International Fund Solutions Investment Review and Outlook
International Fund Solutions Market update Q1 2018 2017 has been a year where headlines have been dominated by politics and populism. From Trump s inauguration in January, the start of the impeachment process in May, and his last minute passing of corporate tax cuts for Christmas, the 45th President of the United States has provided a busy year for journalists, politicians and commentators alike. The UK has not been immune despite many hoping for a quieter year after the Brexit referendum in 2016. A June snap General Election resulted in a minority Conservative government supported by the DUP in a confidence and supply deal, Sterling being buffeted by sentiment around the ongoing European negotiations and the Bank of England implementing the first base rate rise in a decade. Europe also suffered its own political overhangs, with general elections in France and Germany, but for the most part the status quo won out against the greater extremes of populism. However, Merkel s CDU were not unscarred by the experience and have, so far, been unable to draw together another grand coalition to govern the country. Finally, and not to be outdone, Japan had its own snap general election in October amidst the North Korean missile threat, which returned Abe to power with the mandate to continue with his reforms. Almost as noticeable as the headlines was the lack of impact any of this had on the global economy where broadly growth continued, earnings came through, consumer and manufacturing confidence increased, unemployment fell and inflation remained remarkably subdued. Over the course of the year the Federal Reserve raised rates three times (by 0.25% each time) and started to unwind its QE programme. The Bank of England raised rates for the first time in over a decade, albeit simply an unwinding of the post Brexit referendum cut, and even the ECB started to talk about the winding down of their asset purchase programme. Japan was alone in continuing on their current course with QE and a targeted 10 year yield of 0%. The world appears to be on a more solid footing at last, but the flipside is that Central Banks moving towards normalisation increases the scope for policy error. During the quarter the yield on 10 year US Treasuries moved from 2.34% to 2.41%, to end the year pretty much where it started. However, the yield on 2 year Treasuries has moved from roughly 1.2% to 1.9% over the year, as a result of the Fed rate tightening cycle, flattening the yield curve in the process. Traditionally a flat yield curve has been a precursor of imminent recession, although so far this flattening appears to be the result of technical factors rather than something more malignant. Although the UK yield curve has also flattened this appears to be driven by different factors, with the 0.25% base rate move propping up the short end and EU related uncertainty on productivity and future inflation impacting the long end. Despite starting the year with commentators predicting an imminent pull back in expensive equity markets, they climbed throughout the year as earnings came through to support valuations and the world continued on a path of synchronised growth. Emerging markets led the way, shrugging off the worries of potential US protectionism, to end the year up 37%, the US was up 21% during the year, European markets gained 10% and even the UK was up 13% despite the currency fluctuations and ongoing Brexit negotiations. Generally growth outperformed value, although there were signs of a possible style rotation towards year end, and this is something we will be watching carefully into 2018. Overall we have maintained our maximum overweight equity position across our multi asset strategies. Looking ahead, there is no doubt that inflationary pressures are starting build, with the market currently under-pricing the potential for further interest rate rises from central banks. This coupled with potential geopolitical shocks as events unfold in the Brexit negotiations, European elections and a possibility of a Trump impeachment, will mean that investors will need to stay focused on market developments. While we do not see an imminent downturn in equity markets, we are mindful that valuations in many areas appear stretched, however provided earnings growth continues to be delivered, this should lead to positive returns for the year. Quarterly Investment Review / 01
International Fund Solutions Discretionary Portfolio Strategies - Asset Weightings Global Growth 100% Core Funds 80% Core Funds 10% 10% Tactical Asset Allocation ETFs USD GBP Euro 100% 20 15 10 4% 4% 4% 10% 8% 8% 60% 5 0 6% 8% 8% Equity: Domestic Equity: Developed Equity: Emerging Moderate/ Global Balanced 80% Core Funds 20 15 10 Tactical Asset Allocation ETFs USD GBP Euro 4% 4% 4% 10% 8% 8% Global Conservative 80% Core Funds 25% 40% 20 15 10 Tactical Asset Allocation ETFs USD GBP Euro 4% 4% 4% 10% 8% 8% 40% 5 0 6% 8% 8% Equity: Domestic Equity: Developed Equity: Emerging Moderate 15% 5 0 6% 8% 8% Equity: Domestic Equity: Developed Equity: Emerging /Moderate Global Global Fixed Income 90% Core Funds Tactical Asset Allocation 10% ETFs 100% Core Funds /Moderate 35% 5% 10 8 USD GBP Euro 2% 2% 2% 10% 6 4 5% 4% 4% 100% 45% 5% Cash 2 0 3% 4% 4% Equity: Domestic Equity: Developed Equity: Emerging As at 31 December 2017 / 02 Quarterly Investment Review
