It was the best of times, it was the worst of times

VT Tyndall Unconstrained UK Income Fund

As we anniversary that extraordinary day, 23rd March 2020, when the Prime Minister first told the nation that people must stay at home and certain businesses must close, it seems appropriate that we should take a step back and review the incredible events of the last 12 months, and in that sense the opening line of Charles Dickens ‘A Tale of Two Cities’ seems particularly apt.

To be clear, this week’s commentary will deliberately make no reference to the countless truly dreadful humanitarian aspects of the Covid-19 pandemic. That is not to diminish their significance in any way, but rather they are better left to be addressed by others far more qualified than us. Our focus this week is, therefore, to reflect on the economic and stock market events of the past year.

Indeed, if ever there was a period in time that typified the old adage that ‘the stock market is not the economy’ then arguably the past year is it. As you can see from the chart below from Panmure Gordon, in the face of huge uncertainty surrounding the nature of the Covid-19 outbreak, our decision to enforce a mandatory shutdown of vast swathes of the UK economy led to a GDP contraction in 2020 of -9.9%, the worst outcome for over 300 years (since the Great Frost of 1709 to be precise) and dwarfing anything else we’ve seen in a very long time.

As the next chart highlights, the FTSE 100 Index has made a total return of +39.3% over the year since lockdown began. The more domestically orientated Mid 250 Index and Small Cap Index have risen an even more impressive +67.1% and +86.6% respectively.

A glance at the table above also offers a sense of the leadership within the market over the last year. How many would have guessed, in the middle of March last year, that the market would do what it has done, led by and large by highly cyclical stocks?

To help explain this apparent dichotomy between soaring stocks and collapsing economic activity we refer readers to the legendary billionaire US investor Stan Druckenmiller. Back in 2015 Stan revealed a number of key insights to his investment thinking including the following:

“Earnings don’t move the overall market; it’s the Federal Reserve Board….. focus on the central banks, and focus on the movement of liquidity…. most people in the market are looking for earnings and conventional measures. It’s liquidity that moves markets.”

If indeed liquidity and central banks move markets, then for sure we have seen their influence over this past year. Seemingly taking their lead from the last financial crisis in 2008/9, central banks globally unleashed huge liquidity support operations to counter the economic and market effects of the pandemic, expanding their balance sheets at an astonishing pace as the chart below, from Panmure Gordon, highlights.

In a change to the previous crisis script, it hasn’t entirely been all about monetary policy support either, with governments globally lifting the spending shackles and engaging in all manner of fiscal support schemes. Here in the UK the government has spent an estimated £400bn+ on various mechanisms to support the country through the crisis.

Apart from the importance of liquidity trumping economic fundamentals, are there other investment lessons to be gleaned from this most unusual period? The key one for us is that, when it comes to bear markets, it is the quantum of price destruction that is most important rather than the length of time over which that destruction takes place.

Back in February/March 2020 we witnessed, albeit for a brief period, a great many high quality cyclical stocks with great franchises, strong management and excellent long-term fundamentals, selling at distressed prices – in many cases down 50 – 70% from highs reached just a few weeks previously. In the VT Tyndall Real Income Fund, we took the decision to buy into large numbers of them in significant size and, pleasingly, our fund has benefited substantially over the past year as a result.

Whilst we would love to claim prescience as to how market events would subsequently unfold that was simply not the case. We had absolutely no idea as to the nature and timing of eventual recovery. What we did know was alarmingly simple. If you buy a share that has fallen sharply and, due to the quality of the business and its management, you have confidence in the eventual recovery of that share price, then timing becomes broadly irrelevant.

In a world that gets more and more short term focussed all the time that’s perhaps a dangerous thing to say. However, simply put, a share that has fallen 70% at the time of purchase will deliver a gain of +2 % just to get back to the original starting point. That’s just maths. If you have confidence in that as the most likely outcome then trying to second guess exactly when it might happen seems something of a fool’s errand. If recovery happens quickly so much the better but if it takes longer than you think, given the ultimate upside, frankly who cares.

Now recovery is getting underway, and notwithstanding the very strong returns from our portfolio over the past year, the upside potential we see from here is still tremendous. After this, most extraordinary and difficult year, that’s something to be truly positive about.

26th March 2021
Read time : 6  mins

This content is intended for professional clients only.

Data source (unless otherwise stated): Bloomberg
Not for retail distribution – this document is intended for professional clients only

WARNING: All information about the VT Tyndall Unconstrained UK Income Fund (‘The Fund’) is available in The Fund’s prospectus and Key Investor Information Document which are available free
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