Witan Investment Trust : From TINA to TIARA and back?

From TINA to TIARA and back?

Friday, 01 October 2021

Witan Investment Trust Plc (Witan), one of the UK's oldest and largest investment trusts, that invests using a multi-manager approach, looks at the opportunities and challenges that face investors in the last quarter of 2021 and into 2022.

Discussing these potential trends with the fund managers that manage money on behalf of Witan, there were 4 common themes:

• Inflation risks
• Lingering pandemic uncertainty
• Geopolitics, specifically in China
• Evolving growth opportunities

Andrew Bell, CEO of Witan Investment Trust comments:

"At the beginning of the year, reopening hopes drove investment into equities - TINA (there is no alternative) was the cry, with bond yields close to zero and vaccinations on the way. With higher valuations, peaking policy stimulus and the Delta variant all having acted as TINA turners, the case is now more nuanced. Corporate earnings have become more important at the very time that cost inflation and supply disruptions are making them less predictable."

During the summer, these doubts saw bonds in demand as yields retraced much of their Q1 rise, even though higher inflation is normally seen as toxic for fixed rate investment.

Andrew continued:

"TINA gained a TIARA (there is a risky alternative). Even inflation linked bonds are priced to give negative real returns, but at least offer protection against future inflation. The same cannot be said for fixed rate government bonds, where yields in many regions are below zero and even in the US and the UK they are below current and targeted future inflation rates - offering return-free risk where historically their portfolio role was to offer risk-free returns."

Witan believe that in the longer term, governments seem committed to expansive spending policies, with social stresses and commitments to combat climate change offering a political licence to do so. Revolutionising transport, heating/cooling fuel, electricity generation and industrial processes over 30 years will create both innovative winners and obsolescent losers. This is on top of the established but accelerating growth opportunities from information technology and the new medical fields of genomics and cell and gene therapies. Equity investment is likely to be driven by these enduring growth drivers, while taking account of the tactical risks posed by valuation compression and earnings disruption.

The key comments from a number of the fund managers that invest on behalf of Witan about Q4 2020 and beyond are:

Artemis

We have for years found the commentary from our holdings of more interest than the scribblings of any strategist. All bar none highlight two major areas of concern. Firstly, inflation. For the first time in years it is a real problem, because it is everywhere - in utility and material costs, and increasingly labour. Semiconductor prices, the component of many daily use products have been rising rapidly. The second issue is availability and supply chains. The pandemic, localised shutdowns and disrupted transport links have all impacted corporates' ability to access supplies. And in areas such as hospitality, the availability of labour is a major problem. Scarcity drives pricing. The companies we invest in don't think these issues are particularly short term. Some of the pandemic wrinkles will be ironed out, and supply chains will improve but the risk is pricing remains elevated for longer than many think. The ability to deal with these costs, and the pricing power to offset them will be our key area of focus for the fourth quarter and may well throw up some significant opportunities.

GQG

One of the biggest challenges and opportunities will be in identifying the durability and validity of returning to normal. Will we be able to achieve some semblance of a pre-pandemic way of life as we attempt to send our children back to school and the work force more broadly returns to the office? Or will we see spikes in cases from the Delta variant that prolong the road to reopening further out into first half of 2022? Last, but certainly not least, what will the broader market implication be for either outcome? As investors, it's our job to probability weight the outcomes of complex puzzles like this with an imperfect set of information. With that said, we look forward to the challenge ahead.

Jennison

We remain in the early stages of many disruptive secular trends globally and we expect growth stocks to maintain their leadership over the long term. Companies with the most unique business models and the strongest and most durable growth profiles continue to reside in the technology and consumer discretionary sectors. Key trends we are seeing include a strategic shift to direct-to-consumer models, which can be very supportive of earnings; growth of cloud-based applications, which we expect to occur across industries; and the emergence of tech enablers that are the backbone for many of these secular trends. In terms of challenges, we are concerned about the investment implications of the aggressive measures taken by Chinese regulators. While we have been reducing direct exposure in our portfolios to Chinese companies for almost a year due to increasing government intervention, we have also recently taken more decisive action to further reduce risk.

Lansdowne

One of the key challenges will be determining how businesses are being impacted by supply chain disruption: some areas of the economy are seeing significant unmet demand which is likely to prove enduring, while other areas, currently experiencing double ordering and restocking, will suffer weaker demand once inventories have been rebuilt. At the same time, inflation, particularly in energy and labour markets, will create margin pressure for businesses that don't possess the pricing power to pass this on, in addition to generating uncertainty around the future level of interest rates, potentially leading to opportunities for banks. Finally, we expect to see stronger growth in services (from current depressed levels) and as the economy normalises it will present an opportunity to focus on new areas of growth for the next decade in themes such as electrification, infrastructure and genomics.