International Fund Solutions Key Investment Themes Equity Mid & Small Cap Companies: Exhibit structurally higher earnings growth rates than large and mega cap companies. We believe that active fund managers in these sectors have greater potential to outperform market indices given the limited analyst coverage, broader universe of stocks and greater dispersion of winners and losers. Technological Change: The technology sector continues to take share of the global economy and this trend is only going to accelerate. Our managers can access investment themes with genuine exponential growth opportunities as we progress towards the digital age. Global Healthcare: Global healthcare demand is set to grow substantially in the decades ahead due to ageing demographics in developed market countries. Using a specialist manager with industry expertise we are able to access exciting new technologies in medical science along with leading healthcare services and pharmaceutical businesses. Emerging Market Growth: Our focus is on the domestic wealth cycle of emerging countries where demographics and organic growth make for a powerful long term investment thesis. Fixed income Sovereign and Investment Grade Debt: The international fixed income models (, US dollar, Euro) are primarily exposed to these two sectors, with exposures in the region of 70%. There is up to 25% split between both the Yield Corporate Credit and Emerging Debt sectors, with the remaining 5% held in Cash. Exchange Tradeable Funds (ETFs): All three models have a 40% exposure to Government and Investment Grade Corporate ETFs, with maturity profiles ranging between one to seven years. Duration: The aggregated underlying duration in the international fixed income models is currently in the region of 2.5 years, but with a core focus on sovereign and supranational, unlike the real return strategy, which is primarily corporate. Real return Fixed Income with an Absolute Return approach: The allocation to this core component includes a blend of unconstrained bond fund strategies and exchange tradable funds (ETFs), focusing on government, investment grade, non-investment grade corporate sectors, together with exposures to emerging debt, primarily local currency and convertibles. Emerging Local Currency Debt and Yield: Both share classes currently have a 15% exposure to both of these sector themes, which have performed particularly well in the US dollar share class. Performance summary The vast majority of our US dollar, Sterling and Euro multi-asset model portfolios delivered solid nominal returns as well as outperforming the composite benchmarks, with only the Euro Conservative and models falling shy of the benchmark return in 2017. Tailwinds from synchronised global growth, low unemployment, loose monetary policy, and solid corporate earnings growth have all led to global equity markets delivering double digit returns in US dollars, with many bourses trading at record highs. We have remained overweight equities in all multi-asset portfolios, moving to a maximum overweight position in July, which has been maintained into year end, with a bias to emerging markets. Our multimanager Fund has outperformed, with strong performance from all regions, bar the US where the underlying managers have struggled to keep pace with the benchmark as the market has been predominantly driven by a select number of stocks in the technology sector. In government bond markets, 10 year yields have remained steady, although in the US, two year yields have risen sharply as the FOMC embark on the normalisation of monetary policy, with interest rates rising on three occasions in the year. Within fixed income, we have remained defensively positioned to interest rate risk, via investment into short dated government bonds, however also focusing on corporate bonds, where spreads contracted over the year, leading to outperformance of the benchmark. Quarterly Investment Review / 03
International Fund Solutions Standard Bank International Funds Limited Multi Manager Fund The Fund continued to push higher with both currency classes posting solid gains for the quarter, albeit fractionally in arrears of the benchmark. The US dollar C share class rose 5.52%, while the Sterling C share class gained 4.38%. This rounded off a very strong year for equity markets, with many indices posting record highs. Returns from most of the underlying managers were in line, or fractionally in arrears of benchmark for the quarter. The exceptions were the Japanese regional managers, who all outperformed strongly, and the Chinese Consumer fund, which returned just short of 10 percent in US dollars. This Fund was also the standout performer of the year, with a gain of 54 percent in US dollars. There was also strong outperformance from our UK, Asian, Japanese and thematic managers. This was partially offset by our US managers who had another difficult year, in aggregate, with most underperforming the S&P 500 index. We are encouraged by the marked pick-up in corporate earnings growth and the backdrop remains favourable for further improvements with increasingly synchronised global economic expansion along with modest inflation and accommodative monetary policy. The big concern is valuation, with most of this good news already fully reflected in equity prices. At the aggregate index level, there is little margin for error, however at the stock level there is a large dispersion of relative valuation and we believe that this will ultimately present an opportunity for stock picking strategies to outperform. Multi Manager Global Balanced Fund The Global Balanced Fund posted a positive return for the quarter, with the US dollar C share class gaining 4.02% and the Sterling C class 3.49%. In relative terms