Keeping a respectful watch
Like everyone, we have been stunned by the events in Ukraine. Wars do happen, but infrequently enough to assume the risk of one is slim in comparison to the alternatives. That we can move to the situation we are now in with such rapidity provides many lessons about what is important in investing and in life generally. We sincerely hope sense and peace will prevail.
Over time, markets will provide us ample opportunities for us not to need to profit from current events. Our main responsibility is to keep a respectful watch over the investments we have made on behalf of our clients, which we continue to do.
We have indirect, not direct, exposure to Russia
We have no direct investments in Russia, either equity or debt. It has in the past been classed as an emerging market, with ESG standards of companies listed there lower than we believe to be acceptable. We do, however, invest in companies whose products and services will be used, often for environmental and social good, within Russia. Examples of this would be software or engineering products which help reduce the environmental footprint of factories. This we would class as indirect exposure.
These products and services are provided by non-Russian companies with strong environmental, social and governance (ESG) practices, usually listed on the UK, US and European stock markets. They work hard to improve ESG standards in the broader Russian economy. With Russia only 2% of global GDP, these revenues will be small in the context of the businesses which provide them, and also in the context of our portfolio. Even so, we will be reaching out to those companies that we feel have the most exposure to see what actions they are taking. For some it will be a difficult decision whether to exit or to remain. A case-by-case basis will be our approach.
It sounds relatively obvious, but we should state we have no exposure to the commodity and defence industries, which are most impacted – both positively – by recent events. Whilst this may not have benefited our investment performance in the short term, something we will discuss later, we believe it is important to our investors that they know where their profits and investment returns are coming from. We can and have, over time, delivered good investment returns without being involved in these areas.
A road map for investing in uncertain times
As we have often repeated, the only risks which matter in investing are the ones we don’t know about. Once a risk is known about it is, by definition, likely too late to respond as markets will have discounted it. Once this definition of risk is appropriately considered, the only logical conclusion is to not take excessive risk in the good times, to avoid a permanent loss of capital for investors when unforeseen events occur. Therefore, for us the choice of investing in good quality and under-leveraged companies is not one of style – investing is not fashion after all – but one of believing this best captures the long-term benefits of investing in equities, while at the same time providing a degree of reassurance in the bad times.
We can report that, while no year is free from the companies we invest in surprising both positively and negatively, we have been pleased overall with how the companies we are invested in are adapting to an ever-changing world. When it comes to investing, in the long run micro is more important than macro (although, in the short run, macro is more important than micro). So long as the companies we invest in keep adapting and delivering, past experience tells us current events will pass and our portfolios will rebound. No one knows how the situation in Ukraine will evolve from here, and its short- and long-term consequences may well be profound economically and societally, but this need not mean where we choose to invest on your behalf will change. In many respects situations like the present reinforce, not disprove, the need to have high standards, both sustainably and financially, when considering the companies we will invest in on your behalf.
Before the war in Ukraine began, investment markets were unusually narrow. High oil prices and stressed supply chains (a function of rapid economic growth following Covid lockdowns) had led to inflation concerns resulting in central banks resetting expectations as to how quickly they would normalise interest rates and other stimuli embedded in the economy during the pandemic. This created a vigorous rotation into energy and, with the exception of banks, out of everything else. This relatively unique market construct has created some significant differences in industry fund performance and benchmarks, and we are no different.
Equally unique is that credit has not been the hedge on equities that it has been in the past, although this may change if the war in Ukraine resets interest expectations (downwards) again. This has resulted in drawdown in our mixed asset funds (predominantly equity and debt) being higher than in the past. It is hard to say if this is a temporary or permanent feature. Despite the fall in bond prices, equities have fallen further, and due to our low expectations for credit returns over the long run, we retain a pro equity bias in our mixed asset funds.
In this context our fund performance this year becomes clearer. No exposure to energy as it doesn’t meet our sustainable or financial criteria for investing; credit not being, at least for now, a hedge for equity exposure; and a preference in the long run for equity over debt. This is quite different though from other narratives out there. We have not invested in more speculative areas of technology and markets, as defined by profitless and/or early-stage businesses whose long-term value is unclear. This has been a bubble that burst before the war in Ukraine. Equally the underlying performance of the companies we own has, in totality, been good and similar to previous years, even as their share prices have fallen.
A final point to remember is that the first 10 weeks of this year should be seen in the context of the last 10 years performance of our sustainable funds, which has been exceptional.
The nature of time
One of my favourite authors is Carlo Rovelli, a physicist who writes about the nature of time. One of his many ideas is that days, weeks and years are a human, artificial way of measuring time and that time should actually be measured by events. Applying this to our own lives, many people towards the end of them see their lives as a small number of events or happenings, some good and some bad, which have defined them. Rarely does anyone look back and talk about how many good years and how many bad years they have had.
Using this same idea, markets are measured and defined by events, not by months and years. Of course, humans have constructed standard time horizons to judge performance over, but that isn’t the way investing works. When I look back at my own investing career it has been a series of events, some good some bad, which have defined it. Prior to the invasion of Ukraine, I would have said the key ones had been the terrorist attack on 11 September 2001, the financial crisis of 2008, the creation of the cloud computing industry around 2013, and the pandemic of 2020. Each of these changed the nature of markets in a way the passing of the intervening years could not. It is possible current circumstances are the fifth event – the coming weeks will decide that?
My point is considering investing as a series of events is a more productive way to think about it than weeks, months and years. Of course, these human constructs of time will be a useful tool with which to monitor performance, but they are not relevant to how we invest. If the current situation the world finds itself in proves to be another true marker of the passing of time, we will adapt in the same way we have in the past and we will look back at it at the end of our investing lives as an event which defined us. In the meantime, we will keep a respectful watch on the unfolding events.
Past performance is not a guide to future performance. The value of investments and any income from them may go down as well as up and is not guaranteed. Investors may not get back the amount invested. Portfolio holdings are subject to change, for information only and are not investment recommendations. The views expressed are those of the author at the date of publication unless otherwise indicated, which are subject to change, and is not investment advice.
Royal London Sustainable Managed Income Trust, Royal London Sustainable Managed Growth Trust, Royal London Sustainable Diversified Trust, Royal London Sustainable Word Trust and Royal London Sustainable Leaders Trust are held within RLUM Limited Unit Trusts, which is an authorised unit trust scheme. The Manager is RLUM Limited, authorised and regulated by the Financial Conduct Authority, with firm reference number 144032.
The RL Global Sustainable Equity Fund is a sub-fund of Royal London Equity Funds ICVC, an open-ended investment company with variable capital with segregated liability between subfunds, incorporated in England and Wales under registered number IC000807. The Authorised Corporate Director (ACD) is Royal London Unit Trust Managers Limited, authorised and regulated by the Financial Conduct Authority, with firm reference number 144037.
The RL Global Sustainable Credit Fund is a sub-fund of Royal London Asset Management Bond Funds plc, an open-ended investment company with variable capital (ICVC), with segregated liability between sub-funds. Incorporated with limited liability under the laws of Ireland and authorised by the Central Bank of Ireland as a UCITS Fund. It is a recognised scheme under section 264 of the Financial Services and Markets Act 2000. The Investment Manager is Royal London Asset Management Limited. Most of the protections provided by the UK regulatory system, and the compensation under the Financial Services Compensation Scheme, will not be available.
For more information on the funds or trusts or the risks of investing, please refer to the Prospectus or Key Investor Information Document (KIID), available via the relevant Fund Information page on www.rlam.co.uk.