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Investment Committee Meeting Notes 10 June 2020

The latest quarterly Town Close Financial Planning Investment Committee Meeting took place on 10 June 2020.

The TCFP Model Portfolio remains unchanged. We noted that, since our last ICM, we changed the model portfolio twice.

First, at 10% down we reduced bonds from 20% to 10% and added to global smaller companies. Then, with values down 20% in total, we sold half the remaining bonds and added to global larger companies.

These changes have, to date, had a significant positive impact on your account balances. We were lucky with our timing, but eminently sensible to draw up a protocol and action it without hesitation once thresholds had been breached. It is that sort of discipline that leads to great outcomes.

A third step, if values dropped by 40%, was not implemented. We do not now expect it to come into play. If it does, we will request your agreement again.

In March we anticipated that, as values recover, we would look to return profits to both your bond and cash allocations as appropriate. We are not yet ready to do this.

Much of the initial dramatic falls have been recovered but valuations remain attractive other than, perhaps, amongst the largest of US large caps. We will gravitate back towards bonds/cash once we feel more of the equity market has achieved “fair value”.

We expect fair value to appear somewhere in the coming expansion phase which is a little way off yet. Currently, we are in the early days of the recovery.

For now, we will maintain our minimal bond holdings. Not with any great conviction, they yield next to nothing and are, therefore, a costly hedge against equity volatility. To be completely candid, we’re not sure what the point of them is. But the thought of being 0% or 100% anything is uncomfortable to us, other than for very client-specific reasons, so we will stick with a 5% holding.

A last point about TCFP’s investment strategy is “discretionary” powers. The time and effort taken to gain your individual agreements to portfolio changes is inefficient and results in lost opportunities (returns). You may have heard me mention this during our recent virtual AGMs.

As a result, we are taking meaningful steps to alter our permissions with the FCA to allow us to make portfolio changes without first agreeing them with you. This should have a significant benefit to your overall returns.

We propose restricting ourselves so that you understand the parameters within which we will make changes. They will be in line with the protocol outlined above, just more comprehensive. We feel it important that we are constitutionally restricted. A “white paper” will be completed over the coming weeks and shared with you to gauge your thoughts and feelings.

An initial survey of our clients came out strongly in favour of making this change.

Covid-19 is no longer our number one concern. The worst of it and the economic damage it has caused are now behind us. The recovery is underway on all fronts. We can see what has happened in other countries who are ahead of us, which makes what is likely to happen here quite predictable.

Most notably, none of the countries that came out of lockdown sooner than the UK have suffered a “second wave”; there is no reason to expect the UK to be the exception rather than follow the rule.

Economically, the worst is now behind us. That is not to say the turmoil is over. As the financial life support is withdrawn there will be bankruptcies and unemployment.

This is to be welcomed in some respects, capitalism works best when capital is free to go where it produces the biggest bang for its buck. Intervention keeps businesses that otherwise would (and should) go bust alive, thus tying up capital that could be put to better use elsewhere.

Our best guess is that it will take two years for this capital and labour to be redeployed more effectively. It will take longer, the longer Government interferes.

The furlough and other support packages were entirely moral and necessary. No Government can tell a business it must close and not compensate them.

Over the coming months you can expect big moves up and down in the GDP and unemployment figures, with next to nothing happening to interest rates or inflation. These may or may not cause some shocks (in either direction) to stockmarket levels. That is entirely understandable and expected, and to be ignored.

Bear in mind that the recovery will be the aggregate of the economy, not the individual sectors or businesses that are suffering now. Good, strong economic performance has started and will grow. The media see no reason for you to know this yet.

Brexit can be expected to happen. Expect there not to be a comprehensive free trade agreement. Expect not to exit on WTO terms. Expect the loss of business with Europe to be made up by gains in the anglosphere. Expect lots of whining and wailing and gnashing of teeth. Expect to get on with your lives as normal, nothing much will change regardless.

And that was the meeting. The next will be in September.

future proofing your finances 

Town Close are expert financial planners. Our goal is the same as yours – to help you do the things that are important to you in the time you have remaining.

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