Fund Management Diary

Transcription

1 Fund Management Diary Meeting held 15 th August 2017 Near, Medium and Long Term A principle focus of investment management is a consideration of the time frame for investment, with most investors looking to the medium and long term, where risk can be reduced. In mathematical terms, risk can be defined as a measurement of standard deviation in which the key factor is principally determined as the square root of time. It is therefore no coincidence that we have reached a point since the 2008 crisis to determine if changes in circumstances, related to the measures which were taken at the time and thereafter followed by the domination of extraordinary quantitative easing, need to be assessed. In the near term, the unprecedented size of the balance sheets created by Central Banks will continue to ensure that upward momentum in world stock markets will be maintained. However, in the short term the principle threats will predominantly come from political crises and mishaps. The most obvious at this time are; A. The Korean peninsula. Historically, it has been shown that when people are subjugated and kept in poverty by a despotic dictator, in order to maintain the regime, they turn to demonising a real or imagined foe. In this case the Kim dynasty, who in the 1950s invaded South Korea, came up against the United States, representing the United Nations. Their defeat was only stopped by the Chinese and an uneasy peace along the 38 th parallel was artificially created. Effectively, hostilities have continued from this time, up to Kim Jongun following his father in creating nuclear weapons. Ostensibly, agreements have been reached so that the West, led by the US, would support economic development if the nuclear programme was suspended. North Korea has continually ignored the agreements while treating a succession of US Presidents with contempt. Up to this time it had been felt that the programme would take years to come to fruition, but this has now been superseded by an ICBM with a capability of carrying a miniaturised nuclear device. Following Kim Jong-un s threat to fire four missiles towards the US military base of Guam, he has found that through President Trump he is facing the real threat of nuclear destruction and is now back-tracking, especially as China is showing real irritation with his posturing. World stock markets are now taking the view that the position can be contained, but the risks remain real and need the world leaders to take a high level diplomatic position to curtail Kim s ambitions. B. President Trump. Since his election, he has found it almost impossible to obtain the backing of the Republican Party, with an inability to get his programmes through congress and the senate. He faces a real prospect of impeachment and if the US congress fails to raise the debt ceiling this autumn, it could spark a technical default on Treasuries. In order to maintain the promises made before the election, Trump needs to be able to initiate his tax reforms and infrastructure spending. However, in one area he has demonstrated that he has full executive powers and as Commander-in-Chief, with Syria, he has shown his ability to undertake a missile strike. The risks to his presidency are all too evident, but again, in our opinion, he has the ability to benefit the nation through his tax reforms and given the threats against him, support could come from unlikely areas.

2 C. Brexit. As set out in a diary of the 1 st August, it now appears that Philip Hammond s proposed transitional period will now become policy. As stated this should then be able to meet the three criteria required by the EU with regards to EU/ citizenship, the Irish border and divorce settlement. This could then allow trade talks to proceed so that deals can be negotiated within a reasonable time scale. However, surprisingly, the new Irish Taoiseach has threatened to block the plans, as he seems to think that a border in the Irish Sea will force a reunification with Northern Ireland. He stands to lose his biggest trading partner, with customs borders will break the years of free movement traditional since 1923 and was contrary the policies of his predecessor. Furthermore, it is highly unlikely that he would have the support of the Ulster Unionists as this goes against to the Good Friday agreement. An unintended consequence which may give rise to a hard Brexit. For the medium term, Gillian Tett, writing in last week s FT, believes that the next risk is hiding in plain sight. The good news today is that Western banks are well capitalised, regulators are alert, the global economy is growing and Central Banks are providing monetary support. But the bad news is that precisely because the system has become so flush with cash - and is seemingly calm - there is complacency; and not just about the dangers of clearly risky bets but also about the perils of safe assets. Consider the world of ETFs. This sector has recently exploded in size, with more than $4tn in AUM. This is changing market flows in potentially unpredictable ways, which investors and regulators do not entirely understand. This year for example, investors have rushed into an obscure inverse VIX ETF that benefits from low volatility. This is the 34 th most actively traded security and has returned almost 100% this year, and appears to have distorted measures of volatility. She also cites treasury bonds as risk-free pillars of modern finance, but alludes to the former Fed chairman Alan Greenspan s warning that they are in a bubble and when longterm interest rates move, they are also likely to move fast. While she doesn t expect imminent shocks, she refers to the securitized investment vehicles of 06/07, stating that investors must keep questioning assumptions, even in areas that seem boring, geeky and dull. Looking to the long term, Mohamed El-Erian, also writing in the Insight column of the FT, stated that while the global economy is expanding with little inflationary threat, the Fed, the ECB and the BoJ have signalled - yet again - that they are in no rush to moderate their exceptional stimulus. There is no limit to how far financial risk taking can deviate from fundamentals, but the gap has so far been adequately supported by Central Bank action. However, it is easier when a Central Bank is acting alone. The ECB could and should be signalling a higher probability of, and details regarding when it hopes there will be two orderly policy transitions; a tapering of its large-scale security purchases and the readying of markets for interest rate rises. The Fed has shown that a pivot can involve a beautiful normalisation away from a period of prolonged reliance on experimental, unconventional methods. But it is easier to deliver on a stand-alone basis than when group dynamics operate. The question for investors is, how systemically important Central Banks can effect the policy pivot without undermining the overall liquidity support that has been critical for decoupling asset prices from fundamentals. Put simply, the Fed is years ahead of the ECB and there is little chance of the BoJ altering its policies. The big question will arise when the next recession hits the global economy and at this stage there is strong economic thinking that Central Banks, who have not created sufficient leeway will find it difficult to reduce interest rates and this could lead to the likes of the ECB and BoJ being forced once again into negative interest rates, with all the consequences that arose in 2015/2016.

