ASSET MANAGEMENT ROYAL LONDON GMAP BALANCED FUND Quarterly Report 31 March 2018 For professional investors only, not for retail investors
Contents CONTENTS ROYAL LONDON GMAP BALANCED FUND 3 2 PAGE
Royal London GM AP Balanced Fund ROYAL LONDON GMAP BALANCED FUND Fund data Fund Distribution yield 2.04% Underlying yield 1.47% Fund size 51.2m Gross half yearly income¹ 0.99p Unit Price² 110.60p Launch date 14.03.2016 Source: RLAM. Based on the M Inc share class. ¹Related to the period August January (inclusive) and paid at the end of March. ²As of 31 March 2018. Performance Fund (%) (M Acc) Fund (%) (M Inc) Benchmark (%) Relative (%) (as compared to M Inc) Q1 2018-2.23-2.19-2.05-0.14 Year-to-date -2.23-2.19-2.05-0.14 Rolling 12 months 1.44 1.49 1.85-0.36 Since Inception p.a. 14.03.2016 6.63 6.66 7.29-0.63 Past performance is not necessarily a reliable indicator of future performance. The value of investments and the income from them is not guaranteed and may go down as well as up and investors may not get back the amount originally invested. Source: RLAM, based on the M share classes. Performance for the Fund is calculated on a mid basis with income re-invested. The Fund returns in the table above are gross of standard management fees. ¹GMAP Balanced Composite Benchmark. The benchmark has been designed with the aim of maximising long run return in excess of inflation for a given level of risk. As of 6 April 2017, the UK Government announced that Funds paying interest distributions (Funds more than 60% in interest bearing assets, such as fixed income securities/bonds and cash) will be required to pay those distributions gross of tax. As a result, all performance figures provided within the quarterly report will conform to gross of tax, effective from this date onwards. RL GMAP range Our GMAPs fund range is designed to span the risk return spectrum, with each fund aiming to maximise the long-term real return for its given level of risk through a broadly diversified portfolio of investments. 3 PAGE
Fund characteristics The Fund is designed for investors with a mid-level appetite for risk and corresponding mid-level capital return requirement over an investment cycle of approximately 6 to 7 years. It is well diversified, with investment across a broad range of difference asset classes, sectors and regions. Typically, the Fund has equal weighting to fixed income assets and cash versus equities, property and commodities, providing a balance between risk and defensive assets. The Fund combines active fixed income and property funds with low cost equity trackers and commodities. Fund commentary What we thought What we did What happened Effect on portfolio Against a backdrop of positive global growth, we expected equities to outperform. Japan is a beneficiary of US dollar strength and positive, synchronised global growth. Emerging markets tend to do well when global growth is strong but are vulnerable to any slowdown in China or a stronger US dollar. With the longer term fundamental picture remaining positive for global growth and inflation still subdued, the backdrop for corporate returns continues to be positive. We expected commodities to be supported by a tightening balance between supply and demand, resulting in higher prices, but potential for weakness in Chinese demand was a concern. We believe that government bond markets look expensive against a backdrop of tightening central bank policy. We increased our overweight position in equities during market dips in the quarter, given our positive global growth and inflation apparently peaking, and interest rates rising only gradually. Although still positive on Japan, we reduced the position after strong performance early in the quarter and given USD weakness. We increased our overweight position in emerging market equities. We had an overweight position in high yield bonds. We moved from a neutral position in commodities to being overweight. We retained an underweight position in UK bonds over the quarter. Global equities fell over the quarter as concerns over inflation, trade and greater regulation of the tech sector hit sentiment. The return from global equities over the first quarter of 2018 was -4.4% for sterling-based investors. The Japanese stock market return to UK investors was -2.6% over the quarter, compared with the local currency return of -4.7%. Emerging markets benefitted from ongoing positive global growth and continued predictable, gradual US interest rate rises. High yield debt underperformed investment grade corporate bonds, in part because of outflows due to risk aversion on inflation concerns. Commodities advanced for a third straight quarter, helped by a weaker dollar. Brent crude oil traded near threeyear highs as producers agreed to extend output cuts through 2018. UK yields rose over the quarter as a whole, as the market priced in the likelihood of another BoE rate rise in May. Although equity markets were weak over the quarter, this was more than offset by the positive impact of underlying market selection, and our equity positions made a marginally positive contribution to performance. The Fund s overweight exposure to Japanese equities in local currency terms made a negative contribution to performance. The overweight position in emerging markets was positive for Fund performance in local currency terms over the quarter. The overweight position in high yield bonds had a positive effect on performance due mainly to fund selection. The overweight position in commodities was marginally negative for Fund performance over the quarter, not helped by the weaker US dollar. Our bond positions added value over the period, driven by the positive impact of underlying fund performance. 4 PAGE
