October 2016 Review prepared by Morningstar Investment Management Europe 1 Oliver s Yard, 55-71 City Road, London EC1Y 1HQ Model Portfolios for Zurich Moderately Cautious - Long Term Quarterly Reports for Quarter 3, 2016
Contents 2 Introduction... 3 About Morningstar Investment Management Europe Limited... 3 Moderately Cautious Portfolio Long Term Q3 2016... 4 Performance Portfolio Constituents to 30/09/2016... 5 Commentary... 6
Introduction to Morningstar Investment Management Europe and the Model Portfolios 3 Introduction Morningstar Investment Management Europe Limited has been engaged by Zurich to advise upon the fund selection for a range of Model Portfolios. The Portfolios are available for use by UK authorised Intermediaries and are designed to suit differing risk appetites. evalue FE is the asset allocation provider and Morningstar Investment Management Europe advises upon the fund selection for the Model Portfolios, drawing from the Morningstar Rated fund universe. The asset allocation is provided to Morningstar Investment Management Europe by Zurich. While the Model Portfolios are continuously monitored, a formal quarterly review takes place following which updated Portfolios are sent to Zurich. This quarterly report explains the performance of the Models and provides information about the market environment. Any recommendations for fund changes are included and explained in this document. About Morningstar Investment Management Europe Limited Morningstar Investment Management Europe Limited provides comprehensive investment advisory and portfolio management services for financial institutions and financial advisers. Morningstar Investment Management Europe Limited applies the independent qualitative investment research from Morningstar, Inc. analysts to provide asset allocation, investment selection and portfolio construction services to life, pension and fund-of-funds providers. Our investment research approach has been in place since 1994 and is forward-looking in nature, which leads to a strong emphasis on the qualitative aspects of research. Morningstar Investment Management Europe s aim is to recommend a relatively small number of funds that are of the highest quality and deliver risk and return outcomes that support various investment objectives.
4 Moderately Cautious Portfolio Long Term Q3 2016 Key Facts The Zurich Model Portfolios were established in September 2012. Asset allocation is provided by Zurich and sourced from evalue FE. Morningstar Investment Management populates the asset allocation with funds it considers appropriate and attractive as a result of its in-depth, qualitativelydriven research process. Investment Objective The objective is to deliver a risk and return profile in each of the asset classes that is commensurate with the underlying markets, whilst seeking outperformance over the long-term. evalue FE describes a potential investor in this Portfolio as follows. You are prepared to take moderate risks with your investment but wish to avoid the risks usually associated with investing all your money in company shares. You are looking for an investment that is expected to fluctuate in value less than company shares and so which is likely to involve a significant proportion of fixed interest assets. As a consequence, you accept that the investment return is likely to be lower. You appreciate that over some periods of time the value of your investment can fall and you may get back less than you invest. Asset Allocation (as at quarter end) Performance from 30/09/2012 to quarter end Japan 5.55% North America 24.05% UK Gilt 45.00% Europe ex UK 7.40% UK All Companies 13.00% UK Corporate Bond 5.00% Please note that the asset allocation above reflects the model positioning as it stood throughout the quarter. Please see below for any recommended changes to asset allocation post quarter end. MP stands for Model Portfolio and CB stands for Custom Benchmark. The custom benchmark used to measure performance is a composite that reflects evalue FE s asset allocation output. It is amended over time in line with evalue FE s output. At the end of the quarter, it was composed of the following: 45% FTSE Gilts All Stocks, 5% Markit iboxx GBP Non-Gilts, 13% FTSE All Share, 7.40% FTSE World Europe ex UK, 24.05% S&P 500 and 5.55% Topix. Please refer to the information in the footer below regarding performance. The performance chart shows the cumulative returns of the Model Portfolio and the Custom Benchmark, assuming a starting value of 100. All performance data shown above is sourced from Morningstar Direct. The performance of the overall Model Portfolio shown in the performance table above and the performances of the constituent parts of the Model Portfolio (shown in the table) are based upon data sourced from Morningstar Direct and represent a model only; they are not representative of an actual portfolio or fund. Past performance is no guide to the future. Ptl stands for percentile and relates to the ranking of the fund within its IMA sector. CB stands for Custom Benchmark. The Custom Benchmark is based upon a composite of the indices/sectors shown above to represent the evalue FE asset allocation output. Morningstar Analyst Ratings are subject to change at any time and without warning. Please see www.morningstar.co.uk for the latest Ratings.