3 Strategy Central Banks excessive balance sheets remain the principle focus for markets. We continue to believe that a well-diversified portfolio of quality assets provides the best balance between mitigating downside risk and providing opportunities for growth. Specific risk is now in bond markets as the Fed continues with the projected move towards normalisation of monetary policy and therefore fixed interest exposure is generally short-dated with inflation protection. We continue to believe that global inflationary risks exist in the medium and longer term. Providence The fund management team are pleased to note the positive performance of Aviva Investors Equity Income over the last 12 weeks. Another strong performer over both 12 weeks and shorter time periods is the an fund, SLI an Equity Income. The replacement of MGTS Ardevora Income is being planned for the next 2-3 weeks, no changes have been made to the fund this week. Equity Income 42% Bonds 38% Other 0% Cash / Money 9% Select The funds within the n allocation (Fidelity Institutional South East and Schroder n Income) have performed well recently relative to their peer group, and it is pleasing to see defensive holdings performing well when n markets have been somewhat weak recently. The switch away from MGTS Ardevora Income into the ishares Equity Index fund is continuing and the team expect this to be complete next week. No other changes have been made to Select this week. Equity Income 23% 12% 1 12% 7% Bonds 19% Cash / Money

4 International A good performer this week within the US allocation has been the JPM US Select fund, and the Majedie Equity has continued to perform strongly within the fund selection. The hedged share class of the Schroder Tokyo fund has shown somewhat weaker performance recently, which appears to be due to the strengthening of the Japanese Yen over recent months. The team remain comfortable with this position and no changes will be made at present. 34% 13% Cash / Money 4% 10% 1 Japan 7% 17% Venture Relative to the IA sector, the Schroder n Income fund performed well amongst the funds over the last week, helped by its defensive nature and allocation to Australia, which has offered protection against the recent falls in n markets. Relative to their peer group, most of the funds performed well last week, led by the JPM Income fund which has been particularly strong. There have been no changes made in this portfolio this week. Other 9% 3 34% Cash / Money

5 Important Information Please note that the contents are based on the author s opinion and are not intended as investment advice. This information is aimed at professional advisers and should not be relied upon by any other persons. Any research is for information only, does not constitute financial advice or necessarily reflect the views of the author and is subject to change. It remains the responsibility of the financial adviser to verify the accuracy of the information and assess whether the fund is suitable and appropriate for their customer. Past performance is not a reliable indicator of future performance. The value of investments and the income derived from them can fall as well as rise and investors may get back less than they invested. Important information about the funds can be found in the Supplementary Information Document and NURS-KII Document which are available on our website or on request. Issued by Margetts Fund Management Ltd Margetts Fund Management Limited is authorised and regulated by the Financial Conduct Authority For any information about the company or for a copy of the company's Terms of Business, please contact the company on or at 1 Sovereign Court, Graham Street, Birmingham B1 3JR You can us at admin@margetts.com