THE GUARANTEED RETURN FUND ANNUAL REPORT 2018 The Deposit Administration Fund generali-worldwide.com
INDEX 1 Global Economic back-drop & Macro Situation... 3 2 UK Financial Markets... 4 3 The GBP Deposit Administration Fund... 5 3.1. Performance comparison chart... 5 3.2. Asset distribution by sector... 6 3.3. Asset distribution by credit rating... 6 THE GUARANTEED RETURN FUND ANNUAL REPORT 2017 Page 2 of 7
1 Global Economic back-drop & Macro Situation With the UK s key event of 2016 being the referendum that decided that it would leave the EU, 2017 was anticipated to be the year when the UK would outline how it would leave the EU. On the 29 th March, UK Prime Minister Teresa May sent a six-page letter to the President of the European Council. In this letter to Donald Tusk, she formally invoked article 50 of the Lisbon Treaty, starting the twoyear countdown. The EU s stance was firm and clear from the beginning. Ahead of any trade talks, the UK would need to agree to settle its obligations, frequently referred to Britain s divorce bill. In a speech in September, Teresa May outlined that the UK will honour commitments we have made during the period of our membership. Speculation remains over what the final bill will be but it was deemed that sufficient progress had been made to proceed with the next stage of the negotiations. Whilst UK EU politics frequently dominated the news, closer to home Teresa May called a summer General Election, as she sought a clear mandate for Brexit. Despite heading into the campaign in a comfortable position, no doubt why they decided to go to the polls in the first instance, the Tory s campaign did not go as planned. With an ultimate narrow victory, they lost their majority and with limited choices, they formed a surprise coalition with the Northern Irish Democratic Unionist Party. Having survived the General election, May remains under threat from the leader of the main opposition party, Jeremy Corbin and within her own party as speculation mounts of a leadership challenge. On the economic front, the autumn budget was an opportunity for Chancellor, Philip Hammond, to announce economic forecasts that reaffirmed the difficulties that uncertainty brings. His 2017 growth forecast was 1.5% followed by 1.4% in 2018 and 1.3% in both 2019 and 2020. Of note, was a reduction in the pace of growth in house prices and we saw prices in London actually posting a decline during the year. It was a similar situation in consumer data, with Retail Sales trending lower, again signaling a deteriorating situation. Likely connected to some of the softer data was wage growth, which fell to 1.9% in May before recovering to a still sub-inflation 2.5% in November. The data was not all negative and UK Manufacturing, supported by a weaker pound, peaked at an annual growth rate of 5.1% in October. Another economic highlight was unemployment data, which showed that the UK jobless rate was only 4.3%, the lowest level since 1975. On the inflation front, we saw steady increases from January s 1.8%, to 2.6% by June, peaking at 3.1% in November. In total, we saw four monthly prints at or above 3%. With inflation significantly above the 2% target, and outside the 1% to 3% permitted range, the Governor of the Bank of England had to write to the Chancellor explaining how the Bank would bring inflation back to target. Whilst the last time the 3% threshold was exceeded was back in 2012, the Governor previously wrote a letter in December 2016, when the Governor commented on inflation of only 0.9%. THE GUARANTEED RETURN FUND ANNUAL REPORT 2017 Page 3 of 7
At the Bank of England, the Governor, Mark Carney announced at the end of September that he considered it time for the Monetary Policy Committee to ease its foot off the accelerator and at the same time he cautioned over reckless household borrowing. His message was clear that in a limited and gradual way monetary stimulus would be reduced. A little over a month later, his prediction came true, we saw rates raised by ¼% back to ½%, reversing their post Brexit emergency Interest Rate cut. 2 UK Financial Markets The UK bond market started 2017 with 5-year Gilt yields at 0.49% and 10-year Gilt yields at 1.24%. After a volatile year, they ended the year with higher yields at the shorter end of 0.72% and lower yields of 1.19% respectively. The limited changes from the beginning to the end the year, resulted in the 3-7 year UK Government bonds returning only 0.24% compared with 4.47% a year earlier. Looking at the UK Government bond market in more detail, Gilts as they are known, due to the edging used to on the old certificates, remained well supported for much of the year. At the shorter end of the yield curve, almost six months after the Bank of England s 2016 rate cut to 0.25%, we saw the yield on the UK s 1-year bond fall to only 0.02%. Around the same time, we saw lows on the 5- year Gilt of 0.33%. For longer dated instruments, notably the much followed 10-year Gilt, yields traded below the 1% level on a number of occasions, reaching a summer low of only 0.93%. Whilst shorter dated yields increased during the year, eroding capital values, positive returns were generated by longer dated bonds maturing in eight years or more. Notably at the longer end of the UK s bond market, Gilts maturing in 10 years or more, were well supported throughout 2017. Where fixed income allocations were actively managed, with portfolio risk reduced after the summer, returns were superior to passive strategies. Continuing last year s equity market performance, the MSCI UK posted total returns of 11.7%, helped by a strong rally throughout December. Across the UK equity market, medium sized companies outperformed their larger peers. Regarding foreign exchange, it was mixed fortunes for the British pound. Amid a weaker Dollar, Sterling gained a significant 9.5% to 1.35 against the American currency, however relative to the Euro, holders of Sterling experienced losses of 4%. THE GUARANTEED RETURN FUND ANNUAL REPORT 2017 Page 4 of 7
3 The GBP Deposit Administration Fund As detailed in the following charts the declared rate on the Sterling Deposit Administration fund was 1.0% for 2017. This reflects another good performance by the fund, with the declared rate being higher than both the yield on shorter duration assets and many bond market indices. For policyholders renewing contracts with us, the Fund s guaranteed rate continues to head lower. This is a function of the continued low yield environment coupled with prudence, however, we still aim to deliver returns above the current guaranteed rate over the longer-term. In terms of portfolio construction, the bonds backing the fund remain extremely high quality with 51% of the portfolio invested in Government bonds, of which 20% are AAA rated, being higher rated than the UK Government. The modified duration of the assets backing the Deposit Administration Fund ended the year at 3.5 years and increase of 0.4 from a year earlier. We continue to actively manage the assets within the fund to provide the best outcome possible in 2018. 3.1 PERFORMANCE COMPARISON CHART 16 14 5 year Gilt Yield Cash Yield 12 Deposit Administration Fund Yield 10 8 6 4 2 0 THE GUARANTEED RETURN FUND ANNUAL REPORT 2017 Page 5 of 7
3.2 ASSET DISTRIBUTION BY SECTOR Banks Sovereign Multi-National Oil&Gas Auto Manufacturers Food Cosmetics/Personal Care Municipal Transportation Cash 3.3 ASSET DISTRIBUTION BY CREDIT RATING AAA AA+ AA AA- A+ A THE GUARANTEED RETURN FUND ANNUAL REPORT 2017 Page 6 of 7
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