Retirement Advantage. Quarterly Report. Quarter Executive Summary. Outcomes

Transcription

1 Retirement Advantage Quarterly Report Quarter Executive Summary Over the course of the third quarter there have been no changes to this reasonably tight list of funds. Six of the nine strategies continue to meet Square Mile s Green reporting status, one fund remains at an Amber while the two others remain at Pink - meaning that although they are currently not fully meeting their outcomes and/or objectives, we believe that there are mitigating factors that can explain this. We do not have any pressing concerns at the current time with regard to any of the strategies and maintain conviction in all of the funds within this collection. Outcomes Cautious Balanced Flexible Peer Group Aware Henderson Cautious Managed AXA Framlington Managed Balanced Threadneedle Global Equity Key: Outcome Orientated Standard Life Investments GARS Jupiter Merlin Balanced Portfolio Jupiter Merlin Growth Portfolio Meeting Objective Behind Objective Income Bias Invesco Perpetual Distribution AXA Distribution Henderson Global Equity Income Objective Not Met - expected and explainable Objective Not Met INVESTMENT SERVICES

2 2 SUSPENDED AXA Distribution 9.0% AXA Distribution v UK CPI, rolling 5yr monthly AXA Distribu8on v UK CPI, Rolling 5yr monthly Inflation Protection 7.0% Objective: The managers aim to deliver a growing income with the potential for capital growth over the medium to longterm primarily through investments in fixed income (predominantly government bonds and index linked securities) and blue chip equities. The fund has a target asset allocation position of 55% in UK equities and 45% in fixed income; with the fixed income component comprising of 35% index linked gilts, 7% conventional gilts and 3% cash. The managers ultimately believe that this asset allocation provides a conservative, stable, diversified platform from which to build performance across the different economic cycles. While the fund does not have an explicit inflation linked objective, the managers aim to deliver a consistent return over the long-term from a high quality portfolio of equities and fixed income stocks, that meet or exceed, the rate of inflation. Since the fund s launch, the managers have delivered consistent returns well ahead of the rate of inflation with moderate levels of volatility. The performance of UK index linked investments over the course of 2016 continues to be extraordinary with the FTSE Actuaries UK Index Linked All Stocks TR index returning 28% over the nine months to end September, and 22% over the last four months alone. This has been driven by the expectation of an increase in UK inflation driven largely by the fall in Sterling. The UK equity portfolio has also provided strong returns post Brexit given the preference for larger companies which tend to have a reasonable amount of their earnings generated from overseas operations. The fund s A rating was suspended following the departure of lead manager, Richard Marwood. We are reassured that management of the fund has passed over to team head, Jim Stride, who is responsible for asset allocation. Jamie Forbes-Wilson has been brought in as co-manager and to run the UK equity component of the portfolio % -0.4% -0.6% -0.8% % -1.4% -1.6% -1.8% Apr-07 Dec-07 Aug-08 Apr-09 Dec-09 Aug-10 Apr-11 Dec-11 - Apr-07 Jun-08 Aug-09 Oct-10 Dec-11 Feb-13 Apr-14 Jun-15 Aug-16 Aug-12 Apr % FTSE BritGov up to 5 yrs, 3.5% FTSE Brit Gov All Stocks) Dec-13 Aug-14 Apr-15 AXA Distribution v Composite, Rolling 5yr monthly (Composite: 55% FTSE All Share, 17.5% FTSE Brit Gov Index Linked up to 5 yr, 17.5% FTSE Brit Gov Linked All Stocks, 3.5% FTSE BritGov up to 5 yrs, 3.5% FTSE Brit Gov All Stocks) AXA Distribution v IA Mixed Investment 20% - 60%, rolling 5yr monthly AXA Distribu8on v IA Mixed Investment 20% - 60%, Rolling 5yr monthly May-07 Sep-08 Jan-10 May-11 Sep-12 Jan-14 May-15 Sep-16 Dec-15 Aug-16

