Simon Taylor: Welcome to our quarterly Managed Portfolio Service (MPS) webinar. In this session, we’ll review the key investment highlights from 2024, assess the performance of our MPS strategies, and discuss how we’re navigating important global and domestic changes.
Well, we'll cover, global market highlights. Looking at in particular, the strong performance in US equities, the impact of a stronger US dollar on global trade and emerging markets and we'll look at the challenges in European markets and also developments in China and emerging economies.
In the political space, we’ll look at the key political changes, in particular following last week’s return of Donald Trump to the White House, what this could mean for global markets. We’ll go back to Labour’s budget and its potential impact on the domestic economy and investments.
Finally, we have an important update with regards to the rebranding of the MPS strategies. One of the key changes we’ll cover today is the move of those MPS strategies from Investec Wealth and Investment (UK) to Rathbones. This is an important development that directly impacts your clients and takes effect immediately.
Please continue to take the opportunity to pose questions via your business development directors.
I am now pleased to hand over to Ronelle Hutchinson, senior investment director at Rathbones, to begin todays webinar.
Ronelle Hutchinson: Thank you Simon, 2024 was a year marked with lots of twists and turns, economically and politically but despite this volatility risk assets performed well with the MSCI All Country World up 20% in pounds. Fixed income assets however, disappointed with the UK gilt index returning -3% for the year.
Within equities, US equities was the star performer delivering 27% in pounds underpinned by strong performance from the magnificent seven. The UK delivered 9.5% for the year, outperforming Europe which returned 2.8%.
This chart shows how throughout 2024 market expectations for interest rates in 2025 had shifted meaningfully throughout the year. In September 2024, market expectations for interest rates for the end of 2025 had fallen to 2.75%. But by the end of December, these expectations had repriced meaningfully with the market expecting interest rates by the end of 2025 to fall to 3.9%. As you can see this has been a meaningful re-pricing in interest rates throughout the course of the year and this has been as a result of stronger US economic data, sticky inflation, and a Trump election win.
It is likely that this theme of US exceptionalism that we have seen for the last two years is likely to continue. So, what do I mean by this? This is where US earnings growth has been stronger than the rest of the world. We expect this to continue in 2025 underpinned by policy support with Trump likely to cut taxes and implement a wave of deregulation. On the positive side, the market does expect a recovery in earnings from Europe and the UK as lower interest rates begin to feed into the economy, but this is not without risk.
So, what are the risks? US valuations specifically are expensive with the US currently pricing in a 22 times PE ratio and this is higher than the long-term average of 15 times. Any policy or market event that could de-rail corporate earnings would cause this PE rating to de-rate, negatively impacting total returns. Europe and emerging markets look fairly valued while the UK looks outright cheap but remain at risk of disappointing on growth and earnings given the uncertain policy backdrop.
Stronger for longer growth in the US versus the rest of the world should support a stronger US dollar and this is likely to be a headwind to the prospects in the rest of the world, specifically looking at trade with higher imported cost of goods and the impact of tighter financial conditions as capital flows to the US.
From an asset allocation and portfolio positioning going into 2025 we are neutral on global equities currently. Global growth has slowed in the last six months making us cautious going into the first half of 2025, within equities we do see better relative value in the US. However, we remain concerned about valuations and as a result we are focused on diversification and biased to the quality areas of the market where valuations are cheaper and earnings growth relatively solid.
We are neutral on UK equities and Europe. However, as additional interest rate cuts feed into the economy which could potentially boost investor confidence, we are looking for opportunities as this feeds into the economy to upweight into these regions if this materialises. We are underweight emerging markets. China’s stimulus to date has been insufficient to meaningfully support the economy and with the risks of tariffs this may be an additional headwind to emerging markets.
Thank you, Ronelle, for that review of 2024 and for the outlook for world markets in 2025.
The three main messages I have taken from your presentation were:
We remain neutral on equities going into half one.
