Investment Commentary Q3-2015

Transcription

1 asset management Q commentary quartely Investment Commentary Q RETURNS Q3-15 % RETURNS Q3-15 % US EQUITIES COMMODITIES (CRB INDEX) EURO EQUITIES OIL (WTI) UK EQUITIES GOLD JAPAN EQUITIES SILVER WORLD EQUITIES HEDGE FUNDS EMERGING MARKETS US GOVMT BONDS 2.16 EURUSD 0.26 EU GOVMT BONDS 2.77 GBPUSD UK GOVMT BONDS 3.30 Q3 was brutal, with many markets giving back months worth of gains. In this issue we shall avoid repeating ourselves with our views on the markets. Anybody who has missed our commentaries of August 24th (Seeing Red) and Sep 3rd, can request them and we will be happy to provide them. Our views remain unchanged. In this issue we shall mostly focus on the numerous changes we made to portfolios and the reasoning behind them. But first we thought it would be interesting to share with you some of the main points of the UBS conference we attended in London this week. Usually, the main speeches are quite boxed and plastic. This time, from the five major talks, we found some of them to be of the highest quality, and we summarise two of them below. Paul Donovan, Global economist, Managing Director UBS Investment Bank: Fed should have raised rates, as the US economy is doing well. Unlike hourly wage growth, which has been rather static, the main gauge of employment is compensation/wages& salaries, which have seen a 4% rise. This is very healthy. Small businesses account for 60% of the OECD economy, and these are doing much better than large caps. China is not a driver of the world economy and has yet to integrate fully into the world economy. China accounts for only 1.6% of the CPI basket in the US. The main US GDP components other than the consumer are housing/healthcare/power generation/ food. None of these are China-related. So China is not exporting deflation as widely believed. e.g only 5% of the ipad components are made in China! China matters to commodity exporters much more than to other OECD countries. So Australia and Brazil are not going to be attractive. Europe is attractive as bank lending is increasing and there is increasing domestic demand. Small businesses in Europe have seen a much-improved credit environment. Inter-company credit is healthy, and accounts for 40% of business finance i.e. more than bank lending and capital markets. This has resulted in a domestically-led recovery.

2 Axel Weber. Chairman UBS. Ex-president of the Bundesbank ( ): Monetary policy is the only determinant of asset prices. Expects Fed to raise rates in December (not October). Expects 4 rate rises in 2016, totaling 100bp, and reaching 3% eventually, but not more. US economy is the only one that has healed Expects ECB to announce further QE when the current round expires in Sep For the next 2/3 years monetary policy will diverge, with tightening in US/UK, loose policy elsewhere. Bullish on USD Likes European equities Was very diplomatic when he was asked to grade the ECB policies, declining the offer. Oil is L shaped. i.e. prices are not coming back anytime soon. More trouble ahead for EMs Greece s problems have not gone away. Expects reluctant but partial implementation of reforms, and thereafter funding will not be disbursed. He diplomatically said Greece is finished but on its own a Grexit will not make a difference to Europe. But he is concerned about implications on Spain/Portugal as it might lead to bad governance there. China is on top of its correction and remains confident on China. Portfolio Restructuring Every quarter our investment committee reviews and scrutinizes our investment strategies and the way they are implemented. It is a standard investment process that is essential in order to ensure that our strategies and tactical deviations are aligned with your long term goals and have the best of breed funds and securities. Many of you might have noticed a lot of pending deals in your portfolios, which reflects part of this restructuring. It includes rebalancing, selling securities that have reached stop-loss targets and replacing existing funds with ones that we judge to have better prospects. Below we summarise the main changes we made and the reasoning behind them. Note that depending on your risk profile and currency strategy changes can vary. We are selling Nevsky, a hedge fund we like very much, and rate it as one of the best. The reason is that we want to give you exposure to a larger variety of top hedge funds, including Nevsky. Due to the high minimums it was easier to form a fund of our best hedge fund ideas and invest in that for you. As a result, and due to logistical purposes, we needed to sell the current Nevsky holding, and buy it back at a later stage. Note that Nevsky is closed to new investors. We sold the main Stoxx 600 ETF, which is very cost-effective and has served us well. Yet recently we discovered a better replacement, the BNP Theam Quant Equity Europe Guru Fund. We bought the institutional ( I ) class, which has only a 0.5% management fee. The chart below shows the performance of this fund vs the Eurostoxx 600 Index for the last 3 years.

