Archive of quarterly portfolio updates
For clients of our Managed Portfolio Service
Watch previous quarterly updates about our Managed Portfolio Service (MPS)
Q3 2024
Q3 2024: transcript
Ronelle Hutchinson: Over the quarter, we saw banks rally as the key central banks like the Fed and the BOE moved to cut interest rates. UK bonds for the first time in a while outperformed UK equities, up 2.7 percent. Equities were up 2 percent, pushed higher by investor optimism post the elections.
In a surprise development for this quarter, we saw that the S&P500 in pounds delivered negative returns largely as a result of the pounds strengthening 6% over the quarter.
With large parts of the developed world cutting interest rates and with China joining in and implementing substantial fiscal and monetary policy measures to resuscitate the economy, we are more confident on the outlook for growth in the months ahead. And as a result, we are more optimistic on the outlook for equities.
Andrea Yung: As Ronelle mentioned, we're more confident on the outlook for the global economy. We've seen inflation begin to moderate and central banks starting to cut rates. And for that reason, we made the decision to increase our global equity allocation.
We're also seeing value in small and mid cap companies, which have been weighed down by higher interest rates. Current valuations are looking particularly attractive. As monetary policy begins to ease and interest rates decline, we anticipate that small and mid sized firms will experience a stronger benefit, leading to enhanced returns.
As we reflect over the quarter, all portfolios generated positive returns. It's been those assets which are sensitive to interest rates that have generated the strongest performance. Our lower-risk portfolios have performed better due to higher exposure to fixed income and property. Within equities, our Asian and emerging market funds, which have exposure to China, perform very well towards the end of the quarter. And this is on the back of Chinese government stimulus, which has helped to support investor sentiment.
Looking at our performance since inception, our portfolios remain strong and ahead of the peer group. This has been supported by our regional allocation and fund selection. We continue to take a long-term approach to investing with a focus on protecting assets.
Ronelle Hutchinson: With a synchronised easing in global interest rates taking hold, we think investor risk appetite for cyclical stocks and undervalued regions like the UK and Europe should improve. It is likely that in this new regime, new winners will emerge. And we are advocating that investors prepare by remaining diversified.
We recommend staying invested in higher yielding assets, quality fixed income assets that should provide some portfolio stability in the event of any adverse market shock.
Q2 2024
Q2 2024: transcript
Question: How have markets performed in the 2nd quarter of 2024?
Ronelle Hutchinson: Equities in the U. S. and Europe have continued to rally in the second quarter, while Japanese equities have struggled, weighed down by currency depreciation. Bonds, on the other hand, have lagged pretty much across the board as the much anticipated interest rate cuts by the Fed and the BOE have been delayed due to sticky services inflation.
Questions: Are there any changes in the economic output? Will the election have any impact?
Ronelle Hutchinson: We are experiencing a divergence in growth in developed markets. Economic data in recent months from the U. S. has begun to disappoint, pointing to a slowdown, while incoming data from the U. K. and Europe has improved confirming that a recovery is underway. Markets have responded positively to the U. K. election outcome. As evidenced by the pound, which has strengthened, and we think this should fuel investor optimism about the prospects.
Question: What changes have been made to the portfolios?
Andrea Yung: As Ronelle mentioned, we're now seeing opportunities arise within the U.K. Market, and therefore, over the last quarter, we've increased our allocation to the U.K. We've seen for a while that U.K. Markets have looked relatively cheap. However, we've been hesitant to add exposure here, as the U.K. Has continued to face particular headwinds of negative sentiment and economic uncertainty.
More recently, we've now started to see these economic concerns eased. We've got more political stability and we're starting to see a positive turn in sentiment. It's a combination of these factors which lead us to believe that now is a time to take advantage of these opportunities. We've also slightly reduced our position to emerging markets.
Since the start of the year, we've seen positive performance in the region. However, there are challenges that still exist for these countries, most notably China and concerns surrounding their real estate sector. Although we believe emerging markets will really benefit from interest rate cuts in the U.S. and a weaker dollar, we are cautious about being overly exposed at this moment in time.
