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Discretionary Portfolio Service

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Investment strategies devised in line with your objectives and to maximise market opportunities.
 

Second Quarter 2016

Third Quarter Commentary is now available

 

PORTFOLIO

PERFORMANCE

Portfolio returns were positive across the risk spectrum over the second quarter, despite volatility stemming from uncertainties over the timing of US interest-rate rises and Britain’s vote to leave the European Union.

Both bond and equity markets delivered gains in sterling terms over the review period, with the sharp depreciation in the value of the pound buoying overseas returns. As the pound dropped, the value of non-sterling (overseas) assets rose for UK investors, when translated back into the home currency. 

A focus on diversification, one of our core investment principles, worked well given portfolios (particularly equity-heavy mandates) hold a significant proportion of non-UK assets. In particular, negative exposure to Europe and Japan was generally offset by positions in currencies that strengthened against sterling. However, we missed out on some of the upside from sterling’s weakness against the dollar, given our relatively light holdings of US stocks, which we regard as expensive.

As the pound dropped, the value of non-sterling (overseas) assets rose for UK investors, when translated back into the home currency.

Within the UK market, our bias towards large-cap multi-national companies proved beneficial. The globally-focused FTSE 100 index overcame Brexit volatility at the end of the quarter to regain last August’s levels, strongly outperforming its more domestic, mid-cap FTSE 250 cousin.

However, some of our favoured equity themes, such as a preference for financials, were hurt by the referendum outcome, as investors sold out of sectors heavily correlated with the UK economy. The likelihood of further UK interest-rate cuts – or in Europe, the potential for rates to go even deeper into negative territory – was also seen as putting pressure on banks’ profit margins.

In bond-tilted mandates, we have a preference for corporate debt, which in the short term made more modest gains compared to UK government bonds. Gilts had a particularly good June as investors sought sanctuary amid the referendum-induced volatility and as Bank of England Governor Mark Carney emphasised that monetary conditions would remain easy. 

Portfolio returns, after fees Defensive Balanced Growth
Last Quarter 1.85% 2.78% 3.81%
Rolling 12 Months:
End Jun 15 to end Jun 16 2.65% 1.01% 0.06%
End Jun 14 to end Jun 15 4.04% 4.28% 4.19%
End Jun 13 to end Jun 14 - - -
End Jun 12 to end Jun 13 - - -
End Jun 11 to end Jun 12 - - -
Blank cells represent periods prior to the Strategies launch
Source: Coutts/Thomson Datastream

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.

Spotlight on

Holdings

 

  • European Dividends Tracker Note

    The European Dividends Tracker Note is a 50-month sterling-denominated investment linked to the dividend future prices of companies that make up the Euro Stoxx 50 Index. The product tries to take advantage of potential discrepancies between what dividend futures are pricing-in and what actual future payouts will be, by buying and holding the futures until expiry. 

    Given the turbulence we have seen in financial markets of late, this note was chosen as part of our strategy to find alternative sources of returns that have little correlation to stock market performance. 

  • JOHCM Continental European Fund

    This JO Hambro European equity fund has been managed by Paul Wild since 2008. Paul uses a ‘top-down’ investment approach combined with ‘bottom-up’ stock picking, looking initially at the economic environment before selecting sectors and businesses that are likely to benefit from prevailing trends. 

    While the fund typically focuses on the larger-cap segment of the market, the portfolio is managed relative to its underlying benchmark, with position sizes based on the team’s analysis and the stocks’ underlying liquidity (a measure of how easily shares can be bought and sold).  While the fund doesn’t have a defined style, it tends to favour quality businesses with robust management.

    We like this fund given Paul’s experience and that his strategy provides dynamic exposure to European equities, tilting to different companies throughout a market cycle.  The flexible approach and lack of bias to a particular style makes this a strong core European equity offering for us, providing access to one of our favoured regions.  

  • UBAM Global High Yield Solution

    This fund is a means of accessing high-yield (lower credit quality) corporate debt, which we favour within the fixed income space.