Lindsell Train

Looking to Q4, we would expect our so-called 'pure tech' holdings to perform well, as they continue to benefit from the strong tailwinds of increased eCommerce penetration, and digitisation. We're also optimistic about our tech-enabled media names as consumers will likely continue to turn to the films and video games that kept them so engaged over the challenging past year. Performances across consumer staples names have been less impressive recently, perhaps reflecting other investors' fears about the impact of rising interest rates on the valuations of these long duration assets. Finally, we're keeping a close eye on our sports clubs, whose balance sheets may still need to weather considerable uncertainty, and our Japanese holdings, which are feeling the effects of global investors' concerns about companies with material exposure to China. We remain extremely confident in the underlying quality of each portfolio constituent and continue to analyse their future prospects far beyond merely the next three months.

Veritas

We anticipate that the biggest challenge facing companies in Q4 will be rising costs. These include not just labour and raw materials, but also areas such as supply chain costs (logistics etc.) as well as the cost of essential components such as semiconductors. It is quite possible that many companies will not have been able to raise prices to offset these costs in Q3 and Q4 results and hence margin compression (vs. expectations) is quite possible. Conversely, the greatest opportunity for companies in Q4 will be found in those companies that are benefitting from the tightness in supply - this could include companies in the transport and logistics arena together with manufacturers of essential components (and certain commodity related companies).

WCM

Some of the biggest challenges will likely be geopolitical in nature. China continues to demonstrate that it has more bite than bark on economic and social issues. Tensions remain high between the two largest economic powers. There is also continued uncertainty around COVID, the economic recovery, and inflation, just to name a few variables, which can complicate things for short term investors. With a long-term view, however, any short-term volatility in the markets could create attractive entry points into some great businesses. We are seeing particular opportunity in select parts of the semiconductor value chain. Health care is another area we're seeing lots of innovation and opportunity, specifically around things like cell and gene therapy and personalised medicine.

Andrew concluded: "For investors looking to invest for the long term, coming out of the pandemic brings opportunity but it is important to look for well-managed, soundly financed companies that are undervalued relative to their growth prospects."

For further information please contact:

Alexis Barling, Director of Marketing
Witan Investment Trust plc
Tel: [phone]
[email protected]

Notes to Editors

Witan Investment Trust plc

Established in 1909, Witan is one of the UK's largest investment trusts, managing £2.0bn (source: Witan, as at 31.08.2021) on behalf of over 25,000 investors. Witan operates a multi-manager structure and currently has 7 principal managers. For further details please visit www.witan.com.

Issued and approved by Witan Investment Services Limited. Witan Investment Trust is an equity investment. Please remember that past performance is not a guide to future performance. The value of an investment and the income from it can fall as well as rise as a result of currency and market fluctuations and you may not get back the amount originally invested.

Discrete Performance*	Q2 2016 Q2 2017	Q2 2017 Q2 2018	Q2 2018 Q2 2019	Q2 2019 Q2 2020	Q2 2020 Q2 2021
Share Price (Total Return)	36.2%	10.9%	0.6%	-11.6%	34.7%
Net Asset Value (Total Return)	28.0%	8.7%	2.8%	-8.9%	37.3%
Benchmark (Total Return)**	22.8%	8.5%	6.1%	2.3%	24.5%

_{* Source: Morningstar, percentage growth to 30th June each year. Total return includes the notional investment of dividends.}

_{** Witan's benchmark is a composite of 85% Global (MSCI All Country World Index) and 15% UK (MSCI UK IMI Index). From 01.01.2017 to 31.12.2019 the benchmark was 30% UK, 25% North America, 20% Asia Pacific, 20% Europe (ex UK), 5% Emerging Markets. From 01.10.2007 to 31.12.2016 the benchmark was 40% UK, 20% North America, 20% Europe (ex UK) and 20% Asia Pacific. The benchmark changes since 2007 reflect a shift from the UK in favour a more international strategic asset allocation, together with an index simplification from 2020. For more information go to www.witan.com/support/legal-information.}

_{The views expressed herein represent those of the specific fund managers (as at the date of publication) and not those of Witan Investment Services. No reliance may be placed for any purpose on the information and opinions contained in the newsletter or their accuracy or completeness. No part of this material may be copied, photocopied or duplicated in any form or distributed to any person that is not an employee, officer, director or authorized agent of the recipient, without Witan Investment Services Limited's prior permission. Witan Investment Services Limited is registered in England no. 5272533 of 14 Queen Anne's Gate, London SW1H 9AA. Witan Investment Services Limited provides investment services and is authorised and regulated by the Financial Conduct Authority.}