Hi, I’m Dom Byrne from BlackRock, and I’m here to give you an update about the Tailored Plan, which you are invested in.
How did the plan perform compared to the market, over the last three months? Did we have a good quarter or a bad quarter?
With stock markets coming off one of the sharpest and deepest declines in history, the second quarter of 2020 was characterised by a broad recovery. The COVID-19 pandemic caused the most difficult situation the world’s economy has faced in modern history. Economies globally are still struggling with the impacts of the pandemic and the accompanying lockdown restrictions that brought activity to a virtual standstill, with several countries likely to record a recession in the first half of 2020.
However, encouraging signs have started to emerge amid a predominantly challenging outlook. Some data suggests that the economic contraction across developed countries has bottomed and there are hopes for a potential coronavirus vaccine (which does not exist yet). Financial markets have moved ahead on expectations of an economic rebound and, as a result, stock markets recorded strong positive returns over the last three months.
Portfolios delivered positive returns, particularly for younger customers with over 20 years to retire (for example). For those younger customers, this is mainly because they are more heavily invested in global stock markets, which have outperformed bond investments over the most recent period (source: BlackRock, as of 30 June 2020. Performance gross of fees in GBP). The results were particularly encouraging given the sharp losses experienced in the first quarter of 2020. Over the longer-term (i.e. over the last five years), the portfolios have delivered strong positive returns.
Looking more deeply into the drivers of return, all the markets that the plan invests in delivered positive returns but there were some key themes. Firstly, it was beneficial to own stocks from developed markets outside of the UK, both in terms of large and small companies. Secondly, it was beneficial to own a wide range of fixed income (bonds) exposures as inflation linked, corporate and emerging bonds outperformed traditional UK government bonds (UK gilts).
Despite the recent recovery in stock markets, we still advocate the use of diversification within portfolios to help better manage risk as we approach retirement. This doesn’t mean we can eliminate risk entirely, but we aim to build a portfolio that has a range of sources of risk and return, as opposed to being reliant on one single market. We expect that, despite lower long-term return potential, owning diversifying strategies such as bonds can help in periods of market stress. For example, UK bonds have significantly outperformed UK shares so far in 2020. Finally, timing markets is very hard particularly when trying to respond to periods of severe shock. Therefore, having a plan to de-risk as you approach retirement is critical. For example, de-risking our portfolios after the recent sell-off would have meant missing out on the subsequent recovery.
What can savers expect for the next quarter?
The initial COVID-19 contraction is larger than the great financial crisis of 2008, but we believe its cumulative impact on the economy will likely be less as long as the policy response remains strong enough to cushion the blow. Normal economic crisis and recovery cycle does not apply, so we are tracking three signposts: how successful economies are at restarting activity while controlling the virus spread; whether stimulus is still sufficient and reaching households and businesses; and whether any signs of financial vulnerabilities or permanent scarring of productive capacity are emerging. Markets are laser-focused on changes in any of these three “known unknowns,” and a possible second wave of infections and policy fatigue are major risks in the second half of 2020.
The shock will have long-term consequences that are starting to play out. Policymakers are funneling money directly to the (non-financial) private sector, with debt monetisation, which is a way for the central banks to finance the government spending, being a possibility down the road. The pandemic is reinforcing structural trends such as ecommerce and sustainability; amplifying deglobalisation and geopolitical fragmentation; and may deliver a generational shock to the emerging world.
We expect volatility to remain elevated over the near-term and, whilst we appreciate this is challenging given the uncertainty in markets, we believe savers should take a long-term perspective. This is particularly relevant for those savers with a long time to retirement. This is because, simply put, we still expect shares to outperform other assets such as cash and fixed income over the long-term and therefore believe stocks and other risky assets have the potential to help our savings grow over time.
How has BlackRock driven positive social change in the past quarter?
Sustainability considerations are at the core of our approach to how BlackRock invests, manages risk and executes its stewardship responsibilities. This commitment is based on our conviction that climate risk is investment risk and that sustainability-integrated portfolios can produce better risk-adjusted returns to investors in the long-term.
While BlackRock Investment Stewardship team (BIS) has been engaging with the companies on sustainability issues for years, this year we are focusing more on engaging with firms in carbon-intensive sectors. These include for example ExxonMobil, where BlackRock voted against directors due to significant concerns about climate risk management and supported a shareholder proposal on governance; or TransDigm, a U.S. aviation manufacturer, where BlackRock voted against a director for lack of progress on climate risk reporting and supported shareholder proposal to adopt emissions goals. These companies face material financial risks during the transition to a low-carbon economy. Together, they represent a significant proportion of market capitalisation and CO2 emissions in their respective regions. BIS is determined to maximise the impact of its climate-related engagements.
In 2020, we have identified 244 companies that are making insufficient progress integrating climate risk into their business models or disclosures. Of these companies, we took voting action against 53, or 22%. We have put the remaining 191 companies “on watch.” Those that do not make significant progress risk voting action against management in 2021.
Through this report, we hope to provide a deeper look at our engagement process and methods; how we are working to promote transparency in investment stewardship, both in our own activities and through the adoption of disclosure standards; our involvement with Climate Action 100+; and our view on the importance of social factors to the long-term health of companies and society as a whole.
The opinions expressed are as of June 30th 2020 from BlackRock and are subject to change at any time due to changes in market or economic conditions.
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Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy.
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BlackRock DC LifePath UK Risks
Credit Risk: The issuer of a financial asset held within the Fund may not pay income or repay capital to the Fund when due.
Equity Risk: The values of equities fluctuate daily and a Fund investing in equities could incur significant losses. The price of equities can be influenced by many factors at the individual company level, as well as by broader economic and political developments, including daily stock market movements, political factors, economic news changes in investment sentiment, trends in economic growth, inflation and interest rates, issuer-specific factors, corporate earnings reports, demographic trends and catastrophic events.
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As with all investments, past performance is not indicative of future performance and you may get back less than you start with.