2020 – A year to forget for investors?

For clients who had portfolios with exposure to stocks and shares (equity) of between 40% and 60%, delivered an average total return, after our charges, of 2.1%.  For those clients with a more capital growth focus and where portfolios have equity exposure of between 60% and 80%, average total returns were 3.8%.  This despite the UK stock market, as measured by the FTSE All Share, ending the year down 9.8% on a total return basis.

Whilst the UK was the worst performing market, the opposite was true for the US which despite the crisis recorded a total return of 14.8% (S&P 500 index).

One of the reasons for a positive return was not just down to our rigorous investment process but also one of the main and fundamental investment principles and that is diversification.  As well using other asset classes that reduce the risk and volatility of portfolios, within the equity allocation, we invest not just in the UK but across international markets, the returns from which for 2020 offset the losses from UK investments.  

Whilst the UK was the worst performing market, the opposite was true for the US which despite the crisis recorded a total return of 14.8% (S&P 500 index).  The contrast could not be starker in terms of performance and perhaps for investors difficult to understand.  However, the main reason for the disparity comes down to the composition of these two markets.  On the one hand the UK has more traditional companies in which their industries were more directly affected by the pandemic such as financials, oil and leisure.  Meanwhile, across the pond, the S&P one of the main indices is made up of a large proportion of information Technology companies such as Microsoft, streaming services such as Netflix as well as one of the biggest online retailer, Amazon.  Such companies that hugely benefited from the change to work from home and enforced stay at home through lock down restrictions make up nearly 30% of that particular index helped the US stock market record such stellar returns in such a difficult year.

The huge disparity is unlikely to continue especially as positive news surrounding the vaccine rollout has brought about some recovery in areas of the market that suffered the most in 2020.  However, it does highlight the importance of diversification not just within one particular stock market but also across other international markets and is a key part of our portfolio construction and management.

To contact or read more about Nicholas Bolton, visit his biography here.