It's important to note that our exposure to emerging markets is through actively managed funds, We believe it's imperative to utilise the expertise of active fund managers who are on the ground and able to navigate risks and take advantage of opportunities. We believe that this active style helps us to support performance and mitigate risk over the long term.
Question: How have the portfolios performed?
Andrea Yung: At the start of the year, we held a degree of caution for equity markets, given the economic uncertainty and persistent inflation. As a result, our portfolios were underweight in equities, and what transpired over the year is actually very strong performance in equity markets, mainly driven by a select number of mega cap U.S. companies.
Even though we had less risk embedded into our portfolios, our performance has still held up well over the first half of the year. Our U. S. equity allocation, as one may expect, has been the largest contributor to returns across our portfolios, and this has been followed closely by our active positions in Asia and emerging markets.
What's disappointed so far this year has been our exposure to both fixed income bonds and property. These assets are sensitive to interest rates, and as interest rates have continued to hold, the returns have been somewhat limited. However, we do believe that interest rates have peaked, and as interest rates cut to prevail, that's when we expect to see that positive price movement in these types of assets.
Questions: What themes are likely to prevail? Does the trend to lower interest rates change equity leadership?
Andrea Yung: We think this divergence in growth should follow through to equity returns as earnings recover in the U.K. and Europe. While the prospects for stocks in the U.S. like the magnificent seven begin to dim, weighed down by lofty expectations as the Fed moves to cut interest rates. We see a broadening out of global investor risk appetite moving into cyclical stocks and favouring undervalued equity regions outside of the U.S.
Q1 2024
Q1 2024: transcript
Ronelle Hutchinson: We have had a strong rally in global equities at the start of the year. The MSCI All Country World is up 9 percent, driven by double-digit returns in both the US and Japan. Bonds, on the other hand, have disappointed in the short term and commodity prices have moved meaningfully higher.
The US economy has continued to surprise on the upside, forcing investors to dial back their expectation of interest rate cuts. The decline in inflation has stalled, specifically the core CPI, which is the main measure for central banks. Sticky service inflation, driven by tight labour markets, is keeping wages elevated.
And now, with the meaningfully higher commodity prices, there is a risk that inflation will remain higher for longer.
Andrea Yung: Over the quarter, in terms of portfolio changes, we've taken advantage of the opportunity within an emerging market debt. Currently, these bonds are attractively priced, they offer very strong income yield, and they're positioned to benefit from interest rate cuts. Despite the short-term inflationary pressures here to date, the broader downward trend of inflation is positive.
These countries are also at the forefront of monetary easing, and we've seen Latin America already starting to cut rates. We've also further enhanced the diversification within our UK and emerging market equities by gaining a broader exposure within these markets. Given the current concentration within the market, we believe that diversification and risk management is key.
A way in which we manage risk is by taking an active approach. This means rather than just tracking a market or index, we select funds that can identify and take advantage of any undervalued opportunities. As we've seen in the US, the market is very concentrated to such a small number of stocks. And with the US dominating global markets, many of those who are just investing passively are putting a small amount of their money in a very small portion of the market.
Across our models, we need to eliminate this type of concentration risk by having a blended approach to various sectors and geographies that help us provide stable returns over the long term and more resilience in market downturns. So this chart highlights how our portfolios have been able to protect clients' money in periods of market weakness.
The shaded area illustrates the drawdown of our balanced model plotted against the sector. And what you can see is our models have provided stronger protection when markets have declined and this in turn helps to support performance over the long term.
It was another strong quarter for markets. Equities were a key driver of returns as the US continued to show signs of resilience. Our overweight position in Japan also boosted returns as we saw increasing optimism supported by mild inflation and wage growth. Our one year performance again has been positive across our range and we've outperformed the peer group average. This is due to strong fund selection, thanks to the support of our experienced research team.
Our performance figures since inception, which dates back to February 2015, highlight how we perform throughout market cycles. We've managed to continuously participate while on the upside, while still offering a degree of protection in periods of market weakness.