Performance Portfolio Constituents to 30/09/2016 5 The table below shows the performance of the overall Portfolio, on a model basis only, together with the performance of the custom benchmark (CB). It also shows the performances of the underlying funds that currently feature in the Portfolio and relevant indices. The shaded rows show the performances of the constituent parts of the Portfolio. The Model Portfolio shown below reflects the asset allocation positioning and fund selections as they stood at the end of quarter. The performances shown are those of the retail share classes. Fund Weight (%) Morningstar Analyst Rating Q3 2016 (%) YTD (%) 2015 (%) 2014 (%) 2013 (%) 3 YRS (%) Since Inception Annualised (%) Zurich Moderately Cautious Long Term 100.00 6.08 8.42 4.87 7.78 9.74 7.89 8.36 CB Zurich Moderately Cautious Long Term 4.50 12.52 3.12 9.43 9.24 8.97 9.15 UK Gilt 45.00 3.69 14.50-0.20 Allianz Gilt Yield 12.00 Neutral 4.95 16.62-0.95 11.83-5.06 8.16 5.07 BlackRock UK Gilts All Stocks Tracker 10.00 Silver 3.93 14.75 0.13 13.42-4.63 8.63 5.42 Royal London UK Government Bond 13.00 Silver 3.51 13.63 0.09 11.38-4.55 7.67 4.76 Vanguard U.K. Government Bond Index 10.00 Gold 2.46 14.88-0.12 14.26-4.59 8.87 5.61 FTSE Gilts All Stocks 2.34 14.01 0.57 13.86-3.94 8.80 5.71 UK Corporate Bond 5.00 6.02 11.94 0.31 10.96 1.32 7.88 6.65 Fidelity MoneyBuilder Income 2.50 Gold 6.04 12.65-0.52 12.05-0.48 7.78 6.24 Kames Investment Grade Bond 2.50 Silver 6.00 11.24 1.20 10.82 2.38 8.03 7.12 Markit iboxx GBP NonGilts 5.56 13.58 0.49 12.20 0.87 8.58 7.15 UK All Companies 13.00 8.94 2.47 7.83 0.26 24.11 5.77 9.44 CF Woodford Equity Income 5.00 Silver 8.69 3.85 16.19 Investec UK Alpha 8.00 Bronze 8.48 6.31 6.52 6.69 37.77 10.24 15.54 FTSE All Share 7.78 12.38 0.98 1.18 20.81 6.59 9.55 Europe ex UK 7.40 6.52 9.44 8.78 3.25 26.57 9.63 13.80 Henderson European Selected Opportunities 7.40 Silver 6.52 9.44 8.78 3.40 27.84 9.78 14.20 FTSE Europe ex UK 8.97 14.20 5.35 0.16 25.18 8.32 13.01 North America 24.05 10.11 19.60 7.38 17.85 30.59 17.79 17.96 Artemis US Select 6.00 Bronze 9.48 14.23 11.74 BlackRock North American Equity Tracker 12.05 Gold 8.71 21.50 4.24 20.24 28.88 17.70 17.72 Dodge & Cox Worldwide US Stock 6.00 Gold 12.10 25.41 0.48 18.08 37.09 17.61 20.06 S&P 500 6.87 22.36 7.25 20.76 29.93 19.64 19.48 Japan 5.55 20.27 22.90 16.38 3.86 23.35 14.09 17.29 Man GLG Japan CoreAlpha 5.55 Gold 20.91 15.02 18.21 1.11 32.57 11.78 18.89 Topix 11.69 17.62 18.16 2.68 24.67 12.47 16.72 Data is sourced from Morningstar Direct. Please be aware that adjustments to previously reported data can occur. This can be due to factors such as changes to tax treatments, income distributions, pricing or updated information from third parties. Where the funds in the Model Portfolio have converted to clean share classes, the clean share class fund performance has been reflected in the table above and therefore there may be marginal performance discrepancies when comparing to fund performance reported previously. Fund Weight (%) Morningstar Analyst Rating Q3 2016 (%) YTD (%) 2015 (%) 2014 (%) 2013 (%) 3 YRS (%) Since Inception Annualised (%) M&G Feeder of Property Portfolio NR -4.16-8.96 8.74 14.15 6.34 5.22 4.76 Threadneedle UK Property Authorised Trust NR -3.00-6.15 9.49 15.85 5.01 5.73 IPD UK All Property Monthly -2.26 0.07 13.89 19.46 11.02 12.56 11.04 All performance data shown above is sourced from Morningstar Direct. The performance of the overall Model Portfolio shown in the performance table above and the performances of the constituent parts of the Model Portfolio (shown in the table) are based upon data sourced from Morningstar Direct and represent a model only; they are not representative of an actual portfolio or fund. Past performance is no guide to the future. Ptl stands for percentile and relates to the ranking of the fund within its IMA sector. CB stands for Custom Benchmark. The Custom Benchmark is based upon a composite of the indices/sectors shown above to represent the evalue FE asset allocation output. Morningstar Analyst Ratings are subject to change at any time and without warning. Please see www.morningstar.co.uk for the latest Ratings.