3 Similarly for the USD portfolios we are selling the JP Morgan Highbridge US Steep fund and buying the BNP Theam Quant Equity US Guru fund. The latter has proved for many years that it can do better than the JP Morgan fund and the S&P 500 in all market conditions something very rare for any US equity fund. Below you can see the performance of the BNP fund (orange line) vs the JP Morgan fund (black line) and S&P 500 Index (grey line) over the last year. Once again, we bought the I class, which has a very low 0.5% management fee.

4 We are replacing Invesco Perpetual High Income and part of HSBC All Share Index with the CF Woodford fund, which you might already be partially exposed to in your portfolios. This is a relatively new fund managed by Neil Woodford, who left Invesco almost two years ago. The fund was launched in June 2014, and it is clear that the manager gets it with regards to UK equity income investing. Since inception, the fund has outperformed the FTSE All Share Index by a remarkable 22%! We also sold the Japanese ETF. While we still like Japan, we are concerned that weaker demand from China, coupled with currency wars in Asia, might be a headwind for the Japanese market. In its place we bought Healthcare, whose prospects we like after the recent selloff. We have kept exposure to Japan for some growth portfolios. We bought the F&C Small Cap Global fund for some clients (note that some GBP and EUR clients already hold it). The fund seeks to exploit the high investment potential of smaller companies listed on developed global equity markets. Many smaller companies are not widely researched, opening up the potential for the fund s fundamental analysts to identify valuation anomalies. The fund was launched in June 2013, and the managers had broad expertise in the smallcap space prior to launch. Below we compare the performance of the F&C Global Small Cap (EUR share class) with the MSCI World Index in EUR since inception of the fund.

5 Changes are inevitable in a portfolio. We try and minimise the turnover and only make changes when we consider them absolutely justified. We believe that after the recent activity, portfolios will be in better shape to deliver to our clients expectations, always within their risk profile. What we cannot do and we are not aware of any manager that can consistently do so is to be up when markets are down. We always try and produce the best possible risk-adjusted returns within prevailing market conditions. The Elgin Analyst Team Disclaimer All information contained herein and any opinions expressed in it are intended solely for the use of customers of Elgin AMC ( Elgin ). This document is not, and should not be construed as an offer or solicitation to buy or sell any product, security or any other financial instrument. Any opinions expressed in this document are subject to change in that notice. This information is a marketing communication for the purpose of the European Markets in Financial Instruments Directive (MiFID) and CySEC s Rules. It has not been prepared in accordance with the legal requirements designed to promote the independence or objectivity of investment research. This document is not based upon detailed analysis by Elgin of any, market, issuer or security named herein and does not constitute a formal research recommendation, either expressly or otherwise. It is not investment advice and does not take into account the investment objectives and policies, financial position or portfolio composition of any recipient. This document should not to be relied upon as authoritative or taken in substitution for the exercise of your own commercial judgment. This document has been prepared on the basis of economic data, trading patterns, actual market news and events, and is only valid on the date of publication. Elgin does not make any guarantee, representation or warranty, (either expressly or impliedly), as to the factual accuracy, completeness, or sufficiency of information contained herein. This document has been prepared by the author based upon informational sources believed to be reliable and prepared in good faith. Elgin does not make any representation or warranty, express or implied, as to the accuracy, completeness or correctness of this information. Elgin does not accept any liability for any loss or damage, howsoever caused, arising from any errors, omissions or reliance on any information or views contained in this document. The value of any securities mentioned in this document may move up or down, and the value of securities denominated in other currencies will also be subject to fluctuations in the relevant exchange rates. Securities issued in emerging markets are typically subject to greater volatility and risk of loss. Elgin s officers, directors and employees may own or have positions in any investment(s) mentioned herein or related thereto and may, from time to time, add to or dispose of any such investment(s). This information is the intellectual property of Elgin. Redistribution or dissemination of this document is prohibited. Elgin AMC is a trading name of Numisma Capital Ltd. Numisma Capital Ltd is regulated by the Cyprus Securities and Exchange Commission (CIF licence no. 122/10) Additional information from Elgin AMC is available upon request at info@elgingamc.com