- We are now overweight US but in the quality area where valuations are cheaper, and relatively still strong earnings can be seen.
- With the increased yields available on fixed income assets, we expect to see these playing a larger role in MPS portfolios going forward.
- With that, I’ll now hand over to Andrea for her update on the managed portfolio service portfolios and their performance.
Andrea Yung: Looking at our positioning, you can see that, we have an overweight allocation to Fixed Income. We are seeing value specifically in higher quality bonds, given credit spreads are so tight. Yields are now at highest levels that we have seen over the past 15 years and that coupled with where we are in the interest rate cycle, we are seeing opportunity here not only from being able to achieve a higher income but also potential capital appreciation. A large portion of our fixed income exposure is in UK sovereign debt, with gilt yields trending higher, especially towards the end of 2024 and beginning of this year, we saw this as an opportunity to add to our gilt weighting. Also, given where current yields are, this should also help to provide a form of protection if we see a recession.
As Ronelle mentioned, we are taking a neutral stance within our equity allocation across our models.
If we take a look further into our regional equity exposure. We continue to hold a degree of caution for emerging markets, most notably due to the economic concerns within China. The Trump administration with their threat of tariffs and a potentially stronger dollar are going to be a headwind for region. Sentiment in China also looks weak, we have therefore reduced our allocation.
In the US, however, growth continues to look positive and although we have seen inflation pick up and rate being pushed back, economic data remains positive, and a trump victory supports lower taxes and deregulation which helps US companies especially those that are domestically focused. We are aware, that in certain areas of the US market, valuations remain high, and our preference has been to add to the JP Morgan US Equity fund – which focuses on high quality companies at reasonable valuations.
Although the magnificent 7 stocks have continued to be the largest contributors to equity markets over the last year. we are seeing Trump’s administration may favour those companies outside this group, and benefit those which have a larger portion of their earnings derived domestically. We therefore want to look outside of the US market weighted index and ensure that we have sufficient diversification within our portfolio.
Our portfolios remain mainly actively managed, although we do utilise passive investments where we believe we can get access areas of the market. You’ll be able to see, the current split is still weighted towards active funds.
If we turn to performance, looking at 2024. We are pleased with how our portfolios have performed, especially in our higher risk models and how they have outperformed the ARC Peer group.
As we’ve seen, returns have been driven by equity markets. What’s driven returns has been our regional positioning and allocation to the US Index. We have also benefitted from the timing of when we increased our allocation to US smaller caps earlier in the year.
Although Fixed income generally as an asset class has been disappointing this year, our fund selection and allocation to short duration bond funds and emerging market debt, has helped to support returns in this area.
Looking at our performance since inception, our portfolio returns remains strong relative to ARC peer group across our full range. We continue to take a long-term approach to investing, with a focus on downside protection which helps us to smooth out returns and support long-term performance.
Just to highlight that point on drawdown protection, through our focus on risk management, we have been able to protect on the downside and a good example of this was in 2022, when we saw both bond markets and equities fall, our use of alternative assets has helped to add resilience to the portfolio and provide investors with a smoother return profile.
And with that, I will pass back to Simon.
Thank you, Andrea, for the update on the portfolios and their performance there. I think the three main messages I've taken from your presentation were, we're definitely seeing value in the UK sovereign debt markets. The recent increase in yields provides us with a better buying opportunity and you're taking advantage of that. Our portfolios are positioned to favour US growth relative to emerging markets and diversification is key to supporting long term, stable returns. And with that, we’ll now start to move on to some of the questions, that we've received via our business development directors, from our audience.
Many clients have the MPs, assets in pensions, and they've been heavily exposed to passive investing. Where do we see the key risks in this approach?
Ronelle Hutchinson: There are two key known risks. Concentration and valuation risk in the US. The US market is significantly concentrated, with the top ten stocks making up 38% of the S&P 500.
