Portfolio Management Service update

During this very surreal time, we want to reassure you we're still managing the funds in the Portfolio Management Service as normal. I wanted to update and reassure investors with our views on the current market conditions, and some recent changes we’ve made in the portfolios.

But first, I’d like to provide some clarity on the funds’ exposure to the LF Equity Income fund.

The LF Equity Income Fund, formerly the Woodford Equity Income Fund, began a wind-up process in January. The majority of the cash raised from the wind-up has now been distributed. We have invested the cash received in line with each of the portfolio's investment objectives. There is no need for you to take any action, one advantage of being in a managed solution is that asset allocation is done for you.

This article isn’t personal advice, seek advice if you’re at all unsure. All investments and the income they produce can fall as well as rise in value so you could make a loss.

What have we done in the portfolios?

As painful as it may feel now, we think capitalism will survive this crisis. As such, abandoning the market wouldn’t be the right thing to do. We have to stick to our investment principles and analyse the current market against our long-term fair value assumptions

A lot of stock markets now look good value against historical levels according to our analysis, including Asia, UK, Japan and Europe. But despite recent falls, the US is not in bargain territory.

So far we have increased our exposure to UK and Japanese equities by a small amount. We’ve held off large purchases, to keep a cash buffer and capitalise on opportunities if markets fall further.

We’re still cautious on bonds. Bond yields have risen and are looking more attractive. But a yield of 3.5% for investment grade bonds is not high when looking historically. Since the downturn, investors have begun to question if these yields adequately compensate the increased risk. As always remember yields are variable and not a reliable indicator of future income.

Investors are also fearful of businesses with lots of debt that may not survive a period of slow growth. Even if the economy's only impacted for a short period. These include airlines, cinemas, retailers, restaurants and hotels.

The fear is banks and other lenders may restrict who they loan to, or how much they loan. This has worried bond markets and pushed prices down – but it could get worse before it gets better.

What next?

There is still lots of uncertainty and we believe it’s very likely markets will remain volatile for some time.

We’ll continue managing the portfolios with a calm, long-term view. We’ll make changes where we feel they’re adding value, and we'll avoid knee-jerk reactions.

And as things change, we’ll keep investors up to date with developments. You can read our latest views and insights at any time online. These will reflect the ever-changing scenario.

What can we expect to happen to income from investments?

Some companies are scrapping, suspending or delaying dividends in the wake of the coronavirus pandemic, as disrupted revenues mean less cash on the books to reward shareholders.

Yields are backward looking, reflecting past dividend pay-outs, so don’t reflect what you’ll get in the future. As we’re now seeing, companies can change their dividend plans. Even if dividends do bounce back in the second half of the year, we think it’s unlikely the market will pay out as much this year as last.

Much like capital losses, disruption to income is likely to be painful in the short term, but as restrictions on consumers are lifted, and we move past the crisis, companies will return to distributing cash. Investors should be thinking long term, and ward against making changes to their portfolio based solely on dividend yields.

We recognise that this may be a painful time for people relying on their investment income to help fund their retirement, and your adviser is here for you if you need support.