INVESTMENT UPDATE 8th April 2015 PERFORMANCE UPDATE ASSET CLASS REVIEW SPOTLIGHT ON INVESCO PERPETUAL WHAT RISK ARE YOU TAKING WITH YOUR MONEY? FINAL COMMENT PERFORMANCE UPDATE The portfolios continued their excellent start to 2015, rising by between 0.80% and 1.62% in March. This is in spite of the FTSE100 falling 1.95%. The 1 year performances of the portfolios are strong up by between 7.50% and 15.71%, with the Dynamic Equity and Adventurous growing the most. By comparison the FTSE100 has grown by 6.34%. The FTSE100 broke above 7000 in March but then fell back to below 6,850. We had expected it to surge higher after breaking its 7000 ceiling and are somewhat disappointed it didn t. However, we still expect the surge higher to occur shortly. The trend-following portfolios have some of their largest weightings in equities, taking advantage of the strong upward trend in stock markets. Over the month the portfolios performed strongly against the FTSE100, as follows:
Adventurous Portfolio: Brief Commentary 2015 has started off impressively with the portfolio up 6.08% so far this year, including 1.47% in March. The most dramatic news this month was the FTSE100 breaking above the 7000 level, but instead of surging higher, we were left disappointed when it fell back to 6850. The majority of stock markets remain on upward trends and therefore the Adventurous portfolio has a higher than normal allocation to equities at just under 90%. This will only reduce when trends begin to turn down. The 3 best performing funds held within the portfolio were the Fidelity Index Europe, the JP Morgan US Equity Income and the Invesco Perpetual Hong Kong & China funds, which rose 3.68%, 3.32% and 3.28% respectively. Some of these gains were due to sterling depreciating, particularly against the US Dollar. The worst performing funds were all UK equity funds, with all four of them producing negative returns. The underperformance of the UK equity funds could be partly down to the uncertainty surrounding the forthcoming general election, or just simply the fact that the UK stock market has a higher proportion of oil and commodity companies which have been hit by the recent plunge in commodity prices. Whilst there are many reasons to be cautious - including the UK general election, increased problems in the Middle East, and the continued talk of a Greek exit from the Euro - we remain positive that stock markets will continue to move higher. We are happy with the composition of the portfolio but as ever we are looking to see if we need to change any of the funds held or asset allocation. Performance Data Adventurous Portfolio
Balanced Portfolio: Brief Commentary 2015 has started off impressively with the portfolio up 5.15% this year. The portfolio benefitted from exposure to the Fidelity Index Europe, JP Morgan US Equity Income and Invesco Perpetual Hong Kong & China funds. They all rose over 3% during the month and are on strong upward trends. Similarly to the Adventurous portfolio, the exposure to the UK stock market proved to be a headwind for the portfolio as 25% is invested in UK equities. The break above 7000 for the FTSE 100 was extremely promising, but the subsequent fall back to 6850, reduced returns over the month. The majority of stock markets remain on upward trends and therefore the Balanced portfolio has a higher than normal allocation to equities at just over 70%. This will only reduce when trends begin to turn down. The underperformance of the UK equity funds could be partly down to the uncertainty surrounding the forthcoming general election or just simply the fact that the UK stock market has a higher proportion of oil and commodity companies which have been hit by the recent plunge in commodity prices. Whilst 25% of the portfolio is exposed to UK equities, there is still 45% invested in overseas equities. This exposure to overseas equities is relatively high compared to the average investor. The property funds also continued to produce positive returns over the month, but slightly less than previous months. We see the annual return from property funds reducing from over 10% per annum to around 7%, which is still good. All 3 of the Absolute Return funds also produced a positive return with the Way Absolute Return fund leading the pack with a +1.08% monthly return. These funds provide some stability to the portfolio. Whilst there are many reasons to be cautious - including the UK general election, increased problems in the Middle East and the continued talk of a Greek exit - we remain positive that stock markets will continue to move higher. We are happy with the composition of the portfolio but as ever are looking to see if we need to change any of the funds held or asset allocation. Performance Data Balanced Portfolio
