Levitas Portfolio Update - Q2 2020

Levitas A

The portfolio bounced heavily from first quarter lows delivering returns in excess of 18% ahead of the IA Flexible which moved up by a little over 13.5%.

Despite the extreme impact of coronavirus on economies markets bounced back strongly in the second quarter as investors anticipate a rapid return once virus induced lockdowns are eased. This bounce was aided by policy makers around the world pledging unprecedented levels of monetary and fiscal stimulus. Fundamentals have also been supportive as the earnings yield gap between bonds and equities remains heavily skewed in favour of equities. Additionally, there has been a flood of assets into US money market funds which will likely be supportive of equities as investors return to risk assets. As the coronavirus drumbeat softens other risks are looming that might take its place such as oil, Brexit risk and US political risk with the latter especially prevalent as Americans head to the ballot box in November.

The equity component of the portfolio drove solid returns. Riskier positions such as smaller companies as well as micro-cap, unlisted and international assets tended to outperform. Our main themes in the portfolio of technology and healthcare were also solid drivers of returns. Domestic large caps performed well on an absolute basis but underperformed international peers as areas that are under-represented in UK markets such as technology outperformed. Value-bias positions outperformed at the start of the quarter as cyclicals came back into focus, but quality bias positions caught up as the speed of the rally was digested by investors.

We made some changes to the portfolio over the quarter. In our US equity exposure, we added Dodge & Cox US which has a more value / cyclical bias and should outperform if we see a sustained recovery from the US economy. This should provide a solid balance with our growth / quality bias positions such as Morgan Stanley US and technology overweight. Similarly, we also opted to move our domestic large cap positions to a more balanced focus by adding in Lindsell Train UK to provide exposure to non-cyclical positions

Levitas B

The portfolio delivered strong positive returns over the quarter with performance ahead of the IA 0-35% sector.

Despite the extreme impact of coronavirus on economies markets bounced back strongly in the second quarter as investors anticipate a rapid return once virus induced lockdowns are eased. This bounce was aided by policy makers around the world pledging unprecedented levels of monetary and fiscal stimulus. Fundamentals have also been supportive as the earnings yield gap between bonds and equities remains heavily skewed in favour of equities. Additionally, there has been a flood of assets into US money market funds which will likely be supportive of equities as investors return to risk assets. As the coronavirus drumbeat softens other risks are looming that might take its place such as oil, Brexit risk and US political risk with the latter especially prevalent as Americans head to the ballot box in November.

Strong relative and absolute performance from the portfolio as the equity component drove solid returns despite generally being slightly more defensive in nature. International assets tended to outperform domestic equities as areas that are under-represented in UK markets such as technology outperformed.

Gilts were one of the worst performing assets over the quarter but were still flat to slightly positive, our underweight was a positive relative contributor. More aggressive corporate and high yield debt performed comparatively well. It was also pleasing to see that some more defensive sectors such as Alternatives also delivered solid positive returns driven areas such as convertibles.

We made some tactical changes to the portfolio over the quarter. The main change made was to reduce exposure to very defensive short dated gilts in favour of investment grade credit as investor sentiment improved. We feel that short dated gilts were effective at providing protection in difficult markets but can now move to a slightly more aggressive stance. We also opted to move our domestic large cap positions to a more balanced focus by adding in Lindsell Train UK to provide exposure to non-cyclical positions.

You should remember that the value of an investment and the income from it could go down as well as up. The return at the end of the investment period is not guaranteed and you may get back less than you originally invested.

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