Commentary 6 Market Summary Fund Selection A peculiar backdrop often comes with unusual outcomes, which is exactly what the third quarter of 2016 entailed. To name a few of the noteworthy idiosyncrasies, the pound sterling fell to its lowest level in 31 years as U.S. equity markets simultaneously hit record highs. Despite the gyrations, global equities generally rallied strongly, rising 8.3% for the third quarter in sterling terms. Global fixed income also increased 3.8%, driven largely by continued strength in high yield and emerging market debt. Commodities fared worse, down -0.6% in sterling terms (- 3.4% in US dollar terms). Underlying the positive equity environment was a growing basis for optimism in emerging markets. Investor sentiment, earnings expectations and economic data all generally improved over the quarter; especially in the high-growth regions of Asia and Latin America. Emerging markets saw another remarkable quarterly gain of 8.0% in US dollar terms, which equated to an even better 11.1% for sterling investors. Elsewhere, Europe ex UK equities posted solid gains of 9.1%, meanwhile US equities lagged behind albeit with a respectable 6.9% quarterly return. Closer to home, despite significant uncertainty surrounding Brexit and the likely impact on corporate earnings, mid and small caps posted low double-digit returns that were well ahead of their large-cap counterparts. This marked a sign of resilience in the local economy, although small caps have still considerably underperformed large caps in year-to-date terms. Top contributors to relative performance at the fund level included: Allianz Gilt Yield Generated bulk of significant alpha in August through the fund's long duration and 10y and 50y index-linked positions. Man GLG Japan CoreAlpha The fund s strong bias towards financials at the expense of defensive sectors was a significant tailwind in a quarter where sentiment swung towards value. Dodge & Cox Worldwide US Stock Strong contributions from technology and financials names helped the fund to substantially outperform the S&P 500 index. These two sectors combined account for nearly half of the portfolio. Top detractor to relative performance at the fund level included: Henderson European Selected Opportunities The fund's large overweight to the healthcare sector along with an underweight to basic materials caused the fund to underperform over the quarter. Market Outlook Fixed income markets generally reflect the aforementioned setting, with government debt relatively flat over the quarter and credit exposures experiencing greater gains. U.K. gilts were among the worst performing, falling 2.4% in September to finish the quarter up 2.5%, whereas U.K. corporates increased 6.8% for the quarter. Underlying this, we saw increasing speculation surrounding central bank yield manipulation. The market was initially disappointed by the lack of action from the ECB in early September and surprised by the BoJ decision to cap government bond yields in an attempt to ignite inflation. All eyes remain on the U.S. with the case for an interest rate hike by year-end and the presidential race gaining momentum. Opposing this is the continued optimism in emerging markets, which is resulting in strong fund flows pushing prices higher and spreads commensurately lower. With the implications of Brexit still unclear, the property sector remains somewhat clouded. It still seems an irony to many that U.K. open-ended property funds are in the process of re-opening as investors are rediscovering the illiquidity mismatch risk of this investment structure. An encouraging sign is that many of the tradable U.K. property funds reduced their fair-value adjustments, which shows that liquidity is slowly improving in the sector. These are positive signs, although the outlook for the asset class remains obscured by Brexit uncertainty. Please note Morningstar Investment Management Europe is not mandated to tactically adjust the asset allocation of the Portfolio, so the below views are included for information purposes only. The underlying challenge of long-term fundamental investing remains plagued by the low interest rate dynamic. For the best part of a decade, we have had near-zero rates and there are growing concerns about the perceived inability of fixed income markets to deliver a stable positive return in forward-looking terms. This creates a continued predicament from a portfolio construction perspective, as one must balance conviction and diversification. Fixed income remains better suited as a short-term diversification asset than a source of long-term absolute returns. It may therefore be an ineffective exposure for traditional multi-asset investors if/when inflation or interest rates rise. The exact outcome of Brexit is still unclear; therefore, one cannot accurately predict