SCOTTISH WIDOWS PREMIER PENSION PORTFOLIO FUNDS QUARTERLY UPDATE QUARTER

Transcription

1 SCOTTISH WIDOWS PREMIER PENSION PORTFOLIO FUNDS QUARTERLY UPDATE QUARTER This information is for UK financial adviser use only and should not be distributed to or relied upon by any other person

2 MARKET COMMENTARY FOR THE PERIOD 1 APRIL 2018 TO 30 JUNE 2018 Summary: The second quarter of 2018 was characterised by increasing trade tensions, particularly between the US and China, which had a ripple effect throughout markets. The UK and the US share markets recorded strong growth, while equities in China and other emerging markets posted losses. Central bank activity was divergent, with the US Federal Reserve (Fed) hiking rates, the Bank of England (BoE) holding steady but signalling hawkishness, and Europe and Japan remaining relatively accommodative. The UK had some of the strongest equity performance of the period, with the blue chip FTSE 100 Index recording its best quarter since 2010, gaining 9.58% in total returns (GBP). Most of the gains were recorded in April, and to a lesser extent May, as sterling weakness contributed to a favourable environment for those firms with international exposure. The more domestically focused mid-cap FTSE 250 also had a good quarter, with a total return of 8.07%, supported by higher energy prices. June saw UK equities lagging the global average, however, as hawkish rhetoric from the BoE and uncertainty around the Government s ability to strike a Brexit deal kept investors wary. Economic growth was slightly higher than expected; first-quarter GDP growth of 0.2% compared to estimates of 0.1%, supported by household spending. In continental Europe, political headlines led to restrained performance, with the FTSE Developed Europe ex-uk recording a total return of 3.73%. The results of the Italian elections in March carried through until May, as two Eurosceptic parties worked to form and gain approval on a coalition government; uncertainty in Germany also troubled markets, as Angela Merkel faced a leadership crisis over the issue of migration. First-quarter economic growth reported in June was 0.4%, in line with estimates but down from 0.7% in the previous quarter. Amid slower growth, the Eurozone found itself facing trade tensions on two fronts, as Brexit remained unresolved and the US president turned his attention to auto imports. The European Central Bank signalled it would end its asset purchase programme but keep rates unchanged through mid-2019, which investors interpreted as remaining accommodative. The FTSE North America Index gained 10.05% (total returns in sterling terms). Overall, the performance of US equities was robust, amid higher market volatility. The strong gains were aided by a record period for share buybacks, as corporations used their new tax savings to buy back their own shares, rather than invest in capital expenditure. Investors kept close watch on the summit between the US and North Korean leaders, and the ongoing rhetoric against China, which extended to Europe and Canada over the quarter. Overall, the US economic picture remained positive, prompting the Fed to hike its target rate again in June. Canadian stocks remained resilient despite trade tensions, hitting a record high near the end of June. Elsewhere, the FTSE Developed Asia Pacific ex Japan had a total return of 4.35%, while the FTSE Emerging Markets Index fell by 2.38% (both in sterling terms). Emerging Europe, Asia, and Latin America had the biggest losses, dragged down by Brazil and China in particular. The latter country has been at the centre of trade tensions with the United States; the next round of tariffs is due to take effect 6 July. The FTSE Japan had a total return of 3.24% in sterling terms, despite net outflow from foreign investors and a strengthening yen (which traditionally hinders equity performance). Turning to fixed-interest investments, the yield on the US 10-year Treasury ended the quarter slightly higher than where it started (the price was lower), after coming down off highs of more than 3.0%. The yield on 10-year UK Gilt generally followed the trajectory of its US counterpart, while German benchmark bonds dropped sharply at the end of May. The UK index-linked market fell slightly, with prices down by 1.0% over the quarter. Investment-grade corporate bonds dropped back by 0.9%, while riskier high-yield corporate bonds only declined marginally. On a global basis, corporate bonds dropped by 1.59% in sterling terms, according to data sourced from Financial Express. 2

