VT Chelsea Managed Fund Range, March 2024

There was a real expectation that 2023 would be the year the world fell into recession, as a raft of both short and long-term issues - coupled with deteriorating geopolitical circumstances – finally became too much for the global economy to bear.

The reality has been a story of ongoing resilience (although the UK tipped into recession towards the back end of last year), with figures from the International Monetary Fund now projecting global growth of around 3% for the next couple of years*. Not amazing, but far from gloomy.

A couple of months into 2024 and the expectation that rate cuts may take a little longer has put markets into an almost wait and see phase. It has been relatively calm as we wait for something to happen. Inflation has fallen to a more palatable level but we are very aware that there are likely to be more twists and turns on the road ahead.

Please remember that the value of investments will fluctuate and returns may be less than the amount originally invested. Tax treatment depends on your individual circumstances and tax rules can change. Chelsea does not offer advice and, if you are unsure of anything please contact an expert adviser.

Positioning of the funds

As advisers to multi-asset funds we are primed to offer as much diversification as possible, but that has been particularly true in recent times. We naturally have exposure across asset classes and geographies but, importantly, also across market-cap and investment style.

We continue to have a bias towards growth and another theme we have across all of the funds is exposure to longer duration assets - across equities, bonds and investment trusts. That means the funds should benefit when we finally see interest rates cut.

From the equities side, these are quality growth funds, which are compounders of returns. Names like T. Rowe Price Global Focused Growth Equity, Rathbone Global Opportunities, Guinness Global Equity Income and WS Evenlode Global Equity and Global Income.

The investment trust exposure comes through renewables, infrastructure and alternatives. Our fixed income exposure has been fairly high throughout 2023 - duration has been a big issue within this specific asset class (shorter duration bonds were the sensible place to be at the start of 2023), but we have largely delegated this decision to our fixed income managers.

Challenges have begun to turn to opportunities as fixed income and specialist trusts appeal

A number of challenges impacted the VT funds throughout 2022 and much of last year. The first of these would be the performance of fixed income as an asset class amid a rising interest rate environment. For a long time the team recognised the low yields and poor risk reward in fixed income and had been very underweight the asset class for many years as a result. However, the headwinds are starting to turn into tailwinds with inflation falling faster than expected and, importantly, a fall in government bond yields. This has lowered rate expectations and resulted in a bounce back for the asset class. We have gradually added more longer-dated bonds to the portfolios as yields have offered better value.

We feel the asset class is now attractive from both an income and total return perspective, because the market believes the next move for interest rates will be downwards.

The second opportunity comes through our aforementioned exposure to investment trusts – these have been hit especially hard as investors have fled for the safety of government bonds. We heavily reduced our exposure to investment trusts in 2022 but have rebuilt these positions last year because of the incredible value on offer. The simple reason for this is that some of them were as much as 50% cheaper. Many trusts are yielding over 10% and some trusts are still trading on really attractive discounts. In our view the sell-off has gone way too far and with interest rate expectations now falling we think alternative investment trusts could be some of the biggest beneficiaries and so we have positioned the funds accordingly.

Diversification and opportunities in UK PLC

In a world where we have some of the most unstable geopolitics since the Cold War, it is difficult to be a high conviction investor, particularly as recession is still a possibility. Hence diversification and balance has never been so important.

This takes me nicely on to the UK – where low valuations offer a cushion to investors, simply because they cannot fall much further! One thing Brexit achieved is uncertainty, with many overseas investors voting with their feet. They quickly went from buyers to sellers of UK shares, which means UK PLC was bound to struggle.

It is befuddling to me that the UK Government, as of writing, has not considered mandating UK pensions to hold a certain portion of their assets in UK equities. In his Spring Budget, the Chancellor of the Exchequer did say local government pension schemes will be obliged to disclose their asset allocations from April 2024, but clearly a lot more needs to be done to facilitate change in this area.
Figures show just how underinvested domestic investors are in the UK. While the UK accounts for around 4.5% of the global equities index, the average domestic equity allocation stands at just 2.7%**. That number stacks up incredibly poorly with other parts of the world. All it would need is a hint of change in this area and it would be a significant boost for UK equities.

When you look at the global equity market, I would say it is fair value versus its own history (it is not cheap or expensive). The one standout is the UK – which is cheap as chips at the moment. UK companies know they are cheap and are buying back their own shares, while we are also seeing an increasing amount of merger & acquisitions activity from private companies who see this too.

Outlook

The outlook is far from clear. Rate cuts should help riskier assets, but the geopolitical threats are prominent, as is the continued slowdown in growth.

After a difficult period, there does appear to be some light at the end of the tunnel but the need for balance and diversification remains as strong as ever. These principles have been the focus of our attention across the entire range of funds. The need for balance and diversification remains as strong as ever and that is what we have prioritised across the fund range. The diversification of income streams also helps us maintain a healthy income of 5.7% on the VT Chelsea Managed Monthly Income fund.

*Source: IMF World Economic Outlook, January 2024
**Source: Capital Markets Industry Taskforce, data at 31 December 2023

Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. The views expressed are those of the author and fund managers and do not constitute financial advice.