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.
Third Quarter 2016
Both bond and equity markets generally had positive returns for the quarter as Brexit fears eased amid healthy UK business activity, consumer demand and job growth.
Continued positive performance from corporate bonds, which we prefer to expensive and low- yielding government bonds, also helped portfolio returns. The latter, where we have a relatively low weighting, suffered a modest setback over the third quarter.
While overall equity positioning was positive, an underweight stance in US equities held back returns slightly as US shares reached new record highs. Our overweight stances in Europe and Japan also caused some drag as these regions lagged other major markets over the quarter.
|Portfolio returns, after fees||Wealth Preservation||Wealth Enhancement (Medium Term)||Wealth Enhancement (Long Term)||Wealth Generation||Diversified Bond|
|Rolling 12 Months:|
|End Sep 15 to end Sep 16||11.48%||14.70%||16.90%||20.66%||9.74%|
|End Sep 14 to end Sep 15||1.05%||-2.02%||-3.01%||-3.98%||-1.46%|
|End Sep 13 to end Sep 14||4.64%||4.63%||4.51%||3.83%||3.52%|
|End Sep 12 to end Sep 13||-0.34%||4.87%||10.01%||12.92%||1.02%|
|End Sep 11 to end Sep 12||7.71%||9.31%||9.80%||10.67%||11.39%|
|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|
|Rolling 12 Months:|
|End Sep 15 to end Sep 16||11.07%||14.14%||16.22%||18.96%||7.58%|
|End Sep 14 to end Sep 15||1.12%||-1.81%||-3.39%||-5.09%||3.44%|
|End Sep 13 to end Sep 14||5.02%||4.91%||4.55%||3.44%||3.80%|
|End Sep 12 to end Sep 13||0.28%||5.94%||10.64%||12.25%||3.02%|
|End Sep 11 to end Sep 12||8.26%||9.66%||10.02%||6.11%||5.34%|
This portfolio comprises the 30 global stocks where Coutts has the highest conviction, providing regional diversity that has been beneficial during the recent period of sterling weakness. Our team selects companies that best reflect the tactical and strategic opportunities they have identified, in line with our core investment principles of quality and value.
Starting with an investment universe of 1,200 stocks from the S&P 500, FTSE 350 and Europe’s Stoxx 600 indices, this list is then filtered down using a number of parameters including liquidity (how easily shares can be bought and sold), the outlook for profit growth and sustainability of cash flows).
We then conduct a qualitative ‘bottom-up’ analysis based on company fundamentals to identify a final short list before selecting the 30 we believe reflect the most promising companies in our favoured themes.
Algebris is a boutique investment manager specialising in the financial sector. This fund invests across the capital structure of global financial credit, specialising in hybrid fixed-income securities, such as so-called contingent convertible bonds (which convert to equity when triggered by a specified event), of systematically important financial institutions.
The investment team’s analysis across both credit and equity markets offers a comprehensive understanding of the factors governing hybrid securities. The fund has a successful track record and has outperformed its annual return target of 6% to 8% since inception.
Throughout 2016 we have preferred corporate debt over government bonds. That is because we see little risk of any significant rise in corporate default rates and believe the additional yield over government bonds more than compensates investors for the added risk. We also see this asset class being supported by the ongoing hunt for attractive sources of income.
We have expressed our view through the PIMCO Global Investment Grade Credit Fund. The managers invest at least two-thirds of their assets in high-quality global investment grade credit using a diversified, risk-controlled and value-based strategy. We believe this approach provides a diversification benefit, yield premium and greater total return potential compared with government debt.
We have maintained our exposure to UK equities through the build-up to the EU membership referendum and after the result because we believed the longer-term investment case would remain intact regardless of the outcome. Following a sharp sell-off during the days immediately after voting day, UK stock markets have rebounded strongly as fears of a sharp slowdown in the UK economy have faded.
The Investec UK Alpha Fund invests in a concentrated portfolio of UK companies, diversified across sectors and company size. Manager Simon Brazier focuses on attractively valued, high-quality businesses with strong balance sheets. He is supported by an experienced and well-resourced investment team with a successful long-term track record.
The BMO Equity Market Neutral Fund seeks to generate a positive return through most market conditions. Its strategy involves investing in stocks that demonstrate one or more of five styles – low valuations, price momentum, company size, low volatility, and earnings growth at a reasonable price. The philosophy underpinning this approach is that a substantial amount of investment performance can be explained by these styles.
The manager minimises stock-specific risk by taking both long (positive) and short (negative) positions. As a result, we classify the strategy as an alternative asset, which we use to add diversified sources of returns to portfolios that are uncorrelated with price movements in riskier assets, such as equities. We also selected this fund because it has relatively low fees and a transparent investment process that is easy to understand.
Following the strong post-Brexit rally and as many equity markets reached new highs for the year, we further trimmed our positioning during the review period to only a slight overweight stance.
In August we reduced our allocation to the shares of global banks following a period of strong performance for the sector, boosted from sterling weakness. For Defensive portfolios, which do not hold the bank-equity theme, we reduced our allocation to local-currency denominated emerging-market debt. Across all portfolios, we used the proceeds to increase exposure to bonds issued by financial institutions, which we see as having attractive yields that are backed up by robust capital structures.
We also took some profits in local-currency emerging market debt in growth portfolios, using the proceeds to increase exposure to investment-grade (higher quality) corporate bonds, slightly reducing overall risk in portfolios.
Summary of moves
- Reduced equity to slight overweight
- Added BMO Global Equity Market Neutral Fund
- Reduced financial shares
- Increased financial bonds
- Reduced emerging market debt (in local currencies)
- Increased global investment grade bonds