Featherstone Investment Review Q4 2021

Whilst 2021 was a good year for our investment portfolios, Q4 was a difficult quarter for our equity positions, many of which had enjoyed a strong 2020/21 but suffered due to the rotation to ‘value’ stocks which we saw at the end of the year.  

 Whilst we accept that some of these 'value' stocks/sectors might have their moment in the sun for a few quarters, we believe that some of them may ultimately become stranded assets. As they only represent a short-term trading option, they are of no interest to us. Indexes full of these sectors (Oil, Mining, Banking) such as the FTSE 100, ended the year strongly whilst our portfolios suffered what we believe will be a temporary blip. 

We remain focused on companies and sectors with long term repeatable earning capability and revenue growth over the next decade. Some of these may have become stretched in terms of value in the short term but continue to look very attractive over the medium to long term.  

Our deliberate avoidance of exposure to government bonds, which suffered in 2021, combined with our increased exposure to alternative assets means that our multi-asset portfolios (A, B and C) had a strong year, with Portfolios A and B significantly outperforming their benchmarks. Our growth stock heavy equity portfolio (D), off the back of a very strong 2020 and first half of 2021, underperformed its benchmark in Q4 due to the rotation into ‘value’ stocks.  

 We are pleased to say that all our wealth management portfolios continue to outperform their investment benchmarks by a considerable margin over the medium to long term.

Performance 

% 3 Month 1 Year 3 Years 5 Years 10 Years Annualised
Portfolio A
Benchmark
1.06
1.81
11.77
7.20
33.03
24.10
42.9
26.2
112.9
74.27
7.86
5.71
Portfolio B
Benchmark
0.40
2.52
11.1
7.9
38.41
25.75
49.94
27.32
136.02
73.31
9.19
5.65
Portfolio C
Benchmark
-0.53
3.23
10.16
10.76
46.13
33.18
60.06
37.48
171.73
101.09
10.76
7.24
Portfolio D
Benchmark
-1.59
3.94
9.04
13.32
55.21
41.54
71.98
47.42
217.76
127.74
12.26
8.53

Source: FE Analytics. Performance to 31/12/2021 shown as total return after investment fees. Past performance is not a reliable indicator of future returns. Capital is at risk. Relevant benchmarks: A (Investment Association Mixed Asset 20-60% Equity) B (ARC Balanced) C (ARC Steady Growth) D (ARC Equity)

 

In our view, Japanese equities have the potential to deliver significantly higher returns than the US over the next decade. Japan offers a relatively cheap equity market and an undervalued currency. In the last decade Japan’s non-financial sector has generated earnings of 10.5% per year compared to the 5.9% of its US peers, yet equity prices have underperformed the US by 50% over the same period. Historically, the investing market has benefitted from higher US bond yields and a weaker Japanese Yen – which is what we have seen over the past six months.

We have therefore increased our exposure by investing in JK Japan Investment Fund which is a high-conviction, index-agnostic Japanese Equity investment fund we have been monitoring since its launch in March 2020. The investment fund is only £60m in size and is run by the very experienced investment fund manager, Simon Jones who formerly ran the JP Morgan Japan fund in Tokyo. The investment fund has a bias to large cap names and thus complements the other two Japan funds held with a smaller cap bias. The investment portfolio focuses on quality companies in strong, competitive positions delivering repeatable and growing profits. Its largest positions are in leading robotics, semi-conductor, and technology companies such as Fanuc, Yaskawa, Shin Etsu and Keyence. We consider these to be hugely undervalued in comparison to their US counterparts. 

We invested into the JP Morgan Climate Change Solutions  fund run by a high-quality team currently only managing £100m out of JPM in London. The fund invests in themes such as sustainable construction, electrification, recycling, and sustainable transport. It represents a high conviction, unconstrained portfolio of companies aligned to delivering climate change solutions with a bias towards small and mid-cap equities.

We exited the iShares Digitalisation Fund and reduced our investment position in Baillie Gifford Discovery Fund both of which served us very well during Covid but, following a strong period of performance, we feel valuations had become very stretched. We also feel we can get a purer investment exposure to the digital disruption theme through other holdings in the portfolio.

 

Lastly, we sold Sarasin Food & Agriculture which has been underperforming. We also believe the strategy suffered from style drift - it has strayed from a pure play on the food and nutrition and was concentrating too heavily on ‘food to go’ which we believe is more volatile. This investment fund was replaced by Schroder Global Sustainable Food & Water a small fund recently launched, run by Mark Lacey who was formerly Head of Global Energy at Goldman Sachs and was ranked as number one energy investment management specialist in a Thompson Extel survey. Mark is supported by Felix Odey, son of the well-known hedge fund manager. The investment management fund focuses on resource efficiency and less carbon and water intensive farming practices. Growing demand driven by demographics is coinciding with increased health and sustainability awareness, whilst changing consumer preferences are being met through new technologies.  Increased focus is also being placed on reducing greenhouse gas emissions in this high carbon intensity area.

The good news is that during the difficult and volatile last quarter of 2021 markets had to adjust to various evolving issues and scenarios, meaning that many of the risks which had been of concern are now priced in.

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Omicron is a stark reminder that the coronavirus is yet to fully play out and the emergence of this new strain, and all its unknowns, unsettled markets. However, this concern dissipated in short order as it became clear the new variant is less virulent. This led to the rise in deeply discounted ‘value’ stocks in the last fortnight of the year. Coronavirus remains an unpredictable risk, but the hope is that with the help of the vaccine, future variants will continue the evolutionary trend to becoming more contagious but less dangerous.

Equally, the US Federal Reserve has decided to accelerate the pace of its winding down of quantitative easing (QE) meaning that there is now a clear route to the end of monetary stimulus. Furthermore, in early December, the market priced in four interest rate hikes on both sides of the Atlantic. Government bond yields have subsequently moved significantly yet remain unattractive to investors and do not threaten the health of equity markets. While inflation remains high, we expect this will recede to somewhere near 3% by the end of the year. We therefore do not expect interest rates to rise to a level which makes cash or bonds attractive enough to affect equity markets in the near term. 

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