MPS Quarterly Review

Transcription

1 MPS Quarterly Review Q Themes for the quarter Political events continue to drive market direction Fiscal stimulus replacing shrinking QE support Inflation trickling through Portfolio positioning Defensive Cautious Balanced Growth Adventurous Q2 Q3 Q2 Q3 Q2 Q3 Q2 Q3 Q2 Q3 Cash 6% 6% 6% 5% 4% 2% 2% 2% 2% 2% Fixed interest 33% 30% 28% 26% 17% 17% 10% 10% 6% 2% UK equities 11% 11% 17% 17% 21% 20% 29% 29% 33% 34% International equities 13% 13% 19% 19% 31% 32% 40% 41% 43% 48% Absolute return 37% 40% 30% 33% 24% 24% 14% 13% 8% 6% Infrastructure 0% 0% 0% 0% 3% 5% 5% 5% 8% 8% Property 0% 0% 0% 0% 0% 0% 0% 2% 0% 0% Portfolio positioning commentary The final quarter of 2016 began as the rest of the year had so far panned out, investors full of uncertainty and markets occupied by macro-economic volatility. It was felt that due to the political ambiguity ahead, notably the US Presidential Election, UK Autumn Statement and Italian Referendum, no changes should be made to the portfolios during October. We retained our cautious stance on fixed income as an asset class, choosing to continue to allocate to index-linked gilts and conventional gilts. At this time we were of the view that conventional gilts still had a place in the lower risk portfolios due to their hedging benefit in times of market turmoil. We also saw index-linked gilts as continuing to provide more upside than conventional gilts as we see the breakeven rate moving still higher (the difference between conventional and index linked bond yields). Inflation in the near term also has the

2 propensity to be pushed higher by the recovering oil price and in sterling terms the oil price has recovered very strongly over the past year. Clearly this has been driven up by currency movements but we have also seen a real increase in the oil price since the lows seen at the beginning of the year. In equities we also remain cautious; in the Balanced portfolio we are currently allocating just over 50% of the overall portfolio to equities, the lowest proportion since inception in In the UK we continue to use actively managed funds in order that we are able to capture elements of the market in which we see value (in terms of sector, industry and market cap). We have experienced a strong market rally since the beginning of the summer, but now with the market at all-time highs in the UK we need to be more selective than ever in investing in equities. In the international equity space we continue to use defensive funds to access these markets such as Stewart Investors Asia Pacific Leaders, Somerset Emerging Market Dividend Fund and Fundsmith. We also continue to make good use of a range of absolute return funds in the models. They help to control volatility in the portfolios as they have a low correlation to the equity portion thereby reducing the overall correlation of the portfolio to equity markets. The absolute return funds help us the run the portfolios within the specified volatility bands which act as the risk mandates of each of the models. They make up a very important part of portfolios across the risk spectrum particularly at a time in which we are cautious on investing in fixed interest. Following the Trump election in early November, although we remained positive on inflation linked bonds our view become more cautious on conventional government bonds. We started to see downside risk associated with conventional government bonds because yields became so low, whereas inflation expectations in the USA and UK have picked up. In the UK, the decline in Sterling post Brexit means that we expect annual inflation to rise in the first half of next year as forward hedges unwind and the effects of the oil price falls last year drop out of the annual figures. In the US market, wage pressures are building and inflation expectations are moving up from a much lower base. As a result of these views we decided to sell the exposure to conventional gilts (L&G Gilt Index), held until November in the Defensive and Cautious portfolios. In the Defensive and Cautious portfolios, the cash raised from the gilts sale was reinvested in two funds. The Troy Trojan fund, a defensive multi-asset fund run by Sebastian Lyon and invested in gold, index-linked gilts, cash and defensive equities, and Invesco Perpetual Global Targeted Returns, one of our core absolute return strategies. The surprise election of Donald Trump motivated us to increase exposure in the Balanced portfolio to infrastructure. This echoes our continued confidence in the asset class with commitment from governments across the world to fiscal stimulus. In the Adventurous portfolio we decided at the November MPS meeting to take advantage of slightly weaker equity markets and increase our US equity exposure, firstly directly through the mid cap fund as we see this section of the market as one most likely to benefit from a Trump victory, and secondly by topping up the River & Mercantile World Recovery fund, a global value strategy. We reduced the fixed income exposure in the Adventurous portfolio to fund this. The holding in the Invesco Perpetual Monthly Income Plus fund was sold, leaving the fixed income exposure in the Adventurous model as a small proportion in the gilt tracker.

3 The MPS portfolios remained unchanged in December as we feel confident that the asset allocation is appropriate given the background market environment. Markets are still buoyed by the election of Trump, with US indices repeatedly breaking through new all-time highs. Whether or not his optimistic rhetoric on the future of the US economy will come to fruition, is a crucial question for investors to consider. We are also cognisant of the potential risks associated with further currency movement, particularly that of GBP- USD. In this case it seems that the risks related with a strengthening Sterling are as relevant as those associated with a depreciating Sterling vs the Dollar. The chance of a strengthening pound is less likely but the potential magnitude is much greater. At some point during 2017, we may look to hedge some of our Dollar exposure to capture the currency-driven gains experienced throughout In many ways 2016 has emphasised the benefits of portfolio diversification by confirming how difficult it is to predict events and investors reactions to them. Rather than becoming caught-up in the short-term noise of markets, we try to base our decisions on a comprehensive analysis of the underlying fundamentals of the assets that we invest in. Performance drivers 13% JP Morgan US Equity Income 5% L&G Index Linked Gilts 11% Schroder US Mid Cap -3.5% Standard Life Global Index Linked Bond 11% River & Mercantile World Recovery -5% BNY Newton Real Return Portfolio performance commentary Despite the fears present at the start of 2016, and the entirely unexpected events that have happened over the last 12 months, there has been considerable reward for being invested in markets. The LGT Vestra MPS portfolios have had a very strong year; the Defensive portfolio up 7.3%, Cautious up 8.9%, Balanced up 10.9%, Strategic Income up 12%, Growth up 12.7%, and Adventurous is up 13.9% for the year. The stellar performance during 2016 came, unconventionally, from both the equities and fixed income portions of the portfolios. For Q4 the performance was strong for the more equity-biased portfolios and more muted for the portfolios with a higher fixed income component. The Defensive portfolio was up 0.2%, in contrast the Adventurous portfolio was up 2.7%. For the final quarter of the year, the performance of the underlying funds were dictated by the US Presidential Election result. Three distinct themes pervaded markets for the final three months of

