DISCRETIONARY INVESTMENT MANAGEMENT SERVICE
A discretionary managed investment solution, using a multi asset approach, designed to cover a number of different risk profiles to meet a range of client needs and goals.
Fourth Quarter 2016
AS AT 31 DECEMBER
Portfolio returns were neutral to slightly negative over the fourth quarter. In November, the performance of European equities and emerging markets as well as a slight rise in the value of sterling weighed down on performance. We then recovered most of these losses in December.
Applying our core investment principles has led to many strategies benefiting from:
- Diversification - Currency gains from overseas equities have benefited returns for UK investors in recent months amid weakness in sterling (more so for the more globally oriented strategies).
- Value - We have limited exposure to government bonds – which we see as poor value – but continue to favour investment grade corporate bonds on a selective basis. While European and Japanese equities have underperformed since the start of the year, we see them as attractively valued relative to global peers.
- Patience - Long-term thematic positions, such as emerging market equities.
Portfolio returns, after fees Wealth Preservation Wealth Enhancement (Medium Term) Wealth Enhancement (Long Term) Wealth Generation Diversified Bond Last Quarter 0.34% 2.55% 4.10% 5.12% -1.82% Rolling 12 Months: End Dec 15 to end Dec 16 9.75% 12.96% 14.76% 18.68% 7.70% End Dec 14 to end Dec 15 0.28% -0.11% 1.09% 1.23% -2.51% End Dec 13 to end Dec 14 6.78% 4.74% 3.07% 2.30% 4.61% End Dec 12 to end Sep 13 0.01% 5.60% 11.19% 12.88% -1.06% End Dec 11 to end Dec 12 5.97% 8.36% 8.64% 9.71% 10.87%
Past performance should not be taken as a guide to future performance.
The value of investments, and the income from them, can go down as well as up, and you may not recover the amount of your original investment.
Individual portfolio returns may vary.
Charity and Trust Portfolio Returns, after fees Charity Reserve Preservation Charity Reserve Wealth Enhancement (Medium Term) Charity Reserve Wealth Enhancement (Long term) Charity Reserve Wealth Generation Trust Last Quarter 0.49% 2.90% 4.40% 4.98% 1.25% Rolling 12 Months: End Dec 15 to end Dec 16 9.53% 12.80% 14.54% 17.58% 12.63% End Dec 14 to end Dec 15 0.01% -0.04% 0.65% -0.49% -1.59% End Dec 13 to end Dec 14 7.27% 4.86% 2.97% 1.95% 4.51% End Dec 12 to end Dec 13 0.51% 6.38% 11.37% 12.12% 6.08% End Dec 11 to end Dec 12 6.00% 8.58% 8.98% 6.97% 9.11%
The value of investments and any income from them can go down as well as up, and you may not recover the amount of your original investment. Past performance should not be taken as a guide to future performance, please note the performance of individual portfolios may vary.
Diversification through trend-following alternative strategies
With interest rates set to rise further in the US and expectations of higher inflation, the long-term return prospects for government bonds have deteriorated. As a result, we have been adding diversified sources of returns to portfolios that are uncorrelated with risky assets, such as equities, through two new alternative strategies:
BMO GLOBAL EQUITY MARKET NEUTRAL FUND
The BMO Global Equity Market Neutral Fund seeks to generate a positive return through all market conditions. Its strategy involves investing in stocks that demonstrate one or more of five styles – value, momentum, size, low volatility, and growth at a reasonable price (GARP). The philosophy underpinning this approach is that a substantial amount of investment performance can be explained by these styles.
Nomura Momentum G3 Index
The Nomura Momentum G3 Index invests in trend-following strategies across interest rates, foreign exchange rates, equities and commodities. They use long (positive) or short (negative) positions depending on the signals the manager has developed for forecasting trends in each market. Nomura is well positioned as a global investment bank to execute its strategy across all time zones and asset classes.
JP MORGAN GLOBAL MACRO FUND
The JP Morgan Global Macro Fund seeks to generate an annualised return of 7% above interest rates over the medium term by investing across a broad range of asset classes. The fund’s diversified and flexible approach allows it to capture asymmetric opportunities (where there is greater upside than downside potential) through the business cycle. In addition, the managers use a dynamic hedging process to mitigate risk.