it was pleasing to note that both classes were also comfortably ahead of benchmark. The tactical asset allocation overlay was the main driver of the outperformance as the Fund maintained an overweight exposure to equities throughout the period, with a bias towards emerging market equities. Our Tactical Asset Overlay process has been successful in identifying the improving fundamentals for equity investors and although equity market valuations are close to our stop-out limits, we maintain an overweight exposure to equities as we enter 2018. The underlying equity funds all delivered solid absolute returns, but in aggregate were fractionally in arrears of the benchmark return for the quarter. The thematic allocations to Japan, Chinese Consumption and Energy added value while the Healthcare and small and mid-cap allocations detracted. The fixed income managers delivered flat returns broadly in line with benchmark. Multi Manager Absolute Return Fund Both currency classes of the Absolute Return Fund suffered a fractional drawdown for the quarter, with the US dollar C share class dropping -0.07% and the Sterling C class -0.33%. However, for the full year both classes delivered positive absolute gains comfortably in excess of cash returns. The main detractors from performance in the quarter were the multi asset target return funds and the currency overlay. All of our target return funds struggled slightly in a momentum driven market, this was primarily due to losses from the relative value and equity hedging strategies these managers employ. Our overweight exposure to the US dollar also slightly detracted from performance. The Absolute Return fixed income strategies fared somewhat better, with most in positive territory for the period. The strongest return came from the Jupiter Global Convertible Bond Fund, which rose almost 2 percent in US dollars. We continue to focus on defensive strategies given expensive valuations across most asset classes at the current time. / 04 Quarterly Investment Review 2018-002
Contact Information Philip Smith - Head International Investment and Fiduciary tel: +44 (0) 203 167 5075 philip.smith@standardsbg.com Helen Holmes - Head Business Management tel: + 44 (0)1534 881048 helen.holmes@standardbank.com David Jardine - Head International Fund Solutions tel:+44 (0)1534 881316 david.jardine@standardbank.com Simon Bradbury - Senior Portfolio Manager tel: +44 (0)1534 881346 simon.bradbury@standardbank.com Tony Wood - Senior Fund Manager tel: +44 (0)1534 881314 tony.wood@standardbank.com Carl Stirrup - Senior Fund Analyst tel: +44 (0)1534 881319 carl.stirrup@standardbank.com Standard Bank International Investments Limited Standard Bank House 47-49 La Motte Street St Helier Jersey JE2 4SZ www.standardbank.com/international Important Information This does not constitute an invitation to buy or the solicitation of an offer to sell securities or to accept deposits or to provide any other products or services in any jurisdiction, to any person to whom it is unlawful to make such an offer or solicitation, nor should it be construed to constitute any investment advice. Legislation or regulations in jurisdictions relevant to you may prohibit you from entering into certain transactions with us and we strongly recommend that you contact your financial or legal adviser in this regard. It is your responsibility to inform yourself about and to comply with such restrictions. The value of investments may fall as well as rise and investors may get back less cash than originally invested. Prices, values or income may fall against the investors interests and the performance figures quoted refer to the past, and past performance is not a reliable indicator of future results. Investments may be quoted in foreign currencies and investors should be aware that the changes in rates of exchange may have adverse effects on the value, price or income of the investments. If your base currency is not the same as that of your investments, your return may increase or decrease as a result of currency fluctuations. Standard Bank International Investments Limited is regulated by the Jersey Financial Services Commission. Registered in Jersey No. 110601 Standard Bank International Investments Limited is a wholly owned subsidiary of Standard Bank Offshore Group Limited a company incorporated in Jersey. Standard Bank Offshore Group Limited is a wholly owned subsidiary of Standard Bank Group Limited which has its registered office at 9th Floor, Standard Bank Centre, 5 Simmonds Street, Johannesburg 2001, Republic of South Africa. Telephone calls may be recorded. These views are the opinion of the Investment managers only. They do not reflect the views of Standard Bank Group and should not be considered as investment advice. Neither should this be considered to be a Research Report under SEC rules or Investment Research as defined by FCA rules as it has not been prepared in accordance with legal requirements to promote the independence of investment research and it is not subject to any prohibition on dealing ahead of the dissemination of investment research. Copyright - 2012 Morningstar, Inc. All Rights Reserved. Morningstar Rating as of 31 May 2014, in the Global Large-Cap Blend Equity Morningstar Category Standard Bank International Investments Limited is regulated by the Jersey Financial Services Commission. Registered in Jersey No 110601. Standard Bank International Investments Limited is a wholly owned subsidiary of Standard Bank Offshore Group Limited a company incorporated in Jersey, registered No 43694. RMC.2017.40B