3 PAST PERFORMANCE Performance for Premier Pension Portfolio Funds (PPPF) over one year and the most recent quarter. Premier Pension Portfolio One Year Quarter 2 Premier Pension Portfolio One Year Quarter % 5.47% B 3.43% 3.26% % 5.27% % 2.33% % 4.78% C 1.94% 1.58% A 4.46% 4.04% Source: Scottish Widows, Financial Express Analytics. Cumulative performance for periods to 30th June All figures relate to Series 4 (net of fees). Past performance is not a reliable indicator of future results. The value of investments, and the income from them, may fall as well as rise. Investors may not get back the full amount originally invested. STRATEGIC ASSET ALLOCATION 100 PPPF 1 PPPF 2 PPPF 3 PPPF A PPPF B PPPF 4 PPPF C % 0 Commodities DECREASING RISK Source: Scottish Widows. Figures correct as at 30th June

4 INVESTMENT COMMENTARY The Premier Pension Portfolios (Portfolios) generated positive absolute performance over the second quarter. The Portfolios with the heaviest equity exposure gained the most, while those with the highest bond weightings produced more modest advances. The Portfolios have investments in passive smart-beta equity strategies, which are based on indices that weight their components according to fundamental measures (including sales and dividends) or low historical volatility, rather than more traditional market-capitalisation-weighted investments. We believe that by reflecting these metrics smart-beta funds should achieve better performance than traditional passive funds over the long term. This quarter, the two global developed smart-beta funds advanced strongly and contributed to performance across the Portfolios amid strength in developed equity markets. Although the global Fundamental Index strategy advanced by less than its Low Volatility equivalent over the quarter, it was the main contributor to absolute returns in Portfolios where it has a significantly higher weighting (Premier Pension Portfolios 1, 2 and 3). UK equity markets were particularly strong over the period, partly helped by the weakness of sterling. A drop in the value of the pound was supportive as it boosts the value of UK companies overseas earnings in sterling terms. The largest companies in the UK are listed on the FTSE 100 Index and they generally have broad international exposure. As such, the Portfolios positioning in FTSE 100 Index Futures was a key positive influence across the range and was the top individual fund contributor to absolute performance in Portfolios A, B, 4 and C. In the real-estate asset class, global property securities (in the form of the BlackRock Global Securities Equity Tracker Fund) advanced strongly. Despite a more modest increase, physical property, accessed through the Scottish Widows Pooled Fund, also provided a notable contribution to Portfolio performance.* The small Portfolio weights in commodities added slightly to the overall absolute advance as the underlying Scottish Widows Alternatives Pension Fund gained ground amid a backdrop of continued upward progress in crude oil prices.* Both of the absolute return funds produced marginally negative returns over the quarter. The Insight Global Absolute Return Fund detracted the most from performance, but the negative impact on investment returns across the range was slight. The SW Corporate Bond 1 Fund is the Portfolios largest bond market investment and is primarily focused on investmentgrade corporate bonds. This fund fell back over the quarter amid growing strains in international trading relationships and was the main negative factor in Portfolios B, 4 and C, which are particularly heavily weighted to the bond asset class. It was also a significant negative factor in Portfolio A. The Portfolios also have a small weighting to high-yield bonds, which weakened slightly over the quarter but had negligible impact on absolute performance.* *With the exception of Premier Portfolio Fund 1, as this does not invest strategically in commodities, bonds or property. TACTICAL ASSET ALLOCATION Tactical asset allocation (TAA) involves adjusting the long-term strategic asset allocation within a portfolio in order to capture shorter-term relative value opportunities in markets. Rather than undertaking TAA directly within the Premier Portfolios, we invest in the Scottish Widows Global Tactical Asset Allocation (GTAA) 1 Fund, which is managed on our behalf by Aberdeen Standard Investments. As always, we would re-iterate that all of our Premier Pension Portfolios are managed to a long-term view consistent with the investment horizons of our pension customers. Over the second quarter, tactical asset allocation produced only a marginal positive return and therefore had a negligible impact on the overall performance of the Portfolios. NEW FUNDS There were no new funds added to the Portfolios during the quarter. In contrast, during a period that saw escalating trade tensions and US-dollar strength, emerging market (EM) equities declined and weakened absolute performance across the Portfolios. The poorest-performing EM fund over the quarter was the SW Fundamental Index EM Equity Fund, which detracted most from performance in Portfolios 1, 2, 3 and A. The Scottish Widows Global EM Fund and SW Fundamental Low Volatility Index EM Equity Fund detracted slightly from Portfolio returns. 4

