Fund Management Diary Meeting held on 24 th April 2018 Boom in US productivity remains elusive Although labour productivity growth in the United States picked up in 2017, there is still no evidence of a more pronounced pick-up Rising capacity constraints and the tightening labour market should encourage a new wave of capital deepening, which would support a further small rebound in productivity growth Over the longer term, Capital Economics is optimistic that technological advances linked to the digital revolution will drive a renewed wave of faster productivity growth Productivity growth remains weak in the United States After stagnating in 2016, non-farm productivity growth (i.e. the annual change in output per worker) recovered to 1.3 per cent last year, but that only brought productivity growth back into line with the average going back to 2005. There is still no evidence of a more pronounced pick-up, with trend productivity growth firmly stuck in the malaise it slipped into before the financial crisis. The last burst of sustained productivity growth was in the late 1990s, when the first information technology revolution, including the introduction of desktop computers and the internet, generated annual gains of close to three per cent, i.e. double the average now. Mismeasurement probably isn t to blame for the weakness It is sometimes suggested that mismeasurement could explain the slowdown in productivity growth since the late 1990s. The explanation goes that rapid technological change, including the development of new free digital services, is not being accurately recorded as gains in real output. But mismeasurement probably only accounts for a small fraction of the productivity slowdown, since information and communications technology sectors are a relatively small part of the economy and the advertising revenues linked to otherwise free digital services are modest. A moderation in capital deepening is partly responsible, and should reverse soon Labour productivity can be decomposed into three major components: (i) multifactor productivity; (ii) the contribution from the amount of capital per worker (capital deepening); and (iii) the contribution from shifts in the quality of the labour force (i.e. education levels). Multifactor productivity is effectively the residual part of productivity growth that can t otherwise be explained after having accounted for changes in the quantity and quality of the capital and labour inputs employed. It reflects the overall efficiency with which labour and capital inputs are used together in the production process. The slowdown in trend non-farm productivity growth since 2007 is principally due to a sharp drop-off in multifactor productivity growth, from an average of 1.4 per cent per year between 2000 and 2007, to only 0.4 per cent over the most recent decade. In addition, a drop off in capital investment explains the rest of
the fall in trend productivity growth. Rising capital intensity was responsible for 1.0 percentage points of productivity growth pre-2007 but only 0.5 percentage points since then. The surge in real investment in information and communications technology in the 1990s was a unique event that is unlikely to be repeated. Computer hardware will not be the primary source of capital deepening over the next decade or two and, hence, won t provide the big boost to productivity growth that it did at the peak of the dotcom boom. But we could see the development of new technologies driving a surge in investment in other information processing equipment, with communications equipment the obvious candidate. What s more, cyclical pressures also point to improving prospects for capital deepening. As the utilisation of the existing capital stock increases and the low unemployment rate makes adding additional labour more difficult and costly, we would expect to see a broader resurgence in investment growth. Recent tax changes might have a modest impact as well. As such, there is a good chance that some of the drop-off in capital deepening will be reversed over the next few years. Capital Economics anticipates that, following a decade when productivity growth averaged barely one per cent per year, capital deepening will drive a modest acceleration to around 1.5 per cent. Technological advances could still drive a renewed wave of faster productivity growth Although there are good reasons to expect a rebound in productivity growth stemming from a resurgence in capital deepening, the productivity boom in the late 1990s was principally due to an explosion in multifactor productivity growth. There the outlook is much more uncertain. The standard explanation for the surge in multifactor productivity during the 1990s is that the adoption of desktop computers and the birth of the internet provided a boost to productivity that was economy-wide and went way beyond just the value of the information technology capital expenditures. Computers are a so-called general purpose technology, like steam power and electricity, which improved productivity in nearly every sector of the economy. But once businesses had adopted the use of computers and the internet, the boost to productivity growth ended up being short-lived and begun to fade in most developed economies by the early 2000s. None of the technological advances since then have had such as transformative effect. Most economists believe it is just a matter of time before breakthroughs in mobile technology, machine learning, driverless cars, genetic engineering, additive manufacturing and many other areas trigger a renewed surge in multifactor productivity growth. The lesson from earlier general purpose technology revolutions is that sometime the benefits can take decades to become fully apparent. James Watt patented his steam engine design as far back as 1769 and that patent actually expired in 1800. Yet it wasn t until 1830 that steam overtook water as the largest power source in the United Kingdom. Only when the more efficient high-pressure Lancashire boiler was developed in 1840 did steam power really take off. According to the economic historian Nick Crafts, even though the technology originated in the mid-18th Century, most of the gains to United Kingdom productivity from steam and railways occurred in the mid-to-late 19th Century. There are plenty of reasons to believe that the information and communications technology revolution has only just begun. Mobile technology, cloud computing and machine learning capabilities are all now expanding at a rapid pace because data processing has crossed certain thresholds in terms of capabilities and cost. Fully integrating some of these technologies into traditional businesses will require changes in
management practices and organisation structure that could take many years to feed through. During past general purpose technology revolutions, new technologies caused large-scale disruption, with new firms adopting these new technologies eventually supplanting existing firms who were still wedded to old technologies and methods. It is difficult to convert this optimism about digital technological advances into an explicit forecast for productivity growth. But Capital Economics believes that technological advances linked to the digital revolution will drive a renewed wave of faster productivity growth. This could have the potential for a repeat of the golden age in the second half of the 1990s, when productivity growth averaged close to three per cent. Unfortunately, the longer the current slump lasts, the less likely it is that a pronounced pick-up in productivity growth is just around the corner. *This diary has been written in conjunction with Capital Economics. Strategy We agree with the main points set out by Capital Economics above, we are optimistic on the long term performance of equity markets, and believe technological development and innovation will contribute to increased productivity and economic growth. Margetts also believe that if President Trump is able to pass his infrastructure spending plan, this will also be beneficial for the US economy. Given our long term optimism on equities, and the inflationary, rising interest rate environment we are currently experiencing, we continue to believe that equites offer a better return on investment than bonds, and as such favour equities in our portfolios where applicable.