Cautious Portfolio: Brief Commentary 2015 has started off impressively with the portfolio up 4.19% this year. The portfolio benefitted from exposure to the JP Morgan US Equity Income which rose by 3.32% in March. The Global Trend fund was the next best performing fund at +1.96%. This fund benefitted from the strong upward trends in global equities. Similarly to the Adventurous and Balanced portfolios, the exposure to the UK stock market proved to be a headwind for the Cautious portfolio as 22% is invested in UK equities. 15% of the Cautious portfolio is invested in Property and these funds continued to produce positive returns over the month, but slightly less than previous months. We see the annual return from property funds reducing from over 10% per annum to around 7%, which is still good. All the Absolute Return funds held also produced a positive return, with the Way Absolute Return fund leading the pack with a 1.08% monthly return. Perhaps more pleasing was the Schroder European Absolute Target fund (formerly the Schroder UK Absolute Target Return fund) which had another good month growing by 0.51%. Previously this fund had been significantly underperforming. We are still considering whether to replace it. Whilst there are many reasons to be cautious - including the UK general election, increased problems in the Middle East and the continued talk of a Greek exit - we remain positive that stock markets will continue to move higher. We are happy with the composition of the Cautious portfolio but as ever are looking to see if we need to change any of the funds held or asset allocation. Performance Data Cautious Portfolio
Dynamic Equity Portfolio: Brief Commentary The Dynamic Portfolio once again produced a strong monthly return and is up 6.93% this year and an incredible 15.71% over the last 12 months. The portfolio is benefiting from both good fund selection and asset allocation. 6 out of the 15 funds that make up the portfolio are top quartile against their peers over the last year. In addition, the Woodford Equity Income fund is close to being the best performing fund since it launched. (It is not yet a year old). The asset allocation is also proving to be enhancing the returns of the portfolio, in particular the exposure to biotech via the AXA Framlington Biotech fund which grew by 6.34% last month. It is now up 40% over the last 6 months. This fund is the best performing fund over the last year in the UK and it has helped the Dynamic portfolio to outperform. The 3rd best performing fund in the UK is the Jupiter India fund which the Dynamic portfolio also allocates 5% into. These 2 funds are displaying incredibly strong momentum. Over the long term academic research has shown that if you invest in funds/sectors that have the strongest momentum, you will outperform most other investment strategies. However, the one downside to momentum is that if we see a correction in stock markets it is sometimes those funds/sectors that have performed the best that get sold off the strongest. Therefore these 2 funds could fall significantly if we experience a stock market correction. This is why the Dynamic Equity portfolio is our highest risk portfolio and clients must be able to withstand losses of 40% or more if they invest into it. In order to balance out the risk to investing in a momentum strategy, we also allocate to defensive equity funds that hold larger global companies. The intention is that these types of companies should fall less than others when we see the next stock market correction as they are less dependent on the Global economy growing. We are pleased with the performance of the Dynamic Equity portfolio and will continue to analyse if we need to make changes. Performance Data Dynamic Equity Portfolio
Foundation Portfolio: Brief Commentary The portfolio rose 0.81% in March and is now up 3.56% this year. The performance since launch has exceeded our expectations as it has outperformed the FTSE100 but with significantly lower volatility. This month the portfolio has benefitted from exposure to the JP Morgan US Equity Income which rose by 3.32%. However, the exposure to the UK stock market proved to be a headwind for the portfolio as the Fidelity Index UK and Invesco Perpetual High Income funds both fell over the month. 10% of the Foundation portfolio is invested in Property and these funds continued to produce positive returns over the month, but slightly less than previous months. We see the annual return from property funds reducing from over 10% per annum to around 7%, which is still good. All the Absolute Return funds also produced a positive return in March with the Way Absolute Return fund leading the pack with a 1.08% return. Perhaps more pleasing was the Schroder European Absolute Target fund (formerly the Schroder UK Absolute Target Return fund) which had another good month growing by 0.51%. Previously this fund had been significantly underperforming. We are still considering whether to replace it. Perhaps most surprising was the rebound in the M&G Index Linked fund which made up all of last month s losses by growing 4.3%. As we discuss later in the update, this type of volatility is highly unusual and currently bonds are more volatile than equities. Overall, we remain positive that the Foundation portfolio will continue to make good positive gains but at some stage we do feel that the rate of return must reduce. Performance Data Foundation Portfolio
