changes in interest rates, inflation expectations and perceived credit quality. When interest rates rise, bond values generally fall. This risk is generally greater for longer term bonds and for bonds with higher credit quality. The funds invest in other currencies. Changes in exchange rates will therefore affect the value of your investment. The funds may invest a large part of its assets in other funds for which investment decisions are made independently of the fund. If these investment managers perform poorly, the value of your investment is likely to be adversely affected. Investment in other funds may also lead to duplication of fees and commissions. Shares may not be redeemed otherwise than on any Dealing Day. There will not be any secondary market in the shares of the Company.

Regulatory Information

This material is for distribution to professional clients only and should not be distributed to or relied upon by any other persons. The Cells referred to are a cell of Marlborough International Fund PCC Limited (the ‘Company’), a protected cell company incorporated in Guernsey and authorised as a Class B Collective Investment Scheme under the terms of the Protection of Investors (Bailiwick of Guernsey) law, 1987, as amended. Investment may only be made on the basis of the current Prospectus, this can be found on the website Marlborough International Management Limited is incorporated in Guernsey. Registration No. 27895. Regulated by the Guernsey Financial Services Commission. Licensed under The Protection of Investors (Bailiwick of Guernsey) Law 1987. Guernsey Office: Town Mills South, La Rue du Pre, St Peter Port, Guernsey GY1 3HZ. Tel: +44(0)1204 589336.