Portfolio and Market Review 1st Quarter 2021
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Portfolio and Market Review
1st Quarter 2021
1 Oak Court, North Leigh Business Park, Nursery Road, North Leigh, Oxfordshire OX29 6SW
T: 01865 208000 | E: info@mathewscomfort.co.uk | www.mathewscomfort.co.uk
FIN A NCIA L
Mathews Comfort Financial Services Ltd, Authorised and Regulated by the Financial Conduct Authority, PL A NN I NG
Company Registration Number 2187209, Registered in England and Wales.
Index funds DO care about ESG
When powerful vested interests feel threatened by inconvenient evidence they often respond in the same
way. Instead of challenging it head-on with counter-evidence of their own, they seek to undermine it by
spreading and perpetuating myths.
The tobacco industry spent billions obscuring the facts of the health effects of smoking over several
decades. The fossil fuel industry responded in the same way to growing evidence of climate change.
Existential Crisis
Today, active fund management is facing a similarly existential crisis as a result of the rise of passive
investing, which helps to explain the steady stream of myths we read about index funds. We are told, for
example, that indexing makes markets unstable, that it threatens market efficiency and even capitalism itself
— none of which is true.
Another myth doing the rounds in recent years is the notion put forward in an open -editorial in the Wall
Street Journal in June 2017, that passive investors don’t care about corporate governance. Indexers,
the argument goes, are only interested in financial returns, and managers of index funds have little or no
incentive to hold company boards to account on issues like excessive corporate pay, staff welfare, social
justice and the environment.
But is it true? Once again, there’s another side of the story which we rarely hear.
Stronger Incentive
Think about it: index funds should, in theory, have a stronger incentive to monitor the firms in their portfolios
than active managers, who can simply sell out of their positions if they disagree with management. Index
funds, by definition, are in it for the long term. If the company’s stock is on the underlying index, they have
no choice but to engage with the board. It is, moreover, in their interests to do so in order to compete with
active funds that have discretion over their holdings.
But what about in practice? Do index funds challenge company boards on ESG issues? There have been
several academic studies on this subject over the years, and most show that managers of passive funds are
just as likely as their active counterparts to hold boards to account — if not more so.
F I N A N C I A L PL A N N I N G
Academic Studies
In a 2016 study called Passive Investors, Not Passive Owners, Ian Appel, Todd Gormley and Donald Keim
found that index ownership at a firm is associated with more independent directors, the removal of takeover
defences and more equal voting rights.
The same authors revisited the subject with another paper, published in 2018. In it they established a
link between increased index ownership and greater use of proxy fights by activists, as well as a higher
likelihood that an activist obtains representation on the board of the target firm.
In March 2020, Joseph Farizo from the University of Richmond in Virginia published an in-depth study
on the voting records of both passive and active funds. Farizo concluded that the evidence “dispels the
concern that index funds, at least in the aggregate, completely disregard voting responsibilities by either
always siding with management”.
Passive Funds Have More Clout
In October 2020, the Faculty of Law at the University of Oxford published a paper by Adrian Aycum Corum
from Cornell University and Andrey and Nadya Malenko from the University of Michigan called Corporate
Governance in the Presence of Active and Passive Delegated Investment. Although the findings were
less clear-cut than those of the other papers mentioned here, they nevertheless dispelled the idea that
passive funds are bad for governance simply because their fees are lower, leading to smaller budgets for
governance oversight.
The authors wrote:
“While passive fund growth indeed decreases fund fees, it may nevertheless be beneficial for governance.
The reason is that fund fees do not decrease in isolation: lower fees are accompanied by higher AUM,
allowing funds to take larger stakes in their portfolio companies. These larger stakes, in turn, give funds
stronger incentives to engage.”
In other words, the growth of indexing has given passive managers more clout when it comes to ESG, and
we are pleased to see providers such as Vanguard, beefing improving up their ESG resources in Europe
and the US.
Conclusion
In summary, the claim that index funds present a danger to governance because they adopt a hands-off
approach, allowing management to act as it wants to, is another myth created by the fund industry. It wants
and needs investors to believe it, but it simply isn’t true.
