LV= ISA INVESTMENT REPORT

Despite steep volatility through the first half of the year, 2020 ended much like it began; an equity bull market, touching all-time highs. Nominal and relative returns demonstrate strong growth over the year.

Over Q4, high vaccine efficacy rates and increased policy stability through a decisive US election and the avoidance of a no-deal Brexit, drove strong performance across global equity markets. UK equity, a notable laggard, outperformed other developed markets over the quarter (however, ended the year down 9.8%) as the vaccine buoyed value stocks. Generally credit outperformed sovereigns whilst returns from property continued to disappoint. Though gilt and swap rates rose over Q4, they ended the year at much lower levels than they began.

Over the year, the portfolio returned 10.2%, outperforming its benchmark by 286bps. Alpha (a measure of the return relative to the benchmark) was driven by strong stock selection which focused on the technology and healthcare sectors. Allocation detracted, slightly driven by an overweight exposure to UK equities in the first quarter; a position which has subsequently been reversed during the remainder of the year.

Whilst strong performance was generated across all regions, two in particular stood out: the Japan equity asset class outperformed the benchmark by 17.2% whilst the Emerging Markets equity assets outperformed by 15.3%, (both in Sterling terms). Both funds ranked in the top decile of their respective peers during the last 12 months.

Within the Global Emerging Markets portfolio, almost half the outperformance was due to stock selection with China, with technology and healthcare the dominant success stories. Geographically, China, Korea and Taiwan benefited from strong outperformance in the semi-conductor sector. 

In Japan, technology and industrials stocks drove the 12 month outperformance. The fund also benefited from opportunities after the March 2020 lows to purchase quality stocks at attractive valuations that were previously considered too expensive.

US equities returned 20.0% for the year against the benchmark return of 15.5%. Technology dominated the success stories during 2020. The fund was successful in negotiating the value rotation during quarter 4. Profits in several stocks were taken to allow investment in assets that subsequently benefitted from the buoyant vaccine news. These changes were designed to take advantage of the reflation/recovery stage we are now entering.

The European equity portfolio delivered strong outperformance against its benchmark (the assets returned +4.9% whereas the benchmark returned +2.8%) during the year. Stock selection accounted for all the outperformance led by Technology and Industrials. 

UK equity assets (-7.9%) outperformed the FTSE All Share (-9.8%) over the year due principally to the improvement in cyclical stocks and stock picking within Industrials. Overall, the UK equity market lagged all major equity markets during 2020. Fears of a no-deal Brexit hampered the market throughout the year. The market also suffered for its relatively high exposure to energy-related stocks. All three of the underlying UK equity holdings outperformed the FTSE All Share during the year. The UK Equity Income Fund and the UK Select Fund drove the performance, ahead of the benchmark by 382 and 277 basis points respectively. The UK Institutional Fund was only marginally ahead of benchmark, recouping losses made during the first quarter. The UK Equity Income Fund benefitted during the year from its more defensive positioning, consistently outperforming the benchmark.  The UK Select Fund was well positioned to make gains during the first quarter, and benefitted from the reflation/recovery during the 4th quarter. 

The UK corporate-bond portfolio returned 5.1% for the year, outperforming its blended credit benchmark, which returned 4.1%. The majority of the funds exposure to Sterling investment grade credit is through short-dated holdings (those less than 5 years to maturity). Whilst the portfolios low sensitivity to interest rates and duration led to modest absolute returns, strong relative performance was generated through the portfolios overweight position in investment grade credit, relative to Agency/Quasi-Government holdings.

The diversification into Developed Markets credit late in 2019 proved positive as the fund returned 9.7% for the year, comfortably ahead of its benchmark return of 7.2%. The funds overweight exposure to corporates over Agency and Quasi-Government issuers generated much of the outperformance. Security selection was generally positive for relative performance against benchmark.

The decision to remain underweight UK Gilts throughout the year had a positive impact on relative performance. The portfolio outperformed its benchmark (+8.8% compared to +8.3%). Having started the year at 0.82%, the UK 10-year gilt yield finished 2020 at 0.20%. The portfolio maintained a long duration position throughout the year which was responsible for the majority of the 50 basis points outperformance.

The benefit of the funds exposure to UK Gilts was most noticeable during quarter 1, where the assets offset equity weakness within the fund. Their resilient characteristics resulted in stable performance throughout the year. The decision to remain underweight UK Gilts throughout the year had a positive impact on absolute and relative fund performance; the assets returned +8.8% whilst its benchmark returned +8.3%. Having started the year at 0.82%, the UK 10-year gilt yield finished 2020 at 0.20%. The portfolio maintained a long duration position throughout the year which aided performance. US Treasuries produced positive return of +7.5% for the year, slightly below its benchmark of +7.8%.

Due to the strong returns across most asset classes, the Multi-Asset fund (DRR) performed strongly (+8.2%), comfortably ahead of its target (+4.6%). The fund is also in the top quartile against its peers during the year.

Despite rebounding during the second half of 2020, Property assets experienced a difficult year, ending down -2.7% over the 12 months. The funds dividend rate remains one of the highest amongst its peers. It was one of the first funds to re-open to investors.