Ronelle Hutchinson: Our central theme for clients this year is that they maintain portfolio resiliency, mitigating the heightened macro risk that prevails by staying diversified. Focusing on quality equity that is reasonably priced and investing in alternative assets that can deliver uncorrelated returns.
Q4 2023
Q4 2023: transcript
Ronelle Hutchinson: The calendar year returns for 2023 contradicted the fears of stagflation and recession that prevailed throughout the year. Global equities rallied strongly, particularly in the fourth quarter, as investors grew more confident of interest rate cuts. As a result, the S&P 500 ended the year up close to 20 percent and the FTSE 100 ended the year up 8 percent.
UK bonds outperformed, delivering positive returns and the pound strengthened 6 percent against the dollar. The key area of surprise for investors in 2023 was the fact that global growth proved to be more resilient than expected.
Andrea Yung: Across our models, we've increased our exposure to fixed income bond funds. We continue to see better value in these types of investments, which we expect to perform well as interest rates begin to fall. We remain comfortable with our underlying equity positioning within our models, and therefore we've made very little change to this area.
Our models have benefited from the global approach we took last quarter. With exposure to the US, Japan and Europe, generating stronger returns than the UK in the last three months of the year. We also enhanced our cash returns by adding the Fidelity Cash Fund into our lower risk models, the ones that hold slightly higher cash positions.
And this generates higher interest than what standard cash offers.
The changes that we've made to the portfolios this quarter have also had a positive impact on the underlying fees of our models as shown here. These cost savings are present throughout all models and will pass on directly to you. We believe this reduction in cost will certainly help to support performance over the long term.
So just looking at performance, overall, the last three months were positive for markets. Despite our portfolios being slightly more defensively positioned, we've held up well and still managed to participate strongly on the upside. Our performance throughout 2023 again has been extremely positive across our full range and we're pleased with how we've navigated through both the downturn and the rally that 2023 presented.
We've outperformed the benchmark across all models and it's been our exposure to the US and our more global approach which has driven returns. Finally, when reviewing our performance since inception, we've outperformed the benchmark across all portfolios and performed very well against competitors and hopefully this highlights a benefit of our active management combined with the strong research capability that we have.
Ronelle Hutchinson: While the major developed markets of the UK and the US will likely remain at risk of a slowdown, the good news is that the peak of inflation and interest rates are likely behind us, and this should be supportive of households and markets towards the end of the year. However, the timing of the interest rate cuts will remain a source of speculation.
In portfolios, we remain underweight equities and US equities specifically, largely because we believe that markets have fully discounted the good news on interest rates, and this is reflected in the relative valuations of US equities versus bonds. As a result, we are finding value in fixed income. Given the attractive starting yields, and the fact that should interest rates be cut, fixed income assets will generate the additional benefits of capital gains.
Our central theme for investors this year really rests on three principles. Firstly, stay invested. While cash yields appear attractive, looking at the three potential scenarios for the global economy - which is a recession, a soft landing or stagflation. In three of these scenarios, it is likely that cash will lag other risk assets.
Principle number two, stay diversified. Recession and geopolitical risks remain elevated. Therefore, maintaining diversification and portfolio resilience is key. And principle number three, stay global. The outlook for the economy and the prospect for interest rate cuts opens the opportunity set for a wide range of assets out there.
In addition, the new themes of artificial intelligence and deglobalisation and decarbonisation are really transforming industry structures and future winners are still yet to emerge.
Q3 2023
Q3 2023: transcript
What were the key themes driving markets in Q3?
After strong gains for shares in the first half of the year, global equities faltered in the third quarter.
The S&P 500 delivered negative returns in dollars but was up 0.8% in pounds as the pound weakened against the dollar. UK equities delivered positive returns, up 2.4% for the quarter.
Overall, though, the US economy has surprised on the upside and has been much more resilient than anticipated, with strong incoming jobs data.