Attractive valuations in healthcare
We believe the healthcare sector presents an attractive long-term investment opportunity, where demographic trends should support strong and consistent earnings. Yet share prices had fallen in the months before the US election over concerns that drug prices could come under pressure if Hillary Clinton became president. We took advantage of the attractive valuations by adding one of two funds in this sector:
Polar Capital Healthcare Opportunities
Polar Capital Healthcare Opportunities is managed by an experienced team with a strong track record and expertise in biochemistry and investing. They focus on identifying growth-oriented opportunities, predominantly in large-cap securities. But the fund has a strong tilt towards mid and small cap companies relative to its benchmark.
LGIM Global Health & Pharmaceuticals Index Trust
For more defensive portfolios we added the LGIM Global Health & Pharmaceuticals Index Trust, a passive fund that aims to track the performance of the FTSE Health and Pharmaceuticals Index. Given Polar’s concentrated fund has a relatively high tracking error (a measure of how much a fund’s returns diverge from the benchmark index), this more large-cap biased index-tracking option is seen as more suitable for defensive portfolios.
Increasing exposure to sterling
In the days following the Brexit result, sterling depreciated rapidly to multi-year lows against other major currencies. Although it remains depressed, we believe the pound’s valuation will move back in line with its long-term average in the months ahead. To take advantage of this expected appreciation, we are increasing our sterling exposure by:
JO Hambro European Equity Fund
Switching from the euro-denominated JO Hambro European Equity Fund to the hedged sterling share class. The managers behind this strategy combine their view of the global economy with fundamental company research to identify high-quality businesses. With a long-standing investment team and consistent returns, we see this fund as a core portfolio holding.
Pimco Global Investment Grade Fund
Adding a new position in the Pimco Global Investment Grade Fund, also denominated in sterling. This strategy invests predominantly in global investment grade corporate bonds. We like the experienced investment team’s focus on strong company fundamentals, attractive valuations and industry sectors that are likely to benefit from prevailing economic trends.
Value investing in Japan
GLG Man Japan Core Alpha Equity Fund
We initiated a new position in the GLG Man Japan Core Alpha Equity Fund to provide active exposure to Japan’s stock market. The managers follow a contrarian approach by investing in large-cap Japanese companies with strong management teams that are undervalued – typically because they are out of favour with the rest of the market. This strategy is consistent with our own investment philosophy, and we have confidence in the managers’ repeatable process and successful track record.
For a full breakdown of all the underlying funds within the strategies, please refer to our monthly factsheets, available from your private banker or wealth manager.
Early in the quarter we added healthcare, and also several trend-following hedge fund strategies. This was done largely at the expense of government bonds and also reduced our previously high cash weightings substantially in client portfolios, from about 9% to 3% in a typical balanced portfolio. We believe these strategies have limited correlation to equity markets, providing diversification benefits while also offering higher potential returns than government bonds.
In December, we took profits on overseas assets that have delivered strong returns (boosted by sterling weakness in the aftermath of the Brexit result) and repatriated those proceeds into sterling-denominated assets. Our analysis suggests sterling’s valuation should move higher from current historically low levels, back in line with its long-term average in the months ahead.
Summary of moves
- Exposure added to the healthcare sector at what we believe were attractive valuations. Added alternative strategies that can provide similar diversification benefits to government bonds, but where we see greater return potential
- Took profit on overseas assets that had benefited from sterling weakness and increased exposure to sterling-denominated assets given our forecast that the pound would appreciate
The value of investments and any income from them can go down as well as up, and you may not recover the amount of your original investment. Where an investment involves exposure to a foreign currency, changes in rates of exchange may cause the value of the investment, and the income from it, to go up or down.
In the case of some investments, they may be illiquid and there may be no recognised market for them and it may therefore be difficult for you to deal in them or obtain reliable information about their value or the extent of the risks to which they are exposed.
Investments in emerging markets are subject to certain special risks, which include, for example, a certain degree of political instability, relatively unpredictable financial market trends and economic growth patterns, a financial market that is still in the development stage and a weak economy.
Wealth division of NatWest Group.
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