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.
First Quarter 2019
All funds rose in the first quarter of the year as markets recovered robustly from December’s declines. As prices fell, it appeared that the sell-off was overdone and valuations became more attractive – leading investors back to the market.
A key factor behind the shift in market mood was the US Federal Reserve adopting a more patient approach to raising interest rates. The central bank has signalled it would ease off its monetary tightening for now – and this more accommodative stance was echoed by many of its peers across the globe. Less pressure on monetary policy is positive for markets as it reduces the cost of borrowing, making it easier for companies to develop and expand, and to service existing debts. Increasingly positive signs that a US-China trade deal could be reached also bolstered markets.
Global economic growth continues to slow, however. Against this backdrop, while remaining cautiously positive, we have tilted our portfolios and funds away from riskier markets and towards more defensive areas. This move, which means we now have a more-or-less neutral position in equities, has benefitted performance.
We are also holding cash to allow us to move quickly when we see investment opportunities in the event of a pull-back after the steep rebound so far this year.
We reduced our exposure to European and Japanese stocks – and now have a cautious view on Europe while being neutral on Japan. Both Europe and Japan are key exporters so their markets have been hit by the trade tensions of previous months and a troubled Chinese economy – both of which dented demand for their goods.
We have increased our investment in US equities instead, which have performed well and boosted performance – with good stock selection providing an extra lift.
We added to holdings in UK gilts and US Treasuries, as we believe they stand to benefit from the slower rate rises and lower inflation expectations brought on by central bank activity. We bought more Treasuries than gilts because the latter are vulnerable to Brexit-fuelled uncertainty. Our overall government bond position remains negative, however – just less so than at the start of the year.
Our disciplined investment process and core investment principles underpin our decision making:
- Diversification – our decision to increase our investment in UK and US government bonds highlights the importance we place on having a diversified portfolio. Government bonds are attractive at times of greater uncertainty as they provide good hedging characteristics and therefore help to reduce risk.
- Value and selectively contrarian – many investors have been avoiding sterling because of the cloud of uncertainty hanging over the UK while parliament continues to debate the best way ahead on Brexit. But we have increased our position in the currency as we see it as undervalued and actually showing strength on the world stage. Taking positions in currently ‘unloved’ assets – that are therefore good value – but that we think have long-term potential is a core aspect of our investment approach.
- Patience – Economic growth is slowing, but we had predicted this and have positioned our portfolios and funds accordingly, keeping a close eye on the long-term outlook. Markets will always rise and fall day to day, but we believe patience is crucial. There were fears of a recession at the end of the quarter when yields on short-term bonds rose above those on longer-dated bonds – referred to as an inverted yield curve. Whether it happens or not remains to be seen, however. We believe the best move as investors is to stay focussed on the future while maintaining a dynamic asset allocation to navigate markets.
|Portfolio returns, after fees||Wealth Preservation||Wealth Enhancement (Medium Term)||Wealth Enhancement (Long Term)||Wealth Generation||Diversified Bond|
|Rolling 12 Months:|
|End march 18 to end march 19||0.5%||1.7%||2.3%||4.6%||0.2%|
|End march 17 to end march 18||1.8%||2.6%||2.4%||1.3%||2.6%|
|End march 16 to end march 17||10.6%||15.5%||19.4%||23.7%||6.8%|
|End march 15 to end march 16||-1.7%||-3.5%||-4.4%||-4.5%||-0.7%|
|End march 14 to end march 15||9.4%||9.1%||9.0%||9.2%||3.9%|
|Source: Coutts/Thomson Datastream|
|Charity and Trust Portfolio Returns, after fees||Charities and Trust
||Charity Wealth Preservation||Charity Wealth Enhancement (Medium Term)||Charity Wealth Enhancement (Long term)||Charity Wealth Generation|
|Rolling 12 Months:|
|End march 18 to end March 19||1.5%||1.0%||2.2%||2.7%||5.2%|
|End march 17 to end March 18
|End march 16 to end march 17||14.5%||10.4%||15.6%||19.2%||22.6%|
|End march 15 to end march 16||-4.2%||-2.2%||-3.7%||-4.8%||-6.3%|
|End march 14 to end march 15||8.8%||10.0%||9.3%||8.7%||8.7%|
|Source: Coutts/Thomson Datastream|
Over this quarter we have trimmed equity exposure in favour of government bonds. Such bonds provide valuable diversification benefits, particularly in volatile markets, so we increased our investments in US and UK bonds throughout 2018 and in January this year.
We removed our financial sector equity theme from portfolios and funds in January. It now looks less attractive considering the longer-term outlook of slower economic growth and central banks dialling down the pressure on interest rates. Our other equity themes of healthcare and technology continue to perform well, supported by continued innovation and demand created by demographics.
We are holding cash because, in the highly mobile markets seen over the last six months, it provides flexibility to take advantage of any opportunities that arise.
(Please note: not all positioning changes will be relevant for all portfolios)