TAP fund update

In this note, we look at the latest market and economic developments around the Covid-19 infection, as well as offering our view on the investment outlook. We then go on to talk about what actions we have been taking in the Tilney Active Portfolio range (the TAP funds), and how they have been performing during the recent market dislocation.

Market and economic developments around Covid-19

Since our previous note, there have been a lot of developments around the Covid-19 disease, which I’m sure many of you will have been following on the news. You will hopefully recall in our last note that I thought it was wise for investors to resist the short-term urge to sell in the face of these sharply falling markets given that the very best days can often follow the very worst days, and we saw some of that this week, with equity markets rallying 14% in just two days (Tuesday and Wednesday). To be clear we are not saying this is the start of an equally sharp recovery, and there are likely to be more twists and turns as the situation unfolds over the coming months, but it is perhaps a reminder of the potential to miss out if you are trying to trade aggressively in these markets.

Also since our last note, there has been significantly more action from authorities, with the scale of fiscal and monetary policy intervention being discussed in terms of trillions of dollars’ worth, and we could potentially see the scale of intervention exceed that deployed over years following the global financial crisis in just a couple of months. More countries have deployed virus suppression measures, including the lockdown currently in effect here in the UK, all with the aim of bringing the spread of the virus under control. There is reasonable evidence that such policies can be effective – the chart below shows the progression in China which appears to have brought the spread very much under control, whilst in Europe the new case and fatality rates in Italy have been dropping off quite considerably a couple of weeks after lockdown measures were introduced in the country.

China Situation Graph

In the UK (and the US), we are still in the early stages of this progression, and there is no certainty other countries will follow the same course. Even if a broadly similar path is followed, this still means we are likely to see a rapid increase over the next couple of weeks and, sadly, further fatalities, although the latest modelling from Imperial College London suggests the current measures in place may just about be enough not to overwhelm ICU capacity in the country. If measures are successful, the peak growth rate could be a couple of weeks away.

UK Situation Graph

Our view and outlook

Some of the recent developments have been encouraging. The unprecedented steps from Central Banks have ensured that there appears to be ample liquidity in the system, whilst Government actions should be enough to stave off the risk of large-scale insolvencies in the short-term, and these measures have helped markets to find a support level. What we have seen historically (albeit it to varying degrees), is that market recovery tends to come once infection rates start falling, and indeed we initially saw this in China before markets there sold off further as the epidemic turned into a pandemic – and it’s notable that the Chinese stock market has actually fared better than many in developed markets year-to-date.

There are still a number of key elements that we are watching very closely. Firstly, whilst infection rates in a number of the worst hit areas appear to be coming under control, there remains the potential for new outbreaks either within existing risk areas or in new areas, and it is important to remember that pandemics can often have multiple waves. Secondly, although lockdown measures have helped a number of countries, there remains a question mark over how meaningfully these measures will be deployed in the US and also how such measures can be balanced against economic needs in the medium term. A key event for the latter point will be in China, which will shortly be attempting to reverse some of the most stringent measures in Hubei province, which a great many other countries are likely to be watching very carefully. Lastly, for the economy and markets to finally start returning to normality, it is vital that epidemiologists are able to get a much better understanding of the level of infection that has spread by stealth, either through people having no symptoms at all, or with only very mild symptoms. There are now significant steps in this direction, through self-reporting apps and the development of antibody tests, but without this information, economic policy will be flying blind.

We therefore remain of the view that the upside recovery potential in risk assets, particularly equities, remains attractive for patient, long-term investors with an appropriate risk profile. Although there are likely to be further bumps in the road, now is probably the time to think about whether you are suitably exposed to these long-term risk and return dynamics.

TAP fund changes and performance

I have previously suggested that aggressively trading during these times of turbulence is rarely a winning strategy, and our approach is to take a careful, evidence-based approach to investing based upon the long-term outlook. However, there have been a number of steps we have taken recently within the portfolios both with a view to mitigating the worst of the downside losses and also to position for potential recovery. During the most aggressive falls prior to this week, we have allowed our equity weights to drift down with the market, rather than automatically rebalancing these positions, this has the effect of reducing equity whilst markets were behaving dysfunctionally in the absence of meaningful intervention by central authorities. As markets regained their poise towards the end of last week, we began topping these positions back up, but we remain marginally light in this area. At the end of last week we also increased our gold exposure, which now stands at 5% across portfolios. We added these exposures following the sell-off in gold last week, which was the result of investors globally (particularly professional investors) needing to sell gold to cover margin calls when there was less liquidity in other parts of the market. With Central Banks now intervening aggressively, this not only resolves some of the challenges around liquidity, but printing money has historically led to the debasement of fiat currencies – making gold an attractive option, and one that should also offer protection should we see further periods of risk-off moves.

As in earlier notes, below we show three different performance measures for the TAP funds. The first chart shows the drawdowns since the start of the year, which show the impact of this particularly crisis. Furthermore, the table and chart below show the return profile over one year, and we discussed in the previous note how this relates to our estimates of short-term drawdowns as part of the long-term return profile of risk models. Whilst few people wish for market falls, and we are not for a moment complacent about losing money in the short-term, this does at least highlight that current events are not outside the realms of model expectations, and we would expect significant rebounds from these levels. Finally, the five year chart is the minimum we would consider ‘longer-term’ (ideally this is seven years or more), and you can see over that time period, even with the recent falls, not only have all of the funds made a positive return, but most have beaten the expected return on cash over this period.

Drawdown 01/01/2020 to 25/03/2020

1 Year Cumulative Return

5 Year Cumulative Return


Developments continue apace as authorities look to counter the spread of SARS-CoV-2 (the virus that causes the Covid-19 disease), and we are confident that the economic and market response in terms of unprecedented fiscal and monetary policy response should help market stability. There remain key unknowns however, particularly around the compliance with medical advice on restrictions in the US, the development pathway of the disease and how countries can balance domestic lockdown with the need for economic activity in the medium term. For investments, we see attractive long-term opportunities from here for investors willing and able to take on a reasonable level of risk, and we continue to position our portfolios to benefit from the potential upside, whilst being cognisant that downside risks very much remain.

Important information

This document is solely for information purposes and is not intended to be, and should not be construed as investment advice. Whilst considerable care has been taken to ensure the information contained within this commentary is accurate and up-to-date, no warranty is given as to the accuracy or completeness of any information and no liability is accepted for any errors or omissions in such information or any action taken on the basis of this information. The opinions expressed are made in good faith, but are subject to change without notice.

You should always remember that the value of investments can go down as well as up and you can get back less than you originally invested. Past performance is not an indication of future performance.

Issued by Tilney Investment Management Services Limited, which is authorised and regulated by the Financial Conduct Authority. Financial services are provided by Tilney Investment Management Services Limited and other companies in the Tilney Group, further details of which are available at © Tilney Group Ltd 2020

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