Core portfolio quarterly report
Core portfolio (Strategic asset allocation service) - Sterling
quarterly report - 30 September 2008
This review will include an insight into each
asset class including the bank's view of the asset and its
anticipated return. It is these anticipated returns, coupled with
the historic twelve-month risk or volatility attached to each asset
(expressed as a 'standard deviation' figure), that the bank uses to
determine the appropriate allocation to each asset class.
Cash: Despite calls by numerous economists that
aggressive cuts were needed to stabilise the UK economy, the Bank
Of England did not respond to these pleas during the third quarter
of 2008. Dislocation in credit markets is now very apparent and
spreads have continued to widen. On the positive side, the price of
oil has dropped by over $60 a barrel from its July high and this
will help ease pressure on future UK inflation numbers. Expect to
see base rate at 4% by the end of the first quarter in 2009.
Actual return in 2008 YTD 3.72%
Standard
deviation^
0.12%
Current
weighting
25.51%
Bonds: The bond market has not escaped
volatility during recent months, as we have seen a chain of events
leading to a sharp sell off in equity markets and a flight to
quality bond issuers. The performance of our bond exposure reflects
the fall in the iBoxx Sterling Liquid Corporate Long-Dated Bond
Index. The preference has been for short dated government debt as
the fear factor has driven many investors to give up yield in
return for capital preservation. A coordinated government action to
return stability and inject liquidity to the inter-bank money
markets has not yet had the effect of calming investors' nerves.
The government issued bonds have benefited from the increase in
demand and the recent decision to cut the UK base rate from 5% to
4.5% will further enhance the appeal of bonds in general. Our core
portfolio exposure to investment grade corporate bonds is expected
to pick up in the coming months, as interest rates are forecast to
fall further and the finance sector steadies. The UK government has
invested significant levels of capital for a bank rescue package,
which makes investment in UK bank issued bonds a more attractive
opportunity going forward.
Actual return in 2008 YTD -11.28%
Standard
deviation^
9.25%
Current
weighting
14.29%
Equities: Equities continued to fall during the
third quarter as volatility levels increased to record levels and
markets reacted to the monumental events taking place as a result
of the global financial crisis. During the quarter the equity
exposure within the model fell by 11.5% and is now down 24% year to
date in line with the MSCI World Index hedged into sterling.
Central bankers both in the US and, more recently, in Europe are
announcing measures and rescue packages on an almost daily basis.
Clearly, volatility will continue to be high as investors assess
the impact of the actions being implemented and nervously look for
signs that normality can be restored across the global banking
system. Looking further ahead, weakening economic data points
towards a significant slow down in growth rates and central banks,
having finally realised the potential severity, are cutting
interest rates which will eventually support equity markets. During
the quarter, we initially reduced our already underweight position
from 22% to 12% as the storm clouds of the banking crisis gathered.
In mid September, we increased the weighting back to around 20% as
markets reached more attractive levels and a number of our buying
signals were activated. Equity markets are expected to remain
volatile as economic and corporate newsflow shapes investor
sentiment.
Actual return in 2008 YTD -24.04%
Standard
deviation^
17.09%
Current
weighting
18.26%
Property: UK property has continued to suffer
during the summer as the credit crunch combines powerfully with
recessionary fears to create a very poor environment for UK
property. The FTSE EPRA/NAREIT UK Property Index is down over 18%
on the year and fund managers, having to meet redemptions, are
selling assets into a market where buyers are scarce. Our
allocation to property remains zero and we believe, as we look
forward to the end of 2008 and moving into the early part of 2009,
the sector will continue to see falls. We therefore do not propose
to change our allocation in the near future.
Actual return in 2008 YTD
-0.24%
Standard
deviation^
11.28%
Current
weighting*
0.00%
* Asset class exited on 19 February 2008
Alternative investments: Hedge funds: The hedge
fund sector faced its most challenging period through the last
quarter and September's returns were the worst in history for the
asset class. The HFRX index fell 10.3% in sterling terms during the
three months to 30 September and is down 10.26% for the year. Much
of this turbulence was explained by a huge sell off in assets
across the board, prompted by extreme risk aversion and a lack of
trust in the financial system, further exacerbated by fund
redemptions that made managers become forced sellers. However, many
traders were also hit by the unwinding of a previously lucrative
trade involving being long commodities - specifically oil - and
short financial stocks. A relatively short-lived rally in the
banking sector combined with a drop in oil prices served to create
losses and the politically-driven ban on the short selling of
certain key (largely financial) stocks exacerbated the situation
and robbed funds of a key method to generate returns and hedge
market risk. Additionally, the failure of investment bank Lehman
Brothers, which acted as a major prime broker to the hedge fund
industry, led to financial losses and some fund failures. Many fund
managers are now reporting once-in-a-lifetime buying opportunities
in asset markets, although it seems clear that volatility is here
for some time to come.
