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The first quarter of 2017 has seen emerging markets, technology and healthcare boost performance 

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Monique Wong and Alan Higgins reflect on strong performance from Coutts investment strategies in the first three months of the year.

Strong headline performance across mandates

In the first three months of the year, a typical Coutts Balanced portfolio – including about 50% equities – returned in the region of 3.5%. This strong performance trend was reflected in our Growth and Defensive strategies, as well. Growth portfolios returned around 4.8%, beating the FTSE100’s three-month return of 3.7%, while Defensive strategies returned 2.3%, well ahead of cash (up 0.1%) and inflation. Early indications from wealth manager surveys also suggest that we are about one percentage point ahead of many of our competitors for the quarter.

While this is good news for clients, at Coutts we are long-term investors. Positive returns fuel our longer-term performance profile, but investors should be prepared for periods of underperformance in times that our approach is out of favour. As such, we prefer to be judged on our three or five-year record.

 

What’s behind the numbers?

A clear winner for Coutts over the quarter was our emerging markets holdings. The sector delivered a return of over 10% in the quarter, after having been one of the big losers following the election of Donald Trump last year as his protectionist rhetoric put a brake on returns. More recently the President’s struggles to enact key points of his agenda, combined with a relative silence on these issues since the election, have seen the sector rebound.

Europe has been a favoured region for Coutts for sometime, and in this quarter our patience paid off as European equities returned over 7%. We expect continued positive returns from Europe over the medium to long term as the macro picture looks good and we see solid company fundamentals, backed up by the first positive earnings growth for five years.

"Europe has been a favoured region for Coutts for sometime, and in this quarter our patience paid off as European equities returned over 7%."

Our holdings in financial credit benefitted from key banks issuing shares to raise capital. This tends to provide backing for paying the coupon on their bonds, and makes them better able to withstand a downturn, further reducing the risk profile.

Finally, our holdings in our healthcare and technology equity themes performed well on the back of good earnings reports.

Less positive for portfolios were commodities, which generally fell, with the exception of gold. Oil fell by 6% over the quarter, although this was after the oil price nearly doubled in 2016.

 

Value and diversification drive portfolios

Our main portfolio change was to add exposure to locally denominated emerging markets debt. Our holdings have a quality bias, investing in active funds that focus on well-managed corporates and government bonds from the stronger emerging economies. This trade is in line with our investment principles of being guided by macroeconomic data, seeking value and diversifying (in this case) our bond portfolios from poorer-returning developed market debt.

We also see the emerging economies as being in good shape in areas such as inflation and interest rates. Generally these two economic variables are falling in many emerging markets, which makes bonds attractive as they tend to gain value in these conditions, in contrast to developed markets where both are on the rise, undermining bond returns.

We also see emerging market currencies as undervalued, which is why we have taken unhedged local currency exposure. In particular we have taken a position in the Mexican peso against US dollars, as we believe that the peso has been hardest hit by President Trump’s rhetoric.

All in all we believe this has been a good first quarter for Coutts investors. While volatility is likely to return to markets at some point, we will remain true to our investment principles as we endeavour to deliver long-term returns that help protect our clients’ assets.

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