5 BREAKDOWN OF EACH PREMIER PENSION PORTFOLIO FUND PREMIER PORTFOLIO FUND % Scottish Widows Fundamental Index Global Equity Fund 13.4% Scottish Widows Fundamental Low Volatility Index Global Equity Fund 3.5% SW Japan Growth Fund 5.2% SW Europe (ex UK) Equities Fund 5.0% Scottish Widows Emerging Markets Fund 1.8% Scottish Widows Fundamental Low Volatility Index Emerging Markets Equity Fund 12.0% Scottish Widows Fundamental Index Emerging Markets Equity Fund 15.0% Scottish Widows All Share Tracker Fund and FTSE 100 Index Futures 4.0% Insight Global Absolute Return Fund 4.0% Nordea 1 GBP Diversified Return Fund PREMIER PORTFOLIO FUND % Scottish Widows Fundamental Index Global Equity Fund 11.5% Scottish Widows Fundamental Low Volatility Index Global Equity Fund 2.9% SW Japan Growth Fund 4.4% SW Europe (ex UK) Equities Fund 4.5% Scottish Widows Emerging Markets Fund 1.5% Scottish Widows Fundamental Low Volatility Index Emerging Markets Equity Fund 9.0% Scottish Widows Fundamental Index Emerging Markets Equity Fund 15.0% Scottish Widows All Share Tracker Fund and FTSE 100 Index Futures 2.0% Scottish Widows Corporate Bond 1 Fund 1.0% Scottish Widows High Income Bond Fund 4.9% Scottish Widows Pooled ACS Fund 1 2.1% BlackRock Global Securities Equity Tracker Fund 5.0% Insight Global Absolute Return Fund 5.0% Nordea 1 GBP Diversified Return Fund 1.0% Scottish Widows Alternatives Pension Fund 5

6 BREAKDOWN OF EACH PREMIER PENSION PORTFOLIO FUND PREMIER PORTFOLIO FUND % Scottish Widows Fundamental Index Global Equity Fund 10.7% Scottish Widows Fundamental Low Volatility Index Global Equity Fund 2.5% SW Japan Growth Fund 3.8% SW Europe (ex UK) Equities Fund 3.5% Scottish Widows Emerging Markets Fund 1.4% Scottish Widows Fundamental Low Volatility Index Emerging Markets Equity Fund 7.5% Scottish Widows Fundamental Index Emerging Markets Equity Fund 15.0% Scottish Widows All Share Tracker Fund and FTSE 100 Index Futures 7.7% Scottish Widows Corporate Bond 1 Fund 1.3% Scottish Widows High Income Bond Fund 6.1% Scottish Widows Pooled ACS Fund 1 2.6% BlackRock Global Securities Equity Tracker Fund 5.8% Insight Global Absolute Return Fund 5.8% Nordea 1 GBP Diversified Return Fund 1.2% Scottish Widows Alternatives Pension Fund PREMIER PORTFOLIO FUND A 18.3% Scottish Widows Fundamental Index Global Equity Fund 9.2% Scottish Widows Fundamental Low Volatility Index Global Equity Fund 1.9% SW Japan Growth Fund 2.9% SW Europe (ex UK) Equities Fund 2.5% Scottish Widows Emerging Markets Fund 1.2% Scottish Widows Fundamental Low Volatility Index Emerging Markets Equity Fund 5.5% Scottish Widows Fundamental Index Emerging Markets Equity Fund 15.0% Scottish Widows All Share Tracker Fund and FTSE 100 Index Futures 18.5% Scottish Widows Corporate Bond 1 Fund 1.5% Scottish Widows High Income Bond Fund 6.3% Scottish Widows Pooled ACS Fund 1 2.7% BlackRock Global Securities Equity Tracker Fund 6.5% Insight Global Absolute Return Fund 6.5% Nordea 1 GBP Diversified Return Fund 1.5% Scottish Widows Alternatives Pension Fund 6