Index funds care just as much about ESG as active funds do, and arguably more so.
F I N A N C I A L PL A N N I N G
Asset Class Return
After numerous lockdowns and false starts in 2020, the widespread rollout of the COVID-19 vaccine has
given real hope that economies will soon be able to fully re-open. The International Monetary Fund (IMF)
revised its projections of world economic growth in 2021 up to 6%, an increase of 0.5% from its predictions
in January. This is the fastest rate of global economic growth since 1980 and is in stark contrast to the
reduction in global output of 3.3% in 2020, the worst since the Great Depression.1
Figure 1 – Asset Class Performance (GBP Returns)
2
Source: FE Fundinfo (2021)
1
IMF (2021)
2
Global Bonds: Bloomberg Barclays Global Aggregate, UK Gov Bond: Bloomberg Barclays Global Aggregate UK Government
Float Adjusted, UK Equities: FTSE All Share, Global Property: FTSE EPRA Nareit Global, Emerging Markets Equity: MSCI
Emerging Markets, EU Equities (ex-UK): MSCI Europe ex UK, Japanese Equities: MSCI Japan, US Equities: MSCI USA, Global
Value Equities: MSCI World Small Value, Global Equities: FTSE Global All Cap, UK Inflation (RPI): UK Retail Price Index. F I N A N C I A L PL A N N I N G
As in the previous quarter, the change of leadership in Washington was a dominant theme. Once
inaugurated, President Biden wasted no time in announcing the American Rescue Plan, a $1.9 trillion
stimulus package. This was signed into law in March. Shortly afterwards, the President announced his
intention to spend an additional $2 trillion to rejuvenate the USA’s infrastructure via the American Jobs
Plan. US equity markets, as to be expected, reacted favourably and the S&P 500 increased by 7.4% over
the quarter. With this additional support and increasingly positive outlook for the US economy, the IMF
3
amended its predictions of US economic growth from 5.1% to 6.4% for 2021.
China together with the USA are seen to be driving the global recovery. China was the first country to
encounter the virus, first to shut down and the first to re-open. The Chinese economy is expected to grow by
4
8.4% this year despite the continuing trade war with the USA. For another quarter, China again failed to fulfil
its commitments to increase imports of US goods, as outlined in the “Phase One” agreement signed back in
January 2020. There were hopes that changes in the Whitehouse would result in a more cordial relationship
between the two nations. However, the first call between President Biden and his Chinese counterpart Xi
Jinping in February were reported to be tense. Later in March, angry exchanges between the two nations
during high level talks played out in front of the world’s media. As the quarter drew to a close the US
reaffirmed its position that it had no immediate plans to lift tariffs introduced but did express a willingness to
engage in further trade talks.
The first quarter of 2021 saw a continued resurgence in value stocks, giving further hope to long embattled
value investors that the initial upswing in value stocks observed in the last quarter of 2020 was here to stay.
Value investing is a strategy whereby investors seek to identify stocks that are currently undervalued by the
market. The intention is to buy these “cheap”, value stocks and profit from their eventual increase in price.
The opposite strategy is that of growth investing, whereby investors attempt to identify firms whose revenue
and earnings will grow faster than the market average.
Figure 2
Source: FE Fundinfo (2021)
3
IMF (2021)
4
IMF (2021) F I N A N C I A L PL A N N I N G
During 2020, with the assistance of governments and central banks, equity markets rebounded quickly.
However, the disparity between the performance of value and growth stocks initially only increased. This
was because of the disproportionate impact that lockdowns had on value stocks, which tend to be more
cyclical in nature, for example energy, retail, and transport. Growth stocks were more resilient, and some for
example, technology stocks, even benefited from the restrictions.
In the last quarter of 2020, investors’ expectations began to change. With the approval of a number of
COVID-19 vaccines together with President-elect Biden’s plan to spend trillion of dollars to revive the US
economy once in office, the prospect of an economic recovery looked promising. Cyclical stocks looked
to benefit more from the developments and hence value stocks began to rise. As 2021 began, the vaccine
rollout globally gathered pace and further US stimulus plans were announced, sustaining the value rally.