4 the year, all connected primarily to the political event in the States. The first theme resulting from the election of Donald Trump was a rally in US equity markets through the wave of optimism on the potential for US growth that this inspired. The three US equity funds were all up more than 10% for the quarter; the passive Vanguard Tracker, JP Morgan US Equity Fund and the Schroder US Mid Cap fund. The second theme was a rotation out of defensive stocks and into cyclicals; those companies that do well out of a strengthening economy and growing GDP. This rotation hugely benefitted funds such as River & Mercantile World Recovery fund, up almost 10% for the quarter, Schroder Income also up almost 10% and Threadneedle Global Equity Income up over 5% over the past three months. The third major theme affecting the underlying fund performance was the risk-on attitude that quickly permeated markets once the American people voted Trump. What then followed was the knock-on assumption that the growth in the US economy may lead to interest rates rising faster than previously expected. This negatively affected asset classes such as sovereign debt and our gilt exposure, which we have exposure to through the Standard Life Global Index Linked Bond fund, down 3.5%, multi-asset fund Trojan O down 0.4%, and L&G Index-Linked Gilts down 5.7% for the quarter. We expect that interest rates in the UK will stay lower for longer however we do believe that inflation will rise considerably in the short term. This is due to currency impacts leading to import-driven inflationary pressure mainly through retail and energy prices. These expectations should continue to support inflation-linked gilts. Absolute Return funds continued to play their role as volatility dampener within portfolios and for the most part positively contributed to the performance of the MPS portfolios. The Old Mutual Global Equity Absolute Return fund was up almost 4%, RWC European Absolute Alpha (a long/short European equity fund) was up over 3%, Invesco Perpetual Global Targeted Returns, a fund that has had a strong year was up 0.8% for the quarter. The JP Morgan Global Macro Opportunities fund has unfortunately not had as strong a quarter in performance terms, and is down 3.4%. We bought gold in July in the MPS portfolios, via the Trojan O fund as our Trump insurance policy. However, investors acted in a contradictory manner to that which we expected; we saw a surprising appetite for risk post the vote for Trump as the Republican President as the gold price fell. Gold however remains a good hedge against inflation and thus an important element of portfolio construction. Looking ahead, in a world in which the recent rise in equity markets has been driven by purely multiple expansion on what may happen we are sitting here questioning whether the euphoria is actually justified as nothing has happened. With this mind we continue to take an overall cautious stance in the portfolios and aim to take advantage of opportunities as they present themselves.

5 Performance Performance (% return), as at end of December 2016 Q YTD 1 Year 3 Years 5 Years Since Inception Defensive 0.17% 7.34% 7.34% 18.51% 32.93% 40.13% Cautious 0.53% 8.93% 8.93% 21.24% 40.91% 48.89% Balanced 2.11% 10.94% 10.94% 26.44% 59.45% 65.93% Growth 2.30% 12.75% 12.75% 28.87% 65.44% 74.09% Adventurous 2.67% 13.93% 13.93% 30.66% 71.87% 81.63%

6 Contacts Details LGT Vestra LLP 14 Cornhill London EC3V 3NR T +44 (0) F +44 (0) E info@lgtvestra.com W Important information This document is for information only and is for use of the recipient. It is not to be reproduced, copied or made available to others. This document is considered to be a general market or informational commentary and does not constitute any type of investment or other professional advice, it is not a personal recommendation and does not take into account the particular investment objectives, financial situations or needs (including tax) of individual clients. This document is not intended and should not be construed as an offer, solicitation or recommendation to buy or sell any specific investments or participate in any investment (or other) strategy. Investors should be aware that past performance is not an indication of future performance and the value of investments and the income derived from them may fluctuate and you may not receive back the amount you originally invested. Professional advice should always be sought. Any information herein is given in good faith, but is subject to change without notice. No liability is accepted whatsoever by LGT Vestra, its employees and associated companies for any direct or consequential loss arising from this document. This document is not for distribution outside the European Economic area. LGT Vestra is a limited liability partnership registered in England & Wales. Registered Office: 14 Cornhill, London EC3V 3NR. Registration number OC LGT Vestra is authorised and regulated by the Financial Conduct Authority and is a member of the London Stock Exchange. LGT Vestra (Jersey) Limited is incorporated under the laws of Jersey. Registered office: Queen Street, St Helier, Jersey JE2 4WD. Registration number LGT Vestra (Jersey) Limited is regulated by the Jersey Financial Services Commission in the conduct of investment Business under the Financial Services (Jersey) Law 1998, as amended.