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.