This is also driving up US valuations. These top ten stocks trade at a 30 times price to earnings ratio, while the rest of the market combined trades at an 18 times. To mitigate concentration and valuation risk in our portfolios. We continue to maintain diversification, focusing on gaining exposure to the quality areas of the US market that have cheaper valuations yet still relatively good earnings prospects.
Simon Taylor: The cost of MPs portfolios has significantly reduced compared to 2024. What has driven this change, and is it likely to persist?
Andrea Yung: So, there are two main factors at play here. Firstly, looking at our fixed income exposure. We have a preference of UK sovereign debt. And we've chosen to allocate to a passive fund in this space as we believe it's an optimal way to gain exposure to this area of the market. And we feel that this fund outweighs that of other active gilt funds. So, this has increased our exposure to passives and naturally brought down the OCF slightly. So that is one reason. And the other is that throughout the year, we've been able to negotiate cheaper share classes with fund managers and make these available across our platforms. This is one of the key benefits of the combination and the negotiating power that we have given our size.
We do hope that we'll be able to attract further fund discounts, which will be passed directly onto clients.
Simon Taylor: It's been noted that there's been a shift between the active and passive allocations in our MPS portfolios. The question here is, is this driven by cost pressures or an intentional active asset allocation decision?
Andrea Yung: It's definitely been an active decision. Ultimately our focus is providing long term risk adjusted returns for clients. Our cost caps are in place just to assure advisers that we won't surpass a certain pricing point. However, we already sit comfortably below these levels. So it hasn't forced us into making these types of decisions. Ultimately, we know that costs will impact returns. So we're sure that any fees associated with a fund is worth the price, and we won't just go active or passive for the sake of it.
Simon Taylor: How have the recent interest rate changes in global markets impacted world currencies and in the MPs portfolios?
Ronelle Hutchinson: With a stronger US economy, sticky inflation and Trump stimulus, the market has had to pare back the number of interest rate cuts expected in the US. This has further fuelled a strong dollar in the last three months alone. The dollar has strengthened over 6% relative to the pound and the euro. From an MPS perspective we have been maintaining diversified exposure specifically to US assets, exposing portfolios to the strength of the dollar, which has helped mitigate this currency risk.
Simon Taylor: Looking ahead to 2025. Where do we see the key investment risks and opportunities for our MPs portfolios?
Andrea Yung: So a key factor for equity investors next year will be the health of the US economy. We may see increased volatility in markets, and we have to consider that there is greater uncertainty in a Trump presidency and the potential impact of trade tariffs across the world. Inflationary pressures and interest rate expectations will also continue to impact markets. And although we've seen expectations of cuts being pushed back relative to the start of 2024, reductions are still priced into markets. So markets could react negatively if higher inflation persists. So the key is to remain diversified. We have elements of the portfolio which we believe will be resilient in periods of market weakness. Our exposure to gilts should support portfolios and our defensive funds within our alternative allocation should also help. Within regions we are diversified. We don't have a full US weighting in the mega cap funds, for example. We're taking a broader view and we're looking at quality companies.
Simon Taylor: Now an important question here relating to, the migration to the Rathbones brand. From an investment managers perspective. A question here has been how has the migration to Rathbone has impacted decision making? Has it improved or restricted flexibility?
Ronelle Hutchinson: So the benefits of the migration to Rathbones have outweighed the costs to date. First and foremost, we have greater access to a depth of resources in our research team, which has allowed us a greater opportunity set, which means we have a bigger buy list from which to build portfolios, thus providing greater flexibility. In addition, we have greater access to the specialist expertise of Greenbank, which gives us a wider perspective of both downside risks and opportunities when investing in assets. Thirdly, and most importantly, this increased scale has provided greater access to discounted share classes, and this has translated into tangible reduction in OCF’s for client portfolios.
Simon Taylor: And with that, I'd just like to thank everybody for taking part in today's session. As always, if you've got any questions that you would like to pose to us, please do write to us. Or please reach out to one of your business development directors. Thank you for joining us.