the medium-term repercussions on the local economy (such as that from the loss of passporting rights into the EU) and more importantly on longer-term valuations. For this reason, a margin of safety is desirable and increased cash holdings could be warranted as effective downside ammunition. Portfolio Performance Based on the Morningstar Direct Portfolio Management module, on a model basis the Zurich Moderately Cautious Long Term Portfolio Fund selection was a positive across the Portfolio for the third quarter of 2016. Many equity funds experienced a tailwind from the timing of their NAV pricing, as the markets produced stellar returns on the last day of the previous quarter, which was not captured in the NAV of the underlying funds and slightly distorts the reported performance of both Q2 and Q3 16. The sharp fall in the pound sterling has acted as a tailwind for overseas denominated exposures held by sterling investors. However, the further it falls the less upside exists for overseas assets, particularly as there is a growing sense the currency will eventually reach a floor. Brexit-induced volatility did not last long for equity markets and the recent market rally appears attributable to hope rather than a genuine improvement in fundamentals. Opportunities continue to lie predominantly in offshore markets, such as Japanese equities and selected emerging-markets, although currency exposure is an important factor. Within the UK, small- and mid-cap stocks generally recovered more aggressively than their large cap counterparts, which provided a boost to the active funds held in the Portfolio. Another additive factor to fund selection was the strong performance from funds with value style biases. Since the Portfolio s inception in September 2012, it has slightly underperformed its custom benchmark. All performance data shown above is sourced from Morningstar Direct. The performance of the overall Model Portfolio shown in the performance table above and the performances of the constituent parts of the Model Portfolio (shown in the table) are based upon data sourced from Morningstar Direct and represent a model only; they are not representative of an actual portfolio or fund. Past performance is no guide to the future. Ptl stands for percentile and relates to the ranking of the fund within its IMA sector. CB stands for Custom Benchmark. The Custom Benchmark is based upon a composite of the indices/sectors shown above to represent the evalue FE asset allocation output. Morningstar Analyst Ratings are subject to change at any time and without warning. Please see www.morningstar.co.uk for the latest Ratings.
7 Important Information THIS DOCUMENT IS FOR PROFESSIONAL CLIENT USE ONLY AND SHOULD NOT BE RELIED UPON BY PRIVATE CUSTOMERS. Morningstar Investment Management Europe Limited is authorised and regulated by the Financial Conduct Authority to provide comprehensive investment advisory, and portfolio management services for financial institutions, plans sponsors, and financial advisors. 2016 Morningstar Inc. All rights reserved. The information, data, analyses and opinions ( Information ) contained herein: (1) includes the proprietary information of Morningstar; (2) may not be copied or redistributed except as specifically authorised; (3) is not warranted to be complete, accurate or timely; and (4) may be drawn from fund data published on various dates. Morningstar Investment Management Europe shall not be responsible for any trading decisions, damages, or other losses resulting from, or related to, this information, data, analyses, or opinions or their use. It is important to note that investments in securities involve risk and will not always be profitable. Morningstar Investment Management Europe does not guarantee that the results of its investment recommendations or the objectives of the portfolio will be achieved. Morningstar Investment Management Europe does not guarantee that negative returns can or will be avoided in any of its portfolios. The Portfolios described are intended as a guide to fund mixes that could be considered when populating the asset allocation for a particular risk profile. Past performance is no guarantee of future results. The Morningstar Analyst Rating should not be used as the sole basis in evaluating a mutual fund. Morningstar Analyst Ratings are based on Morningstar s current expectations about future events; therefore, in no way does Morningstar represent ratings as a guarantee nor should they be viewed by an investor as such. Morningstar Analyst Ratings involve unknown risks and uncertainties which may cause Morningstar s expectations not to occur or to differ significantly from what we expected. Morningstar Analyst Ratings are subject to change at any time and without warning. Please see www.morningstar.co.uk for the latest Ratings.