3 3 AXA Framlington Managed Balanced Objective: The manager aims to deliver consistent, long-term returns through primarily investing in a portfolio of global equities with fixed income and cash. Asset allocation is viewed against the CAPS Pooled Pension Fund Balanced Managed Median and the IA 40-85% Mixed Investment Shares category. 4.5% 3.5% AXA Framlington Managed Balanced v IA Mixed Investment 40% - 85%, rolling 5yr monthly 5yr monthly As highlighted in previous updates, changes around the management structure of the fund do not appear to have negatively impacted its return profile. Essentially this is a global equity mandate that uses its fixed income exposure to minimise overall volatility. The lead manager, Jamie Hooper, has a decent track record of managing UK equities and runs the UK component of this strategy in a similar way. The longer term track record remains robust against its peer group benchmark and the fund continues to comfortably meet its capital accumulation outcome. The managers continue to maintain the view that equity markets currently represent better value than their bond counterparts. Nonetheless, the team is wary of the risks that could impact the advancement of the asset class. For example, slowing global growth, geo-political tension in the Middle East and the fact that valuations, although not overly expensive, are starting to reach the upper end of historic ranges. The equity portfolio therefore remains focused on perceived higher quality companies that are deemed capable of growing their businesses regardless of the economic backdrop. The bond element is invested across UK gilts and other European government bond issues. There is also a meaningful cash weighting (9%). Feb-99 Nov-00 Aug-02 May-04 Feb-06 Nov-07 Aug-09 May-11 Feb-13 Nov-14 Aug AXA Framlington Managed Balanced & IA Mixed Investment 40% - 85% Absolute Returns, rolling 5yr monthly absolute returns 5yr monthly absolute returns - Jan-98 May-99 Sep-00 Jan-02 May-03 Sep-04 Jan-06 May-07 Sep-08 Jan-10 May-11 Sep-12 Jan-14 May-15 Sep-16 AXA Framlington Managed Balanced R Acc IA Mixed Investment 40%-85% Shares There has been little change to the portfolio over the recent period and as at the end of August, 35% of assets were in UK equities, 14% in North America, 16% in Europe ex UK, 6% in Japan and 4% in each of Asia and global emerging markets. The bond allocation was 15%, with the balance in cash. Over the last three months the positioning has become moderately more defensive following price rises, with equities having been reduced slightly in favour of bonds and cash.

4 4 Invesco Perpetual Distribution Invesco Perpetual Distribution v IA Mixed Investment 20% - 60%, rolling 5yr monthly Objective: The fund is managed on a total return basis with the managers investing in a diversified portfolio of bonds, equities and cash. They have discretion over asset allocation, but at least 60% will be held in bonds. The managers aim to deliver a combination of income and growth over the medium to long-term. The fund is a diversified portfolio of primarily bonds, equities and cash, and managed on a total return basis. Whilst the managers have discretion over the asset mix, at least 60% will be held in bonds with the weighting to equities typically ranging between 35% and 40%. Year to date (to end September) the fund has been lagging the IA 20% - 60% Mixed Investment Shares category. Most of the relative underperformance this year has come from the managers preference for subordinated debt of high quality European banks. This is an area of the market that they continue to find the most attractive yielding opportunities that are on reasonable valuations and whilst this might seem a sensible strategy, some of these positions have experienced sharp price moves particularly around the Brexit vote. Although there remain some pockets of concern in some European banks (with their Non- Performing Loans) the team believe that many are in a better position today and they can find some with attractive spreads and yields. Within the equity component, portfolio activity has been quite muted and the team s preference for companies with visible revenues, cash flows and profits has also led to the stocks seeing their share of volatility. 7.0% - Feb-09 Sep-09 Apr-10 Nov-10 Jun-11 Jan-12 Aug-12 Mar-13 Oct-13 May-14 Dec-14 Jul-15 Feb-16 Sep Invesco Perpetual Distribution & IA Mixed Investment 20% - 60%, Absolute Returns rolling 5yr monthly absolute return monthly absolute return Feb-09 Sep-09 Apr-10 Nov-10 Jun-11 Jan-12 Aug-12 Mar-13 Oct-13 May-14 Dec-14 Jul-15 Feb-16 Sep-16 Invesco Perpetual DistribuHon Acc IA Mixed Investment 20%-60% Shares Overall, we have a very positive view of the managers who have good levels of experience and who have established a strong track record of managing this mixed asset mandate across a number of market cycles.

