Discretionary Portfolio Service
Investment strategies devised in line with your objectives and to maximise market opportunities.
Second Quarter 2016
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|
|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|
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.
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.
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.
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)
27-Feb-2023As the new tax year approaches, you might want to know about possible changes to what you’ll pay in tax. In his Autumn Statement last November, Chancellor Jeremy Hunt announced a series of tax freezes and adjustments. While there are no personal tax rises, the fact that some rates have been frozen following a year of rising prices means we’re likely see more people fall into the higher rate category and find themselves paying more tax as wages increase.