ASSET CLASS REVIEW When building a portfolio, we constantly review each asset class in order to see if they are trending downwards, upwards or just consolidating before their next major move. From this review we attempt to put more of our clients wealth in those assets that are either trending upwards, or are consolidating but look like trending upwards shortly. This section therefore will give you an insight into our current thinking as we have highlighted the current charts that look interesting. US EQUITIES Verdict: The US is no longer outperforming. US stock markets have been global leaders over the last few years, but recently other markets have begun to catch up. The chart below shows the relationship between the US and European stock markets (the higher the line goes the better the US is doing by comparison): As you can see the trend has changed during 2015 and our trend-following portfolios have begun to adjust by reducing exposure to the US slightly. This is done through the momentum part of the Global Trend fund. UK EQUITIES Verdict: Finally 7000 was broken (but not for long). The FTSE100 finally broke through the 7000 level and just when we thought it would surge much higher, it fell back to below 6850. The UK is certainly underperforming and the fact that we have less money invested in the UK in our portfolios than the average investor means that our portfolios have been doing well recently by comparison. The uncertainty surrounding the forthcoming general election is not helping matters but we do feel that the surge higher is not far off. EUROPEAN EQUITIES Verdict: Europe is catching up quickly It is no coincidence that when the US stops printing more money and Europe starts, the European stock markets start to move relatively higher. The chart below shows how the European stock market has broken out of its range and then surged higher over the last couple of months:
It is worth bearing in mind that the all-time high for the Euro Stoxx 50 index was in January 2000, at a level of 5,500, which is nearly 50% higher than where we are today. We therefore feel that Europe might be the leading developed stock market over the next few years as it attempts to catch up. JAPANESE EQUITIES Verdict: Surged upwards to a new 15 year high The surge higher that we had been expecting is now in play. The 2 Japanese stock markets (Nikkei and Topix), out of the 20 global stock markets that we monitor as part of our asset allocation, are now ranked in the top 5 for 1 year performance. This has resulted in an automatic increase in allocation to them via the Global Trend fund. The chart below shows how the Nikkei 225 stock market has broken higher recently but also has much further to go (nearly double) before it reaches a new all-time high:
EMERGING EQUITY MARKETS Verdict: Russia is possibly about to join India and China in an uptrend The performance of the 3 stock markets over the last year is below: As you can see China and India are on strong uptrends, whilst Russia has lost nearly 10%. However, Russia is up nearly 30% over the last 3 months and we are at the stage where this is either a dead cat bounce (after a collapse a market may bounce before falling again) or Russia is at the start of a new uptrend. Over the next month we will probably see a bit more evidence as to which one we are in. Whilst we have good exposure to China and India, we do not currently have any exposure to Russia in the portfolios. BONDS Verdict: Bonds more volatile than equities Bonds have outperformed the UK stock market over the last year but are now displaying much more volatility than equities. The chart below shows how one of the bond funds that we use for the Foundation portfolio fell 10% before recovering in the space of 6 weeks: This volatility is going almost unnoticed in the financial press but if we were experiencing the same swings in equity markets then it would be making headline news.
COMMODITIES Verdict: The price of goods are falling The continuous commodity index represents a basket of 17 commodities. They are Cocoa, Coffee, Copper, Corn, Cotton, Crude Oil, Gold, Heating Oil, Live Cattle, Live Hogs, Natural Gas, Orange juice, Platinum, Silver, Soybeans, Sugar, and Wheat. Since 2011 the price of these commodities have fallen over 40%, which is why the price of the goods that we purchase have at best not been rising and in some cases been falling. This is acting as a stimulant to the economy as consumers are feeling relatively wealthier. CURRENCIES Verdict: Fancy Brazil for your next holiday? Last month we looked at how our holiday in Europe will be much cheaper this summer but what about Brazil? Since 2011 sterling now purchases over 70% more Brazilian Real. In fact, sterling has appreciated by over 15% this year so far, relative to the Real. The Brazilian economy is suffering due to its reliance on exporting commodities (as per the above note you can see that the price of these have fallen) as well as the recent election of a non-business friendly government.