7 BREAKDOWN OF EACH PREMIER PENSION PORTFOLIO FUND PREMIER PORTFOLIO FUND B 10.6% Scottish Widows Fundamental Index Global Equity Fund 8.0% Scottish Widows Fundamental Low Volatility Index Global Equity Fund 1.3% SW Japan Growth Fund 2.0% SW Europe (ex UK) Equities Fund 2.0% Scottish Widows Emerging Markets Fund 1.0% Scottish Widows Fundamental Low Volatility Index Emerging Markets Equity Fund 4.0% Scottish Widows Fundamental Index Emerging Markets Equity Fund 15.0% Scottish Widows All Share Tracker Fund and FTSE 100 Index Futures 27.8% Scottish Widows Corporate Bond 1 Fund 1.8% Scottish Widows High Income Bond Fund 7.2% Scottish Widows Pooled ACS Fund 1 3.1% BlackRock Global Securities Equity Tracker Fund 7.2% Insight Global Absolute Return Fund 7.2% Nordea 1 GBP Diversified Return Fund 1.8% Scottish Widows Alternatives Pension Fund PREMIER PORTFOLIO FUND 4 6.8% Scottish Widows Fundamental Index Global Equity Fund 6.1% Scottish Widows Fundamental Low Volatility Index Global Equity Fund 0.9% SW Japan Growth Fund 1.4% SW Europe (ex UK) Equities Fund 1.0% Scottish Widows Emerging Markets Fund 0.8% Scottish Widows Fundamental Low Volatility Index Emerging Markets Equity Fund 2.5% Scottish Widows Fundamental Index Emerging Markets Equity Fund 12.0% Scottish Widows All Share Tracker Fund and FTSE 100 Index Futures 37.7% Scottish Widows Corporate Bond 1 Fund 2.0% Scottish Widows High Income Bond Fund 7.1% Scottish Widows Pooled ACS Fund 1 3.1% BlackRock Global Securities Equity Tracker Fund 8.3% Insight Global Absolute Return Fund 8.3% Nordea 1 GBP Diversified Return Fund 2.0% Scottish Widows Alternatives Pension Fund 7

8 BREAKDOWN OF EACH PREMIER PENSION PORTFOLIO FUND PREMIER PORTFOLIO FUND C 3.8% Scottish Widows Fundamental Index Global Equity Fund 4.6% Scottish Widows Fundamental Low Volatility Index Global Equity Fund 0.6% SW Japan Growth Fund 0.9% SW Europe (ex UK) Equities Fund 0.5% Scottish Widows Emerging Markets Fund 0.6% Scottish Widows Fundamental Low Volatility Index Emerging Markets Equity Fund 1.0% Scottish Widows Fundamental Index Emerging Markets Equity Fund 8.0% Scottish Widows All Share Tracker Fund and FTSE 100 Index Futures 47.7% Scottish Widows Corporate Bond 1 Fund 2.3% Scottish Widows High Income Bond Fund 6.8% Scottish Widows Pooled ACS Fund 1 2.9% BlackRock Global Securities Equity Tracker Fund 9.0% Insight Global Absolute Return Fund 9.0% Nordea 1 GBP Diversified Return Fund 2.3% Scottish Widows Alternatives Pension Fund The UK equity component represents the Funds exposure to UK equities. Most of the Funds UK equity exposure is currently gained through investments in FTSE 100 Index Futures. Please note that the charts on pages 5-8 exclude the Scottish Widows Global Tactical Asset Allocation (GTAA) 1 Fund, which is the means by which we gain exposure to TAA decisions. The investment in GTAA 1 is possible because we use futures to gain most of the Premier Pension Portfolios Funds (the Funds) exposure to UK equities. Using futures rather than buying UK equities directly frees up capital. This is then used for TAA purposes, with the aim of improving overall returns. The fund splits are target splits and actual percentages may differ marginally throughout the year. At any time, the Funds may use derivatives (contracts which have a value linked to the price of another asset) to help reduce risk or reduce cost, or to help generate extra capital or income. It is not intended that this will cause the risk profile of the Funds to change, but using derivatives might not achieve the described outcomes and may result in greater fluctuations in the values of the Funds. Within the charts, the derivative positions may be included within the asset class to which they most closely relate. Please note that underlying funds and managers may change. 8