And this, amid higher oil prices as a result of production cuts in Saudi Arabia and Russia, is keeping inflation risks front and centre for most central banks. As a result, market participants have had to finally digest a higher-for-longer interest rate outlook this quarter, and this has weighed on sentiment.
From a portfolio positioning perspective, we are defensively positioned. We are underweight in equities and have been increasing duration in fixed income as rising yields have made this asset class more attractive.
What is the current MPS portfolio positioning?
Over the quarter, we've focused on broadening our opportunity set within our models. We've achieved this by reducing our UK home bias and increasing exposure to global funds, and we believe that this will lead to stronger returns over the long-term.
This chart reflects our thoughts well. What we can see is that no one country has a monopoly on industry leaders. The UK market is dominated by energy stocks such as oil and gas, while the US has strong exposure to IT and tech, the likes of Amazon and Netflix. Emerging markets, which includes the likes of India and China, are increasingly producing market-leading companies. These are less thoroughly analysed, less efficient and therefore offer greater opportunity for better returns.
This is why we select for our models what we consider to be the best fund managers that specialise in these areas. They have their feet on the ground and they're able to really take advantage of these opportunities as they present themselves.
So by keeping our investable universe as wide as possible, we're not only giving ourselves the opportunity to invest in the best companies worldwide, we're also diversifying our exposure, which should help to reduce risk.
And as Ronelle mentioned, another area where we're seeing opportunity is in the bond space. As interest rates have increased, so have the returns at bonds pay, and we feel that these income returns are looking very attractive and therefore we've increased our government bond exposure to capture that return.
It's worth noting that we are very cognizant of the risks that are currently present in the economy, and our focus is ensuring that we protect money during times of market weakness. That's why all of our strategies continue to be invested across a range of different asset classes, including bonds, equities and property.
Across our portfolios, we also have a portion invested in assets known as alternative investments. These are hedging strategies which offer a degree of uncorrelation to the standard equity and fixed income funds, and they aim to offer downside protection in periods of economic weakness.
So given the recessionary risks that are present, if we do experience market weakness, it's this portion of the portfolio that we believe will offer that protection.
We continue to take an active approach and this means that rather than just tracking an index, we also select funds that are actively managed. So if we do see market stress, these fund managers can take advantage of any mispricing opportunities that arise.
We're also supported by a large experience research team, allowing us to continually review our holdings and ensure that we remain confident that we've selected the best funds for our models as we transition throughout the market cycles.
So just having a look at how our strategies have performed over the quarter, we've seen positive returns across our models. The dark blue line represents our strategies, and this is plotted against the independent benchmarks of similar risk for each of the models.
What's driven our performance this quarter has been our UK names. Thanks to the energy and basic material sector, these were supported by sterling weakness against the dollar and the recovery in the oil price. Given this set performance within the UK, we feel now is an opportune time to lock in some of those returns as we move more global.
Taking a longer-term view and looking at performance and conception, I'm very pleased to say we've outperformed across all portfolios, and we believe this is down to our active approach and focus on cost reduction. We believe that we can drive returns further over the long term by adopting this global approach.
Another positive to note this quarter is the cost savings that we've been able to make within our models. This is a combination of the fund changes that we've made and also the work that we've done with fund managers negotiating cheaper charges for the funds that we hold. This slide just helps to visualise the level of cost reduction that we've made. The light blue line shows where we were last quarter, and the dark blue line shows where we are at with cost now. So this will help defer the benefit returns, especially over the long-term.
What are we looking out for into year end?
Risks continue to rise in the short-term, with the war in Israel and a weaker outlook for corporate earnings. But rising bond yields and with this, tighter financial conditions, has raised the prospect that we are close to the peak of the interest rate cycle, so the worst may very well be behind us.
Fixed income are offering the highest yields in 15 years, and this is a very attractive risk reward trade-off. We are finding value in this area. There are also pockets of opportunity in equities, and this is outside the mega caps and the broader market indices where valuations are depressed like Europe and small caps. These assets might benefit from any reprieve in interest rates, and as a result, we are looking to add to equities in the months ahead.