Alternative investments: Commodities: The
S&P Goldman Sachs Commodity Index has declined by 20.3% over
the quarter in sterling terms, with consistent weakness across many
sectors driven by fears over global economic growth. Despite this,
the Index is up 12.75% for the year. Most notable has been the
story for oil, which saw a significant sell off to finish September
some $40 lower than where it ended on 30 June. This represented a
19.6% fall in sterling terms. Gold also lost value through the
period, although a mid-period drop was followed by a strong rally
as investors sought solace from other asset markets where risk
aversion hit historic highs. The price ended at $870 per troy ounce
and retained positive momentum into the new quarter. Overall, the
tempering of consumable commodities has given some leeway to
central bankers around the world to focus entirely on global growth
- hence bias towards monetary loosening - as inflationary pressures
abate.
Actual return in 2008
YTD -8.46%
Standard
deviation^
4.94%
Current
weighting 41.94%
Manager's comment: The third quarter of 2008
will, for all the wrong reasons, live long in the memory of global
investors. A quarter which began with signs of improving economic
data in the US ended with the demise of Wall Street institutions
and the global financial system at risk of collapse. Despite the
best efforts of policy makers and regulators, the contagion created
by the sub-prime mortgage crisis in the US engulfed the world's
banking infrastructure and has subsequently put global economic
growth at risk. A recession is now expected, with some commentators
fearing this may extend into a depression. Asset managers and their
clients have faced a very challenging environment. This year the
bank has purposely positioned the portfolio defensively to mitigate
the full impact of the destruction in value we have seen across
asset classes. Whilst this has provided some shelter, we have not
escaped unscathed and the performance of the portfolio reflects
this. As we move into the fourth quarter, we expect volatility to
continue as uncertainties over the depth and width of the recession
"valley" influence market performance in the near term. Over the
longer term, distressed asset values will create buying
opportunities once capital markets normalise and confidence
returns. Capital preservation is our overriding priority and we
will be adopting asset allocation changes whenever they are
appropriate to meet this objective.
Sterling asset allocation:
Sterling risk / return:
Performance versus benchmark:
|
|
2005
|
2006
|
2007
|
2008 YTD
|
Rolling 12 months
return
|
Since inception**
|
|
Total model portfolio performance
|
10.21%
|
8.58%
|
2.01%
|
-10.21%
|
-11.56%
|
11.62%
|
|
Cash rate* (benchmark)
|
4.49%
|
4.48%
|
5.39%
|
3.72%
|
5.15%
|
19.78%
|
|
Standard deviation^
|
4.15%
|
3.56%
|
5.46%
|
6.44%
|
6.25%
|
5.29%
|
Performance figures are for the sterling SAAS (core) model
portfolio (based on income reinvested and gross of fees).
* Cash rate is based on 3 month LIBID
** Launch Date - 1 December 2004
^ Standard Deviation is a measure of how widely "spread out" the
returns of an investment are. The more spread out the returns are,
the bigger and more frequent the losses on that investment. An
investment's return over a year will be within one standard
deviation of its expected return roughly two-thirds of the time,
and within two standard deviations roughly 95% of the time. So, for
example, if an investment has an expected return of 10%, with a
standard deviation of 2%, then its return should be between 8% and
12% two-thirds of the time; and between 6% and 14%, 95% of the
time. From November 2006 this is the annualised standard deviation
of the returns for the SAAS (core) model portfolio.
Disclaimer: Fairbairn Private Bank accepts no liability for any
loss arising from the use hereof nor makes any representation as to
the accuracy or completeness of this factsheet. The information and
opinions above have been compiled or arrived at from sources
believed to be reliable. They replace any previous communication
provided to you by Fairbairn Private Bank. Any underlying research
or analysis has been procured by Fairbairn Private Bank for its own
purposes and may have been acted upon by it or an associate for its
or their own purposes. Please note that figures where quoted have
been rounded up or down to the nearest decimal place and this may
result in slight rounding differences. This information should not
be construed as a solicitation to invest or be relied upon for the
purpose of making an investment in this service. Where daily prices
are not available for valuation or performance measurement
purposes, individual holdings within the SAAS (core) portfolio will
be valued using the last available price.
Notice: The value of your investments and the income from them
can fall as well as rise and you may not get back the original
amount invested. Exchange rate changes may affect the value of
investments. Past performance is not necessarily a guide to future
performance.
Fairbairn Private Bank is a registered trade name of Fairbairn
Private Bank (IOM) Limited and Fairbairn Private Bank Limited.
Fairbairn Private Bank (IOM) Limited is licensed by the Isle of
Man Financial Supervision Commission to take deposits and provide
investment services. Registered office: St Mary's Court 20 Hill
Street Douglas Isle of Man.
The London office is authorised and regulated in the UK by the
Financial Services Authority.
Fairbairn Private Bank Limited is regulated by the Jersey
Financial Services Commission. Registered office: Fairbairn House
31 The Esplanade St Helier Jersey. Latest audited accounts are
available on request.
Authorised and regulated in the UK by the Financial Services
Authority in respect of regulated mortgage contracts only.
UK Financial Services Authority registration numbers:
Fairbairn Private Bank (IOM) Limited 313189
Fairbairn Private Bank Limited 313187
Source: All data has been provided by Fairbairn Private Bank and
Lipper Hindsight.