The reversal of fortunes for value stocks were not the only sector of the market to see a rotation in fortune.
Size investors, those looking to invest in small-cap companies, which had also been hit hard by the
pandemic, also continued their upwards momentum, which began in the last quarter.
Akin to value stocks, things started to shift in the last quarter of 2020. Small stocks returns are closely
linked to the performance of the overall economy. With signs that economic recovery could be fast
approaching in the last quarter of 2020, suddenly smaller firms, whose stocks were cheaper, became
an attractive proposition for their potential to deliver higher returns in 2021.
Figure 3
Source: FE Fundinfo (2021)
F I N A N C I A L PL A N N I N GA review of the performance of five well known factors strategies over the last ten years reveals the extent
of the rotation to size and value in the first quarter of 2021; the losers of previous years, showing the
cyclical nature of the value factor. Contrastingly, momentum, quality and low volatility have generated
negative returns.
Figure 4 - Factor Olympics (Long-Short): Global
Source: Factor Research 2021
F I N A N C I A L PL A N N I N GIt was not only the US government’s stimulus spending and global inoculation programmes that were
impacting equity prices in the first quarter. Early 2021 saw an unusual David-and-Goliath battle over
GameStop stock. The most popular explanation of events has been of that of “the populists (a phrase that
doesn’t really mean much anymore, beyond just “a collection of guys who are mad”) versus the Institutions”
essentially, a young group of stock picking enthusiasts, wanting to test the financial system to make sense
of whether it was all smoke and mirrors, set up by large financial intuitions for self-gain, or an efficient
capital market engine.
Large investment banks, believing the firm’s stock was all but finished had taken “short” positions, hoping
to profit from a fall in its price and eventual demise, common practice in modern day active management,
known as short selling. Unfortunately for them, a social media group had formed, unhappy at the “shorting”,
believing that the stock had real value in its fundamental business offering. They recruited a mass following
of likeminded buyers and using trading apps, drove the price of the stock upwards, causing it to increase
from $17.25 to $347.51 during January, an increase in price of 1914.5%. The motivation of the majority of
these investors then progressed into punishing hedge funds and testing the financial system as opposed
to a genuine belief that the firm was undervalued. However, some investors undoubtedly were able to take
advantage of the rapid increase in price and make a quick profit.
Figure 5 - GameStop Stock Price
Source: Nasdaq (2021)
The saga continued over the quarter, the stock’s price remained volatile and trading was suspended on
various platforms resulting in claims of foul play by investors who saw this as illegal intervention. The US
government and regulatory agencies took notice and launched a number on investigations. Where will it
end for GameStop? No one really knows, but fundamentally, the company appears hugely overvalued, with
social media led investors refusing to sell, claiming it is now not about the profits.
We all like an underdog story but investing is not about trying to turn a short-term profit; that is pure
speculation or as some may say, gambling. If you fancy a gamble, then sure, instead of putting your money
on “Number 4” at Cheltenham, buy GameStop, but be prepared to lose your entire bet. Unfortunately,
despite what you see in the movies, investing correctly is a slow and disciplined process best served by
investing in low cost, diversified index funds.
5
Washington Post (2021) F I N A N C I A L PL A N N I N GPortfolio Performance
6
Portfolio returns continue to build on the late momentum of last year. Returns over 1, 3, 5, and 7 years all
continue to remain in positive territory across both the Core and ESG models.
Figure 6 - Mathews Comfort Cumulative Gross Performance
Source: Betafolio (2021)
1-YEAR 3-YEAR 5-YEAR 7-YEAR
Mathews Comfort 0 0.7 7.6 14.8 29.4
Mathews Comfort 10 4.8 10.3 20.7 36.2
Mathews Comfort 20 9.0 12.9 26.5 42.9
Mathews Comfort 30 13.5 15.5 32.4 49.9
Mathews Comfort 0 18.4 18.1 38.7 57.4
Mathews Comfort 50 23.5 20.8 45.0 64.8
Mathews Comfort 60 28.9 23.4 51.5 72.5
Mathews Comfort 70 34.8 26.0 58.1 80.2
Mathews Comfort 80 41.0 28.7 65.0 88.5
Mathews Comfort 90 47.6 31.3 71.8 96.8
Mathews Comfort 100 54.7 34.1 79.4 105.6
Figure 7
Source: Betafolio (2021)
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All data is up to last price – 5th April 2021. Past performance is no guarantee of future return. Data sourced from Morningstar API.
