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 Q4 Q1 Q4 Q1 Q4 Q1 Q4 Q1 Q4 Q1 Cash 6% 4% 5% 5% 2% 2% 2% 2% 2% 2% Fixed interest 30% 30% 26% 25% 17% 17% 10% 9% 2% 0% UK equities 11% 14% 17% 19% 20% 20% 29% 29% 34% 33% International equities 13% 12% 19% 16% 32% 34% 41% 42% 48% 50% Absolute return 40% 40% 33% 32% 24% 21% 13% 12% 6% 7% Infrastructure 0% 0% 0% 3% 5% 6% 5% 6% 8% 8% Property 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% Portfolio positioning commentary In January, we spent some time considering the style bias in the portfolios, reducing exposure to defensive stocks and adding exposure to cyclically driven companies. This was done via a reduction in the holding of Fundsmith and the addition of the Schroder Income UK equity fund in the Defensive and Cautious portfolios and complete sale of Woodford Equity Income in the Growth and Adventurous portfolios to fund a purchase of the Schroder Income fund. The Absolute Insight Equity Market Neutral fund was sold in the Defensive and Cautious portfolios as the fund is looking to soft close on a couple of platforms. Absolute Insight was replaced with the Henderson UK Absolute Return fund, it can position itself both long and short in equities and thus has ability to make money in both up and down markets. We also wanted to increase our allocation in the higher risk Growth and Adventurous portfolios to

2 commodities, but continue this exposure through an indirect basis. This was done through a sale of the Liontrust UK equity fund and a purchase of a FTSE 100 Tracker fund which as an index has a large weighting to energy and resources via the producers listed in the index. The final change during the first month of the year was a purchase of a technology fund, the L&G Technology tracker fund in the Adventurous portfolio. This reflects our desire to participate in disruptive technologies. The L&G fund is a tracker and includes Apple, Microsoft, Facebook and Alphabet in its top 10 holdings. In the month of February we decided that in the lower risk portfolios we should replace M&G Optimal Income with the Threadneedle Credit Opportunities fund. The Threadneedle Credit Opportunities Bond fund is an excellent low risk fixed income strategy. Specifically looking back to 2015, in spite of a credit specific event, the performance was strong. This is a fund that will be more resilient to difficulties in the fixed income sector than the M&G Optimal Income fund which has a much wider remit and is even able to hold up to 20% of the fund in equities. Across all portfolios that held infrastructure, we switched out of the First State Global Listed Infrastructure fund and into the Lazard Global Listed Infrastructure fund. The Lazard Infrastructure fund has a higher exposure to Europe (vs US) and all of the exposure within the fund is hedged in comparison to the First State fund in which the exposure is unhedged. This move reflected our decision to reduce both exposure to US risk assets and the US dollar in the portfolios. In the Balanced portfolio we reduced the RWC European Absolute Alpha fund and increased exposure to the long only Blackrock European equity fund. In Europe the macroeconomic situation has been surprising to the upside and equity market indices are pushing to new highs, we therefore see this equity market as an area of opportunity for investment. In the Adventurous portfolio we increased our exposure to Indian equities via the Stewart Asia Pacific Leaders fund (c.25% exposure to India). Due to the successful and forward looking reforms by Modi, the most recent of which has provided an opportunity to enter the market, we are positive on the geography. This was funded out of a sell down of the gilt position. During March we made no changes to the portfolios as we were comfortable with our current positioning. Despite equity market highs, we remain confident that the active managers we use in each of the geographic regions are able to generate outperformance and as a house we remain positive on equity markets given the improving macroeconomic picture. Looking ahead we are carefully considering adding direct exposure to Indian equities in the higher risk portfolios. The outcome of the most recent Indian election was a majority in the largest state for Modi s BJP and second place in two other states where it will likely form a coalition government. We are likely to add a direct allocation to India to the MPS portfolios in the near future. We are also focusing specific attention on the index-linked gilt holding which was added to portfolios before Brexit last year. As we see the short term inflation in the UK peaking, we will look to sell this exposure across portfolios.

