Tailored Plan investor update Q2 2020

Dom Byrne

by , Lead Investment Strategist

13 Aug 2020 /  

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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.

Risks warnings

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.

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.

Changes in the rates of exchange between currencies may cause the value of investments to diminish or increase. Fluctuation may be particularly marked in the case of a higher volatility fund and the value of an investment may fall suddenly and substantially. Levels and basis of taxation may change from time to time.

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.

Derivative Risk: The Fund uses derivatives as part of its investment strategy. Compared to a fund which only invests in traditional instruments such as stocks and bonds, derivatives are potentially subject to a higher level of risk.

Liquidity Risk: The Fund’s investments may have low liquidity which often causes the value of these investments to be less predictable. In extreme cases, the Fund may not be able to realise the investment at the latest market price or at a price considered fair.

Counterparty Risk: The insolvency of any institutions providing services such as safekeeping of assets or acting as counterparty to derivatives or other instruments, may expose the Fund to financial loss.

Tax treatment depends on the individual circumstances of each client and may be subject to change in the future.

Important information

Issued by BlackRock Life Limited (“BLL”), which is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and Prudential Regulation Authority. The Fund described in this document is available only to trustees and members of pension schemes registered under Part IV of the Finance Act 2004 via an insurance policy which would be issued either by BLL, or by another insurer of such business. BLL’s registered office is 12 Throgmorton Avenue, London, EC2N 2DL, England, Tel +44 (0)20 7743 3000. Registered in England and Wales number 02223202. Please refer to the Financial Conduct Authority website for a list of authorised activities conducted by BlackRock.

Rates of exchange may cause the value of investments to go up or down. Fluctuation may be particularly marked in the case of a higher volatility fund and the value of an investment may fall suddenly and substantially. Any objective or target will be treated as a target only and should not be considered as an assurance or guarantee of performance of the Fund or any part of it. The Fund objectives and policies include a guide to the main investments to which the Fund is likely to be exposed. The Fund is not necessarily restricted to holding these investments only. Subject to the Fund’s objectives, the Fund may hold any investments and utilise any investment techniques, including the use of derivatives, permitted under the Financial Conduct Authority’s New Conduct of Business Sourcebook which contain the rules by which investment of the Fund is governed. The BlackRock Life Limited’s notional fund units have a single unit price. The unit prices are normally calculated on each business day. For performance reporting, notional units are valued at special closing prices on the last working day of each quarter to enable comparison with the relevant benchmark index.

Any research in this document has been procured and may have been acted on by BlackRock for its own purpose. The results of such research are being made available only incidentally. The views expressed do not constitute investment or any other advice and are subject to change. They do not necessarily reflect the views of any company in the BlackRock Group or any part thereof and no assurances are made as to their accuracy.

This document is for information purposes only and does not constitute an offer or invitation to anyone to invest in any BlackRock funds and has not been prepared in connection with any such offer.

© 2020 BlackRock, Inc. All Rights reserved. BLACKROCK, BLACKROCK SOLUTIONS, iSHARES, BUILD ON BLACKROCK and SO WHAT DO I DO WITH MY MONEY are registered and unregistered trademarks of BlackRock, Inc. or its subsidiaries in the United States and elsewhere. All other trademarks are those of their respective owners.

Your updated fact sheet will soon be available to download in the BeeHive. If you’d like to ask a question in the next update or share your thoughts, you can get in touch with PensionBee via email or Twitter.

As with all investments, past performance is not indicative of future performance and you may get back less than you start with.

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