5 5 Jupiter Merlin Balanced Portfolio Objective: The fund sits in the IA Mixed Investments 40-85% Shares sector and whilst there is no explicit level of outperformance against the sector, the managers seek to deliver superior risk adjusted returns over the long term through a combination of capital growth and income. 3.5% - Jupiter Merlin Balanced v IA Mixed Investment 40%-85%, rolling 5yr monthly Jupiter Merlin Balanced v IA Mixed Investment 40%-85% Shares, Rolling 5yr monthly The fund continues to deliver a solid positive return over a rolling five year basis and therefore meets its capital accumulation outcome. The Merlin team s view on the global economy and outlook for markets has been little changed for some time. They remain wary of fixed interest markets within the ongoing environment of low interest rates and low yields. Consequently, within the bond element of the portfolio, there is no government bond exposure with the team preferring credit and high yield plays. At the asset class level, the team maintains its view that equities, on balance, remain better value than bonds. As a result, the fund s equity weighting is toward the upper end of the permitted 40% to 85% range. Although relatively more optimistic on the outlook for equities, the team prefer strategies that tend to have a beta below that of the market. As a result, there is an emphasis on funds that invest in more stable, higher quality companies, which tends to lead to a more naturally defensive return profile and this has certainly been reflected in the fund s performance numbers over the short to medium term. The fund does also have some exposure (c.5%) to UK commercial property. However, this is played through a strategy that is effectively only available to the Merlin team and hence has not experienced the same recent difficulties as many other open ended commercial property funds. - Oct-07 Jan-09 Apr-10 Jul-11 Oct-12 Jan-14 Apr-15 Jul Jupiter Merlin Balanced & IA Mixed Investment 40%-85% Absolute Returns, rolling 5yr monthly - Oct-07 Jan-09 Apr-10 Jul-11 Oct-12 Jan-14 Apr-15 Jul-16 Jupiter Merlin Balanced Acc IA Mixed Investment 40%-85% Shares The fund currently has 35% in UK equities, 20% in global equities, 13% in US equities and around 6% in each of Asia, European and Japanese equities. Fixed interest holdings accounted for around 5% of assets.

6 6 Jupiter Merlin Growth Portfolio Objective: The fund sits in the IA Flexible Investment sector and whilst there is no explicit level of outperformance against the sector, the managers seek to deliver capital growth with superior risk adjusted returns over the long term. 7.0% - - Jupiter Merlin Growth Portfolio v IA Flexible Investment, rolling 5yr monthly returns The fund continues to deliver a solid positive return over a rolling five year basis and therefore meets its capital accumulation outcome. - Sep-97 Apr-99 Nov-00 Jun-02 Jan-04 Aug-05 Mar-07 Oct-08 May-10 Dec-11 Jul-13 Feb-15 Sep-16 The team have not changed their market view for some time. They maintain the stance that as memories of the financial crisis fade, many investors have developed a greater tolerance for higher risk assets. Ordinarily they would view this behaviour as normal provided the structural problems that caused the crisis were permanently resolved. However, in their opinion these issues have not been resolved and to simply ignore the fact is extremely risky. At the asset class level, the team maintains its view that equities, on balance, remain better value than bonds and therefore continue to favour equities. However, within this, the portfolio is generally invested in funds that have a bias to quality and therefore tends to run with a beta below that of the market. There is a natural bias to the UK and played through long standing investments in managers such as Neil Woodford and Nigel Thomas (Woodford Equity Income and AXA Framlington UK Select Opportunities, respectively). US exposure tends to have more of a value bias through Findlay Park American and M&G North American Value Jupiter Merlin Growth Portfolio & IA Flexible Investment Absolute Returns, rolling 5 Years Monthly absolute returns - Sep-97 Apr-99 Nov-00 Jun-02 Jan-04 Aug-05 Mar-07 Oct-08 May-10 Dec-11 Jul-13 Feb-15 Sep-16 Jupiter Merlin Growth PorJolio Acc IA Flexible Investment Currently, the portfolio has a 32% allocation to UK equity funds, 28% to the US, 10% in each of European and global, 5% to Japan, 8% to Asia/GEM and 5% to a gold ETF. The balance is in cash.

7 7 Threadneedle Global Equity 3.5% Threadneedle Global Equity v IA Flexible Investment, Rolling 5yr monthly Threadneedle Global Equity v IA Flexible Investment, Rolling 5yr monthly Objective: The fund s objective is to grow capital by investing in a portfolio of funds that are managed by Columbia Threadneedle Investment Managers. The managers aim to deliver returns that are in the top quartile of the IA Flexible Investment sector over rolling three year periods. This fettered fund-of-funds continues to deliver sound returns when compared to its peer group benchmark and fully meets its capital accumulation outcome. It is managed using an approach that makes gradual changes to its asset allocation and underlying fund selection, and looks to meet its objective by minimising capital losses. In turn, this leads to a more defensive return profile. Over what has been a volatile period for markets the managers continued to apply the process in a consistent manner. The managers retain a preference to equities over bonds due to the yields on offer and the expected low rate environment being favorable for risk assets in general. However they remain vigilant as they are aware global growth is likely to stay fragile and the expectation that a heightened level of market volatility is likely. - - Aug-02 Oct-03 Dec-04 Feb-06 Apr-07 Jun-08 Aug-09 Oct-10 Dec-11 Feb-13 Apr-14 Jun-15 Aug Threadneedle Global Equity & IA Flexible Investment Absolute Returns, Rolling 5 Year monthly - Aug-02 Oct-03 Dec-04 Feb-06 Apr-07 Jun-08 Aug-09 Oct-10 Dec-11 Feb-13 Apr-14 Jun-15 Aug-16 Threadneedle Global Equity Ret Acc IA Flexible Investment As a consequence, equities have been reduced but a small overweight relative to the benchmark has been maintained. UK and European exposure is now at a neutral level due to concerns around both economies following the Brexit vote. US exposure has been raised to neutral on the expectation of a stronger dollar. Emerging Market and Asian equities have also been increased to neutral as they are less affected by Brexit and also due to the relative stabilisation of China and commodities. The Japanese overweight has been pared back somewhat but they continue to like the region.