SPOTLIGHT ON THE INVESCO PERPETUAL HIGH INCOME FUND We have been receiving feedback on what to include in the Investment Update and one of the suggestions is to spotlight some of the funds that our portfolios are invested in. So we thought that it would be good to spotlight the Invesco Perpetual High Income Fund this month due to its excellent long term performance and recent loss of its high profile fund manager. What s the performance been like? Exceptional. The chart below shows that if you had invested since launch you would have made a return 2.7 times higher by investing in the Invesco Perpetual High Income fund rather than just tracking the FTSE100: What we also value is the consistency of this performance. The table below shows the returns for each calendar year from 2005. You can see that when the FTSE100 struggles (most notably 2008, 2011 and 2014), the Invesco Perpetual High Income fund significantly outperforms: What does it invest in? We believe that the reason why this fund has consistently outperformed is due to the investment process that screens which companies it should invest in. It appears that this process is very objective (i.e. without too much fund manager involvement) in which they look at each company s revenue, profits and cash flow. This objective screening process narrows down the amount of companies that they can invest in before the fund manager ultimately decides which ones to make up the fund with. The types of companies that do well in the screening process are those that generate lots of reliable cash from businesses that aren t too affected by the economic cycle, such as tobacco companies, pharmaceutical companies and telecoms. This is the main reason why the performance tends to be much more consistent as it is these types of companies that tend to outperform - long term-cash generative, stable and profitable companies. What has happened since the lead fund manager left? Neil Woodford left the fund last year in order to set up his own company and competitor fund. The assistant fund manager, Mark Barnett, took over the fund in March 2014 and the performance since he took over has continued to be exceptional, with the fund outperforming the sector by over 10%:
Interestingly Neil Woodford s fund has outperformed the Invesco fund by 5% since launch, which is why we have started to add it into the portfolios, in addition to the Invesco fund. Why should the fund continue to perform well? The key reason behind the success of the fund is the investment process. Since the fund manager left, the same robust investment process has helped ensure that the fund has continued to outperform, meaning that it is not reliant on one person making the correct decisions. There does not appear to be many funds that have such a strong systematic process behind them, relying too much on the intervention of the fund manager instead. Our research has shown that the funds that tend to perform the best are the ones that have strong, rigorous processes behind them and therefore could be taken over by a different manager without affecting returns. We therefore believe that the process behind this fund will continue to ensure that the fund performs well. However, it is the consistency of the returns that we value which will hopefully protect our wealth during the next poor investment period.
WHAT RISK ARE YOU TAKING WITH YOUR MONEY? One of the most important factors that affect the returns on your portfolio is the risk that you are taking. Our objective is to reduce the risk of your portfolio during the bad times and increase it during the good times, so that we protect your wealth in the bad investment periods and you remain invested and benefit from the good investment periods. If this is achieved successfully then the overall risk to your portfolio will reduce and your losses will be minimised during the bad times. But how do we measure the risk that you are taking? The best measure is something called volatility. This is simply a measure of how much your portfolio moves on a daily/weekly basis. For example, if a portfolio grows by 10% in a month and then falls by 5% the next it is much more volatile than a portfolio that grows by 2.5% in each of the two months. So what are the risks in our portfolios? As our investment philosophy follows a trend-following investment strategy you should expect volatility to increase after a strong period of stock market returns. Over the last year the volatility of our portfolios is significantly higher than their Benchmarks. However, over an investment cycle you should expect the volatility to be close to the Benchmarks, which is what we have experienced. This is because during poor investment periods investment volatility should be much lower and this will offset the higher volatility seen during good investment periods. Broom Consultants Investment Portfolios 1 Year Volatility Volatility Since Launch Benchmark Funds 1 Year Volatility Volatility Since Launch Cautious 3.14 5.12 Cautious 3.25 6.63 Balanced 4.01 7.56 Balanced 3.61 7.43 Adventurous 5.11 10.41 Adventurous 4.42 10.40 Dynamic Equity 5.73 6.19* Dynamic Equity 5.47 6.17* Foundation 2.97 2.89* Foundation 2.00 1.96* By comparison, the UK Stock Market FTSE 100 has a volatility of 8.11 over 1 year and 15.02 since launch and the Emerging Market Equities Benchmark has a volatility of 10.40 over 1 year and 20.17 since launch. *Please note that the Foundation and Dynamic Equity portfolios launch date was different to the Cautious, Balanced and Adventurous.
FINAL COMMENT Whilst the upward trend in equity markets persists, our trend-following portfolios have a higher than normal exposure to equities. This has resulted in some strong outperformance recently. The most significant headwind for all the portfolios has been the performance of the UK stock market which has underperformed due to the uncertainty surrounding the general election, as well as the fact that it has many commodity-related companies in the index. These companies have been hampered by the dramatic fall in commodity prices. Our process in identifying winning funds can be seen with the inclusion of the Invesco Perpetual High Income fund. This fund has consistently outperformed and has helped to grow our clients wealth since we launched the portfolios. Broom Consultants Limited Sterling Court, 4 Gresham Road, Brentwood, Essex. CM14 4HN Tel No. 01277 202222 www.broomconsultants.com Authorised & Regulated by the Financial Conduct Authority Please note that this document does not constitute a recommendation. It is intended only to provide you with a guide to how Broom Consultants manages client money. The past is not necessarily a guide to future performance. The value of any investments can go down as well as up and you may not get back the full amount invested. Taxation is subject to change and you may have to pay tax on any gains. The Broom Consultants portfolios are unlikely to exactly mirror our clients portfolios due to the timing of the initial investment and the speed of response to our fund switch recommendations as well as the effect of charges. The figures above therefore assume a client invested on the launch day and have responded immediately to our recommendations. All figures and charts are provided by Financial Express.