Careful consideration has been taken to ensure that the information is correct but it neither warrants, represents nor guarantees the
contents of the information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein.
Percentages may not total 100 due to rounding. Performance Periods: 1 Year: 05/04/2020-05/04/2021; - 3 Year: 05/04/2018-
05/04/2021, 5 Year: 05/04/2016-05/04/2021, 7 Year: 05/04/2014-05/04/2021. Additional performance periods may be accessed
with the help of your adviser via the Betafolio Control Centre: https://app.betafolio.co.uk/ F I N A N C I A L PL A N N I N GPortfolio returns continue to build on the late momentum of last year. Returns over 1, 3, 5, and 7 years all
continue to remain in positive territory across both the Core and ESG models.
Figure 8 - Mathews Comfort ESG Cumulative Gross Performance
Source: Betafolio (2021)
1-YEAR 3-YEAR 5-YEAR 7-YEAR
Mathews Comfort ESG 0 0.1 7.0 11.2 21.0
Mathews Comfort ESG 10 4.0 10.8 18.1 29.3
Mathews Comfort ESG 20 8.0 14.1 24.8 37.3
Mathews Comfort ESG 30 12.1 17.9 32.2 46.5
Mathews Comfort ESG 0 16.7 21.7 39.8 55.9
Mathews Comfort ESG 50 21.2 25.5 47.7 65.7
Mathews Comfort ESG 60 26.0 29.2 55.6 75.3
Mathews Comfort ESG 70 31.2 33.3 64.2 86.2
Mathews Comfort ESG 80 36.2 36.8 72.4 96.9
Mathews Comfort ESG 90 41.7 40.5 81.0 107.7
Mathews Comfort ESG 100 46.5 43.6 89.1 118.2
Figure 9
Source: Betafolio (2021)
4
Closing value 24/12/2020 versus 29/12/2020. F I N A N C I A L PL A N N I N GClosing Words
This time last year the world was reeling from the realisation that the virus that had taken hold of our day
to day normality and posed a serious global health threat. Governments responded by introducing strict
lockdowns and the ensuing panic caused the fasted 30% drawdown of global equities in history.
The team here at Mathews Comfort will freely admit to being flabbergasted by the market’s reaction.
However, our data told us that large market shocks, although rare, had occurred for known reasons in
the past and that markets would recover. Indeed, we saw the subsequent fastest and largest advance in
equities markets in history during the second quarter of 2020.
A year on and equity markets are above their pre-shock levels. This recovery has been made possible by
the tenacity of some very clever scientists to whom we all owe a debt; developing vaccines in months as
opposed to years. In the UK at least, we appear to have the virus on the backfoot, and it looks increasingly
likely that life may soon return to some kind of normality. However, with France and Germany recently
announcing new lockdowns as they struggle to curb a third wave, it reminds us that the pandemic is far
from over.
Foremost, we wish everyone a safe return to normality and hope the performance of your portfolio during
the last year serves to reassure you of the robustness of its construction.
F I N A N C I A L PL A N N I N GBibliography
Corum, A. A., Malenko, A., & Malenko, N. (2021, February 18). Corporate Governance in the
Presence of Active and Passive Delegated Investment. European Corporate Governance Institute
– Finance Working Paper 695/2020.
International Monetary Fund. (2021). World Economic Outlook. Retrieved from:
https://www.imf.org/-/media/Files/Publications/WEO/2021/April/English/text.ashx
Rabener, N. (2021). Factor Olympics Q1 2021. Factor Research. Retrieved April 9, 2021:
https://insights.factorresearch.com/research-factor-olympics-q1-2021/
Washington Post. (2021, February 1). A Breakdown of the Gamestop Situation. Retrieved from:
https://www.washingtonpost.com/business/2021/02/01/understanding-gamestop-situation/
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