9 OUTLOOK As we head into the third quarter, there are a number of key themes that could have an impact on global markets. THE EFFECT OF THE US DOLLAR AND TRADE TENSIONS The US Federal Reserve is well ahead of other major global central banks in tightening monetary policy, both raising rates and running down its balance sheet, while US tax reform and dollar repatriation by large US firms adds to the scarcity of dollars abroad; this is helping to strengthen the US dollar. The European Central Bank (ECB), Bank of Japan and Bank of England have been slower to tighten policy, but a stronger dollar has global ramifications as the US remains the world s lynchpin economy. More expensive money makes investors warier of risky assets. Equity markets entered a new, more volatile phase after the sell-off in February 2018, and we expect this to continue. Tighter dollar funding has hit emerging markets (EM), where borrowers face a rise in the cost of servicing dollar debts. EM assets look likely to remain under pressure in the short term. This provides the fundamental backdrop against which markets have had to digest a range of political risks. Escalating tensions over global trade have become a major source of investor uncertainty, with markets clearly reacting to shifts in the tone of the debate between the US and China. It is tempting to conclude that a trade war harms everybody and therefore policymakers will rationally draw back from the most damaging increases in tariffs and other trade restrictions. But it is becoming clear that the US has lost patience with the trade deficits it incurs under the current system and is serious about securing meaningful adjustments. We expect uncertainty over trade will continue to dog markets until and unless some broader agreement is reached, in particular between the US and China and the Eurozone respectively. HIGHER OIL PRICES Oil prices have gradually risen since the low point of around USD30 a barrel in early 2016, almost tripling towards USD80 a barrel, as the OPEC cartel of oil producing nations has been fairly successful in enforcing production curbs in an environment of strengthening global demand. We think oil prices will be further supported by the Trump administration s re-imposition of sanctions on Iran and reduced supply from Venezuela, struggling with a deeper economic crisis. Higher oil prices act like a tax hike on consuming countries, and are a headwind to growth. The impact on the US is likely to be swamped by the real tax cuts taking effect there, but the Eurozone and Japan will face more of a drag, while higher oil prices will be another factor dragging down consumer emerging market economies including China and India. THE OUTCOME OF BREXIT DISCUSSIONS The Brexit process remains a fundamental short-term driver for UK markets. The pound sterling and UK equity markets tend to react negatively to signs that negotiations are heading for a harder Brexit that moves further away from existing trade arrangements, as this is seen as likely to be more economically harmful. The UK government was holding key internal discussions on their desired approach at time of writing. We expect the debate will continue to be a key driver for UK markets until greater certainty on the outcome emerges. That may allow the Bank of England to return to raising interest rates, perhaps more quickly than the market is currently pricing in. The Eurozone seems unable to shake off homegrown political risks, as concerns over the stability of the German government coalition arose almost as soon as worries over the formation of a Eurosceptic Italian government faded, which themselves came hot on the heels of tensions over Catalonian independence. How much European integration is desirable, and what form it takes, seems likely to be a question that will continue to roil Europe s domestic and international politics and markets. A FLATTER YIELD CURVE It is sometimes interesting to think about what hasn t changed, and in that light we think the ongoing stability of most longerdated government security yields is worth mentioning. Most notably, US 10-year Treasury yields have drifted down even as the Fed has hiked rates and the market looks ahead to wider deficits (and more bond issuance), flattening the yield curve. We think ongoing asset purchases by the ECB and the Bank of Japan are helping suppress yields. But global central bank net purchases will probably turn negative around the end of the year as the ECB winds up its programme. We remain on guard against the possibility of a sharper rise in yields, which could hit equity and credit markets. All figures quoted are in sterling terms to the date specified unless otherwise stated. The information contained in this update has been derived from sources which we consider to be reasonable and appropriate. It may also include our views and expectations, which cannot be taken as fact. Investment markets and conditions can change rapidly and, as such, the views expressed in this update should not be taken as statements of fact nor be relied on when making investment decisions. Forecasts are opinions only, can not be guaranteed and should not be relied on when making investment decisions. For details of the Portfolio Funds aims and risks, please see our Scottish Widows Premier Pension Portfolio Funds Adviser Guide. 9

10 Scottish Widows Limited. Registered in England and Wales No Registered office in the United Kingdom at 25 Gresham Street, London EC2V 7HN. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Financial Services Register number /18