8 AMBER - BEHIND OBJECTIVE 8 Standard Life Investments Global Absolute Return Strategies 1 1 Standard Life Investments GARS v 6 Month LIBOR, rolling 3yr monthly Objective: The fund s objective is to deliver a positive absolute return over the medium to longer term in all market conditions and aims to generate a return equivalent to that of cash +4% p.a. net of fees over rolling three year periods. Falling by around over the first nine months of 2016, this fund has underperformed its LIBOR GBP 6 Months index (which rose by over the period). The first two months of this year and more recently in the immediate aftermath of the Brexit vote were particularly challenging periods. The fund seeks to deliver positive absolute returns whilst attempting to preserve investor capital. However, it is not immune from short-term movements in risk assets due to its directional exposures. Although the longer-term track record remains robust, this is not the first time the fund s positioning has been out of kilter with financial markets over shorter time frames. A number of strategies have generated small negative returns and have therefore driven underperformance this year. These investments are often chosen for the portfolio on the basis of their three-year return potential. For example, the fund s core belief is that the US is on a progressive rising interest rates path. However, interest rate expectations changed in March after more worries emerged surrounding the global growth outlook and the fund s pro-growth investments then underperformed. That said, in May, market expectations became more optimistic again and this helped the US dollar to recover and resulted in the long US dollar positions working well against other currencies. Nonetheless, as market expectations waxed and waned in line with news flow, the fund s short US duration strategy (which aims to benefit from rising interest rates) has been a notable detractor over this period. As noted earlier, June was a particularly volatile month for the fund. For instance, post the UK referendum, European equity exposure experienced significant volatility as worries over the future of the European Union weighed on sentiment. This position remains the largest equity beta exposure in the portfolio. We see this fund worthy of its place within the collection. 70% 60% 50% 40% 30% 20% 10% 0% -10% May-11 Jan-12 Sep-12 May-13 Jan-14 Sep-14 May-15 Jan-16 Sep Standard Life Investments GARS, rolling 12 Month Absolute Returns monthly -1 May-09 Jan-10 Sep-10 May-11 Jan-12 Sep-12 May-13 Jan-14 Sep-14 May-15 Jan-16 Sep-16 May-08 Sep-08 Jan-09 Standard Life Investments GARS v 6 month LIBOR v 6 month LIBOR + 4%, absolute cumulative monthly return May-09 Sep-09 Jan-10 May-10 Sep-10 Jan-11 May-11 monthly return Sep-11 Jan-12 May-12 Sep-12 Standard Life Investments Global Absolute Return Strategies Ret PlaIorm 1 Acc 6 Month LIBOR 6 Month LIBOR + 4% Jan-13 May-13 Sep-13 Jan-14 May-14 Sep-14 Jan-15 May-15 Sep-15 Jan-16 May-16 Sep-16

