What are the risks for investors in 2021?

Can you expand on the concerns you’ve expressed that the market hasn’t ‘priced in’ the risk of COVID-19 mutations?

HAMISH DOUGLASS: It’s guaranteed that the virus is going to keep mutating, because there are so many infections happening around the world. What we don’t know is what the nature of the next mutation will be.

The current vaccines are still highly effective in protecting you against dying, but they’re getting less effective at protecting you from getting infected and getting sick. It’s almost inevitable that, given enough time, mutations will cause an ‘escape variant’ – which could get around these current vaccines. I’m not saying it’s going to happen, but it’s in the viewfinder. It may be a 5% probability, it may be a 20% probability, I don’t know.

A more likely probability is that we get an escaped mutation that undermines the current vaccines, after which scientists recode the vaccines. In that case, you’d have to start the whole vaccination process again, because this new variant would become the dominant variant, and everyone who’s just been vaccinated won’t have any immunity against it.

That would delay the world recovery by 12 months or so, which would have some impact on the markets. There seems to be very little margin of safety in markets for an adverse outcome with the vaccines. No-one knows exactly what’s going to happen.

So how are you considering the risks of COVID-19 mutations on the portfolio?

HAMISH DOUGLASS: I’m very relaxed about it because I think we’re holding a great hand. Across our portfolio, we’ve still got businesses that are reporting incredible results: whether it’s Alphabet, Microsoft, Facebook, Netflix, or Crown Castle.

We’re taking a lot of expert advice, and we’re playing it cautiously. We’re here to protect people’s capital by trying to make prudent decisions.

We never swing for the fences. We’re not going to punt that there’s a 100% probability that the economic story is going to improve, like the market’s pricing it at the moment. We actually don’t know. None of us know what this virus will do in 12 months’ time.

Moving onto a different risk, there’s been speculation that the Biden administration will increase regulation on Big Tech. Does that change your views on the technology companies that you hold, such as Alphabet and Facebook?

HAMISH DOUGLASS: No, I think the regulatory risk has actually gone down. I think it’s more predictable now. Are we going to get regulation? Yes, we are. But to regulate technology companies would mean passing more legislation, which it’s very hard to get consensus on. In the US, that requires 60 senators. This means you’d need 10 senators from the Republican side. And there are deep divisions on this.

Plus, our view is that the regulatory risk is already reflected in the share prices of these companies. Facebook is trading at 23 times earnings, but it’s just grown its revenue at 32% in a year, and it’s still got enormous runway to monetise Messenger and shopping. So, these companies would be at much higher prices if there wasn’t regulatory risk around these stocks. We factor in regulatory risk alongside other things in the future, and we still like the businesses.

In the case of Alphabet, just look at their results. We’re trimming it because it’s now at our maximum position size under our new risk rules. But Alphabet is just one of the strongest business models the world has ever seen, and a little bit of regulation is not going to kill this business. It’s going to come at some cost. But it’s a cost that I think is well within the guardrails and where the share prices are for the economic potential of the businesses.

Over three to five years I have high confidence that we’re going to earn decent returns by holding at these prices. Could there be, say, 10% or 15% of price volatility if a new regulatory enquiry is announced? Absolutely. But when you consider that it’s a 5% or 6% position in the whole portfolio, you’re talking about 0.6% of the portfolio in a month, which is largely just noise in that period. What matters is compounding this money over time. And we’re confident in that compounding.

A discussion about risk wouldn’t be complete without discussing Bitcoin. What are your views about it?

HAMISH DOUGLASS: I would say that the wisdom of crowds and the madness of crowds intersect here. There is no doubt the theory behind the algorithm is a brilliant concept. But there is no basis, other than convincing people of the theory and getting the crowd behind to buy it, and then enough people buying it to offset people who want to transact in it to support the value. There is no government backing. It’s not a fiat currency [money, issued by a government, which isn’t backed by a commodity such as gold], and there are no fundamentals behind it. It’s a digital algorithm on a screen. There’s nothing intrinsic about it at all.

The problem about these things is that if more and more people want to get behind it because there is a limited supply, you can get bubbles occurring. I think currencies should be pretty stable. They shouldn’t go up and down 200% in a year. I think it’s much more of a speculative asset.

I like the idea behind the creation of a digital currency, but I think it’s deeply dangerous and highly speculative to make any judgement call whether you’re going to make or lose money in it. It’s something we would pass on. But if you’re going to do it, treat it as a punt at the races. You could have a bit of fun, but it’s not something I would call an investment class asset from our perspective.

Magellan is a fund manager for St. James's Place.

Where the views and opinions of our fund managers have been quoted these are not necessarily held by St. James's Place Wealth Management or other investment managers and are subject to market or economic changes. This material is not a recommendation, or intended to be relied upon as a forecast, research or advice.

The value of an investment with St. James's Place will be directly linked to the performance of the funds selected and the value may fall as well as rise. You may get back less than the amount invested.