No change in US rates
As expected, the US Federal Reserve (Fed) kept interest rates on hold at 1% at its May meeting. The US economic backdrop is solid, though not spectacular, and the market looks focused on a June rate rise.
If we look at the big picture, the Fed is removing ultra-easy monetary policy conditions that came about in the years following the global financial crisis. This is still far away from a situation where the Fed needs to cool the fever of an over-heated economy.
With headline US inflation running at 2.5%, the real Fed funds rate –allowing for inflation –is still negative and real 10-year Treasury yields are zero. The picture for UK gilts is similar with real yields at -1.5%.
This is why we believe government bonds are expensive for investors and we maintain an underweight allocation within our portfolios to this asset class.
Coutts portfolios flat against negative FTSE
April was a broadly flat month for a typical balanced portfolio, compared to the FTSE 100 which was down 1.3% and UK gilts up about 0.5%. This keeps the year-to-date number for a balanced portfolio at around 3.5%.
The month favoured investment strategies heavy in credit fixed income, which is mostly defensive. Financial credit and emerging market debt performed well and outpaced UK gilts.
Within equities, European equities were supported by an improving economy and good earnings, and made up ground versus its global peers following a benign outcome to the first round of the French presidential election.
Active on energy, positive on sterling
In April we shifted our energy infrastructure holdings from US dollars into sterling.
We invest in energy infrastructure through Master Limited Partnerships (MLPs)US pipeline companies that carry oil and gas across the country. These companies pay an attractive dividend yield of about 6%.
In this trade, we switched from a passive index fund to an active fund manager, the Pimco MLP Fund, where the managers have a great deal of experience investing in quality pipeline companies.
In sterling portfolios, we have bought the sterling-hedged share class, locking in gains we made on US dollar-denominated holdings when sterling fell after the EU referendum. We believe sterling offers good value at the moment and we are progressively adding the currency in portfolios when we identify appropriate opportunities.