9 March 2022 - Ukraine invasion and your investments
As the tragic situation continues to unfold in Ukraine, we hope for peace and a safe resolution.
Our investment partners are continuously monitoring the situation so please be assured that they will revise portfolio allocations if the situation in Ukraine escalates from here.
As we have mentioned previously, your multi-asset portfolios are designed to respond to market volatility in ways that will shield investors from the worst of any major bouts of selling in specific asset classes. The various funds in portfolios are designed to be balanced and have different characteristics to traditional asset classes, such as equities and bonds and therefore perform differently.
Owning investments that are uncorrelated to other asset classes can help limit the ‘downside’ moves experienced by multi-asset portfolios during times like this. It is worth highlighting that your investments are not directly in commodities, as these assets are viewed as highly cyclical and volatile, as illustrated by the recent oil and gold price action. However, many of the investments within your funds are held in companies that are benefiting from higher commodity prices, which will feed through to portfolio returns over time.
Below we have outlined what is helping and what is hurting investment portfolios.
What's helped the investment portfolios?
- Renewable Energy Assets: Increased investment from countries looking to reduce overreliance on single nations for their energy supplies.
- Critical Infrastructure Assets: Able to keep generating cash through periods of economic and political unrest. Some have particularly attractive inflation-linked cashflows.
- Companies with Commodity Exposure: Held within many equity funds benefitting from the rapidly rising commodity prices.
What's hurt the investment portfolios?
- European Equities: Reliance on Russia for energy imports as well as geographic proximity to conflict zone
- Emerging Market Bonds: Linked to EM economic strength which struggles in a ‘risk off’ environment. Strong USD can act as headwind for EM financing costs as well as pressuring EM central banks to raise rates.
- Global Equities: Higher oil price stoking fears of global economic slowdown. Sanctions imposed on Russia also have unfortunate side effect on other companies and countries. Markets struggling to price in the risk/opportunity this will create.
Staying invested pays off
We thought it might be beneficial to look at historical events and the benefit of staying invested to reap the overall rewards.
Stock market volatility does tend to be short lived. Therefore, most experts agree that investors are probably better off sitting tight through these unnerving periods. By selling or delaying making new investments when stock markets become uncertain investors employ a strategy known as ‘market timing’.
The intention is often to invest once stock markets have calmed down or to buy when stock markets have gone even lower. This can be a very dangerous strategy. Sharp falls in stock markets tend to be concentrated in short periods of time. Similarly, the biggest gains are often clustered together. It is also quite common for a large gain to follow a big fall (or vice versa).
Accordingly, an investor who tries to anticipate when the best time is to invest runs a very high risk of missing the best gains. This can have a big impact on their long-term return. To help illustrate this, we have analysed the average annual return from the UK stock market over the last 15 years. As the chart shows, missing just the ten best days over this period would have cut your annual return substantially. Timing the stock market is extremely difficult, the best policy is usually to stay fully invested over the long term.
FTSE All-Share: Effect of missing best days 
Source: Datastream from 30.09.16 to 30.09.21, annualised return. Returns based on the performance of the FTSE All-Share, with initial lump sum investment of £1,000 on a bid to bid basis with net income reinvested.
FTSE All-Share Five Year Performance
Keeping you informed
We continue to speak to the fund managers and investment specialists to gain their insight and understanding of the situation. We are committed to keeping you informed so will continue to provide regular updates and of course welcome your calls and questions.
We want all of our clients to have a positive long term experience of investing and we will continue to keep you updated with useful information. Please do not hesitate to contact me to discuss further.