Fund commentary continued What we thought What we did What happened Effect on portfolio We expect the Fed and the BoE to raise rates in 2018, and we expect sterling to remain volatile. Investment outlook We reduced our underweights in the Swiss franc and the yen. We kept our modest underweights in the Swedish krona and the commodity-sensitive Australian dollar. We moved to a small overweight position in sterling from neutral. Sterling strengthened ahead of the May rate increases, after weakening in the prior quarter. The US dollar weakened for a fifth consecutive quarter. Currency was a negative contributor to portfolio returns. Our Investment Clock is in its early overheat phase, with strong global growth and more risk of inflation; commodities historically have tended to outperform in that environment. Because inflation appears to be peaking and interest rates are only rising gradually, led by the US, the environment is still positive for equities but more challenging for bonds. We maintain an overweight position in stocks and global high yield bonds and an underweight position in UK bonds. We have reduced our overweight position in Japanese equities and increased our overweight in emerging market equities; we have brought our position in European equities from neutral to underweight, we retain an underweight position in Pacific excluding Japan, and have taken US equities from underweight to overweight. Given longer term positive economic fundamentals and with interest rates not expected to rise sharply in the next year at least, we expect the environment to remain constructive for equities but volatility to be more of a feature in markets than it was last year. 5 PAGE
Asset split Source: RLAM. We take a holistic approach to fixed income management and fund weights relative to their respective benchmarks may not reflect tactical exposures. Figures calculated on a look through basis, reflecting underlying assets, not Fund component weights. Geographical breakdown Source: RLAM. Other region includes global fixed income exposures, which are sterling hedged and commodity exposures. Figures calculated on a look through basis, reflecting underlying assets, not Fund component weights. Ten largest bond holdings Asset type Weighting (%) Royal London UK All Share Tracker Fund UK Equities 13.8 Royal London Property Fund UK Property 13.2 Royal London Investment Grade Short Dated Credit Fund UK Fixed Income 9.0 Royal London Short Duration Gilts Fund UK Fixed Income 8.3 Royal London Sterling Credit Fund UK Fixed Income 7.3 Commodities ETF Commodities 6.9 Royal London Short Duration Global Index Linked Fund UK Fixed Income 6.5 Royal London US Index Tracker Fund Overseas Equities 6.4 Royal London UK Government Bond Fund UK Fixed Income 3.7 Royal London Global High Yield Bond Fund Global High Yield Bonds 3.0 Total 78.1 Source: RLAM. Information as at 31 March 2018 and correct at that date, unless otherwise stated. Total weight reflects rounding. 6 PAGE
IMPORTANT INFORMATION For professional investors and advisors only. This document may not be distributed to any unauthorised persons and is not suitable for retail clients. The views expressed are the author s own and do not constitute investment advice. This document is a financial promotion. It does not provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Past performance is not a guide to future performance. The value of investments and the income from them is not guaranteed and may go down as well as up and investors may not get back the amount originally invested. Sub-investment grade bonds have characteristics which may result in a higher probability of default than investment grade bonds and therefore a higher risk. For funds that use derivatives, their use may be beneficial, however, they also involve specific risks. Derivatives may alter the economic exposure of a fund over time, causing it to deviate from the performance of the broader market. All confidential information relating to any Royal London Group company must be treated by you in the strictest confidence. It may only be used for the purposes of assessing the proposal to engage Royal London Asset Management Limited (RLAM). Confidential information should not be disclosed to any third party and should only be disclosed to those of your employees and professional advisers who are required to see such information for the purpose set out above. You should ensure that these persons are made aware of the confidential nature of such information and treat it accordingly. You agree to return and/ or destroy all confidential information on receipt of our written request to do so. Financial promotion issued by Royal London Asset Management April 2018. Information correct at that date unless otherwise stated. Royal London Asset Management Limited, registered in England and Wales number 2244297; Royal London Unit Trust Managers Limited, registered in England and Wales number 2372439. RLUM Limited, registered in England and Wales number 2369965. All of these companies are authorised and regulated by the Financial Conduct Authority. All of these companies are subsidiaries of The Royal London Mutual Insurance Society Limited, registered in England and Wales number 99064. Registered Office: 55 Gracechurch Street, London, EC3V 0RL. The marketing brand also includes Royal London Asset Management Bond Funds Plc, an umbrella company with segregated liability between sub-funds, authorised and regulated by the Central Bank of Ireland, registered in Ireland number 364259. Registered office: 70 Sir John Rogerson s Quay, Dublin 2, Ireland. FQR RLAM EM 0387 7 PAGE