9 PINK - OBJECTIVE NOT MET - EXPECTED AND EXPLAINABLE 9 Henderson Cautious Managed Objective: The manager aims to provide long-term capital growth and income by investing conservatively in a diversified portfolio of UK equities, UK fixed income and cash. Its performance benchmark is a composite consisting of 50% FTSE All-Share Index and 50% Merrill Lynch 5-15 years GBP Non Gilt Index Henderson Cautious Managed v Composite BM, rolling 5yr monthly -3.5% Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13 Jan-14 May-14 Sep-14 Jan-15 May-15 Sep-15 Jan-16 May-16 Sep-16 The fund s manager, Chris Burvill, is acutely aware of the fund s cautious investor base and invests in the asset classes that he knows best. The result is a sterling focused, plain vanilla fund that invests in UK equities, UK fixed income and cash. The manager looks to deliver a return that is ahead of its composite benchmark and to remain competitive in relation to peers. The fund continues to meet our capital accumulation outcome delivering returns that have been consistently above that of the peer group over the longer term. Mr Burvill manages the equity portion with a contrarian, value-biased approach and complements this with bonds to dampen the fund s overall volatility. Henderson Cautious Managed v IA Mixed Investment 20% - 60%, rolling 5yr monthly From a broad asset allocation perspective the portfolio remains largely unchanged. The fund currently has a small overweight to equities (53%) whilst the bond component is at a sizeable underweight at 31%. On the equity side, the manager believes some of the more defensive stocks are looking overvalued and he has been adding to more cyclical names on weakness, particularly post Brexit. The manager s expectation of a pick-up in inflation means he also holds a number of index-linked securities. Cash makes up the remainder of the portfolio and currently stands at 16%. Henderson recently announced that Stephen Payne, who joined Henderson in the summer from Santander, will work alongside Mr Burvill on the fund. We see this addition as a positive move and therefore continue to remain happy with our AA rating Feb-08 Aug-08 Feb-09 Aug-09 Feb-10 Aug-10 Feb-11 Aug-11 Feb-12 Henderson Cautious Managed & Composite Benchmark, Rolling 5 yr monthly absolute return Jan-12 Aug-12 Mar-13 Oct-13 May-14 Dec-14 Jul-15 Feb-16 Sep-16 Henderson CauEous Managed A Acc return Aug-12 Feb-13 Aug-13 Composite Benchmark Feb-14 Aug-14 Feb-15 Aug-15 Feb-16 Aug-16

10 PINK - OBJECTIVE NOT MET - EXPECTED AND EXPLAINABLE 10 Henderson Global Equity Income Henderson Global Equity Income v MSCI World, Rolling 3yr monthly Objective: To generate income in excess of the MSCI World Index with the potential for capital growth. The managers aim to outperform the index by 2% to 3% p.a. over the market cycle, which is typically five to seven years in length. - - The fund continues to generate positive returns and therefore meets its capital accumulation outcome. Indeed, it has delivered positive absolute returns in all of the full calendar years under its current investment strategy, which it has followed since May The fund is not aggressively managed which does tend to lead to a more naturally defensive return profile and this style has proved resilient during more challenging market conditions. The most recent example of this was during the first quarter of Over the medium term the fund has struggled to make any meaningful headway against its benchmark primarily due to its underweight to the US market. This was driven by the fund avoiding a number of the better performing US-listed stocks, which did not meet the managers yield and valuation criteria. - Sep-12 Jan-13 May-13 Sep-13 Jan-14 May-14 Sep-14 Jan-15 May-15 Sep-15 Jan-16 May-16 Sep-16 Henderson Global Equity Income & MSCI World, Rolling 3yr monthly Sep-12 Jan-13 May-13 Sep-13 Jan-14 May-14 Sep-14 Jan-15 May-15 Sep-15 Jan-16 May-16 Sep-16 Fund Benchmark Activity over the past quarter includes the trimming of US holdings such as Reynolds American and exiting the position in Suncorp. Proceeds were invested into BAE and Coca Cola Enterprises, which are new holdings. The overall shape of the portfolio is little changed with the managers continuing to favour healthcare and tobacco stocks with Novartis, Roche, and Imperial Brands all appearing within the top 10 holdings. Conversely, the fund remains underweight oil and mining-related sectors despite the high yields available from these companies. The managers feel that these companies may struggle to meet their dividend commitments and will therefore not put capital at risk by chasing yield. A similar view is held with regard to banks. Distribu0on (pence) 10.0p 9.0p 8.0p 7.0p 6.0p 5.0p 4.0p 3.0p 2.0p 1.0p Henderson Global Equity Income, Distribution and Yield 4.5% 3.5% Yield (%) We believe this fund is a worthy investment and one that should deliver solid total returns over the longer term. 0.0p Year Dividend Yield MSCI World Yield

11 INVESTMENT SERVICES For further information contact us on: T: E: This review is published by, and remains the copyright of, Square Mile Investment Services Limited ( Square Mile ). Unless otherwise agreed by Square Mile, this commentary may only be used by the permitted recipients and shall not be provided to any third parties. Square Mile makes no warranties or representations regarding the accuracy or completeness of the information contained in this review. The information contained in this review represents the views and forecasts of Square Mile at the date of publication but the information set out herein may be subject to change without reference or notification to you.