    Run by Union Bancaire Privee Asset Management (UBAM), the fund invests in European and US credit default swap (CDS) indices as a way of providing exposure to global high-yield returns. By selling protection on high-yield corporate debt (via indices), investors pay a premium similar to the implied credit risk embedded within high-yield bonds.    

    While the fund is largely passive in nature, UBAM actively manages the geographic exposure, interest-rate sensitivity (i.e. how far they will move when interest-rates change) and high-yield credit exposure to add value to the proposition. 

    We believe this unique strategy provides a competitively priced means of accessing high-yield debt through the liquid CDS market. As the fund sells protection, there is a significant reduction in interest-rate exposure compared to traditional high-yield bonds, and so will be less affected by a rise in interest rates. We think the strategy’s strong track record coupled with this  low interest-rate sensitivity make this an attractive way of obtaining high-yield debt exposure in the current environment.  


For a full breakdown of all the underlying funds within the portfolios, please refer to our monthly factsheets, available on request.

Holdings and

Portfolio Update

Having held our nerve during the brutal sell-off in ‘risk assets’ at the start of the year – and been rewarded by the sharp rebound in the early spring – we took the opportunity to take profits in equities in April, moderating our positive stance on the asset class.

We believed further strong advances in equity markets were limited after the sharp rally, and valuations were looking relatively high. For example, the forward price-earnings ratio (PE) – share prices divided by estimated earnings for the next 12 months – for the MSCI World equity index was 16.1 versus its long‐term average of 15.4.

We scaled back equity holdings again in June, prompted this time by signs of slowing growth in the world economy. We are keeping the proceeds in cash pending chances to reinvest – as we still remain positive on the longer-term outlook for global growth and equities.

We believed further strong advances in equity markets were limited after the sharp rally, and valuations were looking relatively high.

In May, we cut much of our position in gold-related assets, such as gold-mining shares. Gold had rallied over 20% from its December 2015 low and miners had nearly doubled in price over that period. We saw factors supporting demand as unlikely to last – these included dollar weakness, the general commodity rally and heightened expectations for corporate defaults. Seeing these supports diminishing, we took the rebound as an opportunity to boost cash positions.

At the fund level, we took a new position in the Capital Group New Perspective Fund in June through trimming exposure to some regional large-cap equity holdings. The fund aims to take advantage of investment opportunities generated by changes in international trade patterns and economic and political relationships. It has a good track record, and we liked the long-term focus and its defensive profile, with an emphasis on higher quality companies that aligns with our own investment principles.

Around the same time, a review of our holdings identified the Fidelity Emerging Markets (EM) Fund as consistently outperforming the broader regional index. As a result, we switched some of our passive index exposure, held through the Lyxor Emerging Markets Exchange Traded Fund, into this actively managed fund. Managed by Nick Price, the Fidelity team looks to invest in quality companies that can deliver consistent returns and are reasonably valued. It contains around 45 select stocks from Latin America, emerging EMEA and emerging Asia.
 

Summary of moves

  • April – Scaled back equity overweight in favour of cash
  • May – Reduced gold-related exposure to boost cash position
  • June – Further reduced equity exposure – though remain modestly positive on equities in the longer term
  • June - Introduction of Capital Group New Perspective Fund
  • June - Reduced emerging-market passive exposure in favour of the active Fidelity Emerging Markets Fund

(Please note: not all moves will be relevant for all portfolios)

Coutts

Market Review

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House View

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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.

 

Important Information

Wealth division of NatWest Group.

Coutts & Co. Registered in England No. 36695. Registered office 440 Strand, London WC2R 0QS. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority

The information in this webpage is not intended as an offer or solicitation to buy or sell securities or any other investment or banking product, nor does it constitute a personal recommendation. The information is believed to be correct but cannot be guaranteed.

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The analysis contained in this webpage has been procured, and may have been acted upon, by Coutts & Co and connected companies for their own purposes, and the results are being made available to you on this understanding. To the extent permitted by law and without being inconsistent with any applicable regulation, neither Coutts & Co nor any connected company accepts responsibility for any direct or indirect or consequential loss suffered by you or any other person as a result of your acting, or deciding not to act, in reliance upon such analysis.

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