INVESTMENT TRUSTS

Is your portfolio 2021-ready?

After a tumultuous year, many investors will be relieved their portfolios are still showing gains. How can you make sure your portfolios are fit for the year ahead as well as the year just gone?

Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested.

2020 has been an unusual year. After some hair-raising moments, stock markets have proved resilient overall, but investors’ experience will very much depend on where they have been invested. Even those who have navigated the extreme conditions of the last 12 months successfully may find themselves with portfolios that look a little off kilter. Spring may feel like some way off, but it is worth dusting down your portfolio in readiness for the tax year ahead.

As we see it, there are five crucial elements that could help you build a resilient portfolio not just in the short term, but for the longer term.  

Positioned for tomorrow’s world – The pandemic has changed the world. It seems clear that the world that emerges will not be the world we left behind. With this in mind, we believe it is more important than ever to invest with an eye to the future. Managers across BlackRock’s investment trust range believe the pandemic may accelerate a ‘corporate Darwinism’ where the strong get stronger and the weak get weaker. It is important to be on the right side of this trend and the flexibility of the investment trust structure makes it easier to adapt.

The BlackRock Investment Institute has identified three key themes for 2021: ‘the new nominal’ – where vaccine rollout leads to an acceleration of economic recovery at the same time as monetary policy remains supportive. ‘Globalisation rewired’ – supply chains are being reimagined and Asia is growing as a force in the global economy. Finally, ‘turbocharged transformations’ - this is where key trends such as ecommerce and sustainability have been accelerated by the pandemic. Our managers bring these trends into their investment thinking.

Diversified – most investors recognise the need to keep a balance of asset classes, sectors and regions at all times. The pandemic has demonstrated that events can emerge from nowhere and wreak havoc on the best-laid investment plans, so it is crucial to have a balance.

This may be particularly important today. 2020 was a year in which specific areas performed very well – the ‘Covid’ winners such as technology, pharmaceuticals or ecommerce – and some very badly. The weaker performers included travel, leisure and high street retail. However, the circumstances of the pandemic have been unique and those companies in tough sectors that have survived the pandemic could emerge strongly when life returns to normal. As such, portfolios need to be balanced across both types of companies.  This is where active management such as that employed across the BlackRock investment trust range can really come into its own.

Investors cannot afford to ignore climate change in their portfolios.

 

Inflation-proof – Low interest rates are likely to persist and global governments will probably keep on spending in the near term to shore up their economies until the pandemic ebbs. That means investors need to be sure their portfolio protects against any surge in inflation.

To date, rising prices haven’t been a problem, but economic recovery brings greater potential for inflation. Central bankers have said they will ‘look through’ higher inflation and keep rates low. For investors, it means holding sufficient weightings in ‘growth’ assets such as the stock market to keep pace. It also means bonds are going to remain a difficult area. Equally, exposure to specific areas, such as mining and commodities, have helped protect portfolios against inflation historically. 

Managing environmental, social and governance (ESG) risks – In this year’s CEO letter, BlackRock CEO Larry Fink said: “The past year saw major net zero commitments by China, the EU, Japan, and South Korea, and last week the US rejoined the Paris Agreement. More and more financial regulators are making climate risk disclosure mandatory, central banks are stress testing for climate risk, and policymakers around the world are collaborating to achieve common climate goals. 127 governments – responsible for more than 60% of the world’s emissions1 – and over 1,1002 companies are considering or already implementing net zero commitments…These changes will have dramatic impacts for investors.” 

Investors cannot afford to ignore climate change in their portfolios. At the same time, the pandemic has highlighted other non-financial risks, such as labour practices. This is likely to become a more important determinant of an investor’s returns in future. The focus on ESG will also bring opportunities for companies that can address these global challenges.

Harnesses the power of dividends – 2020 has been a tough year for income-seekers, with over 40% of UK companies cutting their payouts3. However, dividends remain a crucial element in long term returns, particularly today when the income from shares still compares favourably to that available from government bonds and cash.

It is vitally important to diversify your income across different markets and sectors. Some of the most interesting income opportunities are to be found in overlooked areas of global stock markets such as frontier markets, smaller companies or non-technology US companies. These are well-represented in our investment trust range.

Investors always need to tread a fine line between a portfolio that manages risk and one that is positioned for opportunities. Meeting these five basic goals should ensure your portfolio is fit for whatever 2021 brings.

1Climate Action Tracker, December 2020
2UN News, November 2020
3Link Group, January 2021