3 Performance drivers 9% Stewart Investor Asia Pac -1% JPM global Macro 8% Fundsmith Equity 0.55% RWC Europe Absolute Return 8% MI Somerset Emerging Market 0.80% Old Multual GEARS Portfolio performance commentary Investors have been well rewarded for taking risk since the start of the year. The model portfolios have benefited considerably from the equity exposure taken with all regions and market caps capturing upside from the strength in equity markets. The traditionally riskier parts of the equity market have performed best in this bull market environment; small and mid-cap equity the UK has generated the most performance as the sector scrambles to close the valuation gap created at the end of last year between the UK and the US. Funds such as Old Mutual UK Smaller Companies are up strongly; 28 companies held in the Old Mutual fund have seen an increase in share price of more than 20% year to date. The Old Mutual fund itself is up over 11% since the start of the year; Fever-Tree which is 4.72% of the portfolio is up over 40% over the past 3 months. Another fund that has benefited from the boost in UK small and mid-cap returns is the Marlborough Multi Cap fund, run by Sid Chand Lall. Sid recently commented that he is more bullish on the prospects of the UK s smaller companies for 2017 than last year. He believes the shock of the referendum has been partially priced in and the potential increase in volatility could benefit small cap over large cap companies as a result of the effect of currency. Looking further afield than the UK, small and mid-sized firms, those that tend not to be as internationally focused as their blue-chip counterparts have also performed strongly. In the US the Schroder US Mid Cap fund is up 3.11% for the quarter, driven by the expectation of fiscal and investment stimulus from the Trump administration. Investors have been rushing into US equities on the assumption that President Trump delivers his double digit corporate tax cut and billion dollar investment into infrastructure and construction projects. For the time being we are riding this wave of optimism cognisant that it may well turn out to become a case of buy the rumour, sell the news. Direct US equity exposure currently makes up over 12% of the Balanced portfolio and over 18% of the Adventurous portfolio but the overall exposure to the geography and sensitivity to the currency is higher. We have identified hedged strategies which we can switch into when we reach an optimal valuation point which will ensure that we take profits on the currency move that has benefited performance since Brexit.

4 Value investors have been well remunerated for holding income stocks over the past 6 months, again a theme that has been stoked by the promise of spending from Trump. His fiscal and investment pledge has increased GDP growth expectations which has redirected investors attention to cyclical companies, those that are generally categorised as income stocks. These cyclical companies tend to produce goods and services that get consumed with an uplift in (or expectation of) disposable income, hence the recent spike. We have been well positioned, particularly in the higher risk portfolios, to take advantage of this trend. The River & Mercantile World Recovery fund is up by 9.07% for the first quarter of 2017 and is up nearly 40% since inclusion in the models in April. Defensive, large cap allocations in the model portfolios have also made excellent returns over the past quarter. From Fundsmith s global remit up 8.39% for the quarter, to the US large cap tracker up 4.4%, to Liontrust in the UK up 5.4% we have seen pleasing multi-geographic returns. The support for global equity markets has come from the much documented Trump hope trade, yield tourism through which demand and need for certain levels of income has kept the equity market supported and QE. Infrastructure continues to perform strongly. During the quarter we decided to switch out of the First State Global Listed Infrastructure (US-focused, unhedged infrastructure fund) and into Lazard Global Listed Infrastructure (European-focused, hedged infrastructure fund) as a risk mitigation move to reduce the exposure to the US dollar. This move also reflects our positivity on Europe as an equity geography where valuations aren t as high as the US. The infrastructure exposure has contributed over half a percent to the performance of the balanced portfolio having returned just under 10% for the quarter. The fixed income holdings have also contributed positive return to the portfolios over the quarter. Ariel Bezalel, fund manager of the Jupiter Strategic Bond fund has generated 1.9% return over the past three months using his flexible mandate investing across the duration and credit spectrum. Inflation has been creeping up since the start of the year; the March data breached the Bank of England target for the first time in over three years. In the model portfolios we have been holding index-linked gilts since before Brexit anticipating the impact of the weak currency on inflation figures. The index-linked holding is up 1.80% for the quarter in response to this stronger inflation data. The holding is up 18.9% since inclusion last year. At this point we are carefully monitoring inflation figures ensuring that we exit this trade at the optimum point. Clearly over the past three months, in fact over the past twelve months equity markets generally have displayed impressive returns. During times of such strong equity market performance it is easy to overlook the importance of downside protection. As an investment house running model portfolios within volatility bands that act as risk mandates, we retain an important non-equity element to portfolios the absolute return funds. The increase in correlation between fixed income and equities was the primary reason that we started including absolute return funds in the model portfolios. Absolute return funds help us reduce volatility and control risk by reducing correlation between funds and strategies in the portfolios. Essentially, when equity markets wobble, the absolute return funds cushion the fall, providing the ballast

5 to the ship. When we do see the inevitable sell off in markets, because as we know they certainly don t go up in a straight line the absolute return funds in the portfolio have proven to protect client capital on the downside. Performance Performance (% return), as at end of March 2017 Q YTD 1 Year 3 Years 5 Years Since Inception Defensive 2.23% 2.23% 9.2% 19.2% 32.46% 43.3% Cautious 2.83% 2.83% 11.45% 22.82% 49.68% 53.16% Balanced 4.04% 4.04% 15.32% 29.9% 56.45% 72.62% Growth 4.94% 4.94% 18.02% 33.96% 62.07% 82.69% Adventurous 5.72% 5.72% 20.16% 36.81% 69.9% 92.05%

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.