Fund Comments The below charts show the current positions of the fund, the tactical (short term) targets, and the strategic (long term) targets of the fund. We aim to keep the current positions in line with the tactical targets from week to week. The differences between the tactical and strategic targets reflect the views and convictions of the Margetts Investment Committee. Providence 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% Bonds Cash UK Europe ex UK North American Asia Pacific ex Japan Emerging Markets Japanese Global Current Position Tactical Targets Strategic Targets Asset Allocation: The above chart, as of 20/04/2018, demonstrates the fund s current asset allocation and the tactical targets set by the committee. The tactical target for cash has been reduced from 5% to 4%, and the bond target increased by 1% to 39.5%. This reflects the current allocations of the fund, which we prefer to maintain at present. A small sell has been made from the UK equity allocation and the proceeds allocated to bonds to bring the allocations in line with their tactical targets. Fund Selection: We are selling the Schroder UK Alpha Income fund and buying the Man GLG UK Income fund instead. The Schroder Alpha Income fund has lagged the sector for some time and the fund manager s views do not align with those of the Margetts Investment Committee. The Man GLG fund has a strong track record and brings increased diversification to the UK holdings in Providence. We are also beginning to reduce our holding in the AXA Sterling Credit Short Duration bond fund, and replacing it with the Fidelity Short Dated Corporate Bond fund. The funds have similar performance profiles, however the Fidelity fund offers a more competitive charging structure.
Select 50.0% 45.0% 40.0% 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% Bonds Cash UK Europe ex UK North American Asia Pacific ex Japan Emerging Markets Japanese Global Current Position Tactical Targets Strategic Targets Asset Allocation: The above chart, as of 20/04/2018, demonstrates the fund s current asset allocation and the tactical targets set by the committee. No changes are being made to the tactical targets this week. We have made a small sell from the UK equity allocation in order to bring the current holding in line with the tactical target, and used the proceeds to increase the bond and Asia Pacific equity allocations. Fund Selection: The Jupiter UK Special Situations fund has shown strong performance over 12 weeks, while the BlackRock UK Income fund has been somewhat weaker over the short term. The team are currently reviewing this fund, however there are no changes to the portfolio planned at present.
International 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% Bonds Cash UK Europe ex UK North American Asia Pacific ex Japan Emerging Markets Japanese Global Current Position Tactical Targets Strategic Targets Asset Allocation: The above chart, as of 20/04/2018, demonstrates the fund s current asset allocation and the tactical targets set by the committee. No changes are being made to the tactical targets this week. The UK equity weighting is being reduced slightly, and the Japanese equity and Asia Pacific equity weightings increased in order to keep the allocations in line with the tactical targets. Fund Selection: The JPM UK Dynamic fund has performed strongly over recent months, while the SLI Global Emerging Markets Income fund has lagged the sector over recent weeks. The team are monitoring this fund at present, the management team is due to change soon as part of the Aberdeen/Standard Life merger and the team will review the fund once the change is complete.
Venture 40.0% 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% Bonds Cash UK Europe ex UK North American Asia Pacific ex Japan Emerging Markets Japanese Global Current Position Tactical Targets Strategic Targets Asset Allocation: The above chart, as of 20/04/2018, demonstrates the fund s current asset allocation and the tactical targets set by the committee. No changes are being made to the tactical targets this week. We have taken profits from the UK equity allocation this week, and allocated the proceeds to cash in order to bring the cash and UK equity allocations closer to their tactical targets. Fund Selection: The Fidelity Emerging Markets fund has performed more weakly than the IA Emerging Markets sector over 12 weeks, however the fund remains a strong performer over the long term and the team have no concerns at present. The Stewart Investors Asia Pacific Leaders fund has performed well recently.
Important Information Please note that the contents are based on the author s opinion and are not intended as investment advice. This information is aimed at professional advisers and should not be relied upon by any other persons. Any research is for information only, does not constitute financial advice or necessarily reflect the views of the author and is subject to change. It remains the responsibility of the financial adviser to verify the accuracy of the information and assess whether the fund is suitable and appropriate for their customer. Past performance is not a reliable indicator of future performance. The value of investments and the income derived from them can fall as well as rise and investors may get back less than they invested. Important information about the funds can be found in the Supplementary Information Document and NURS-KII Document which are available on our website or on request. Issued by Margetts Fund Management Ltd Margetts Fund Management Limited is authorised and regulated by the Financial Conduct Authority For any information about the company or for a copy of the company's Terms of Business, please contact the company on 0121 236 2380 or at 1 Sovereign Court, Graham Street, Birmingham B1 3JR You can e-mail us at admin@margetts.com