Core portfolio quarterly report
Core portfolio - Sterling quarterly report - 31 December
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: A turbulent final
quarter of 2008 saw the UK base rate fall to 2.00% (a 3.00%
reduction since September 2008). It is hoped this aggressive move
by the Monetary Policy Committee (MPC) will stimulate spending, as
opposed to saving, and kick-start the economy once more. Although
the intentions from the UK government are clear, economists are
still unsure how long it will take to turn the corner. There are
expectations of further cuts during the first quarter of 2009 and
the UK base rate as low as 0.50% by June.
Actual return in
2008
4.64%
Standard
deviation^
0.29%
Current
weighting
33.30%
Bonds: For the bond markets,
the final quarter of 2008 was characterised by a continued flight
to quality, as investors sought the relative safe haven of
government debt amidst the on-going financial turmoil. As a
consequence of this, 2-year gilts closed the year yielding 1.01%,
with 10-year gilts at 3.01%. In contrast, the credit markets
continued to underperform, driving yield spreads between government
issues and investment grade bonds to historical wides, as investors
demanded greater compensation for the increased default, volatility
and liquidity risk. An analysis of past default and recovery rates
dating back to the Great Depression of the 1930s determined that
given current valuations, high-grade corporate debt represented an
extremely attractive investment opportunity. With this in mind, in
November, we opted to increase our bond holding from 14% to a fully
weighted 20%. As a result of the continued market turbulence and
the risk-return characteristics exhibited by the index tracker fund
held within the core portfolio, a strategic decision was made to
switch into actively managed bond funds. It was felt this change
would facilitate enhanced risk management, offer increased
flexibility and provide improved access to a more diverse universe
of fixed interest investments. Two relatively conservative funds
were selected, both managed by leading fixed income houses. These
investments have already begun making a significant positive
contribution to portfolio returns and are expected to continue to
do so throughout 2009.
Actual return in
2008
-10.77%
Standard
deviation^ 9.22%
Current
weighting
20.85%
Equities: During the final
quarter, equity markets tumbled as plunging business and consumer
confidence indicators suggested that the major economies would
experience a severe recession. Despite a small gain in December,
the MSCI World Index fell by a further 22.18% during the quarter
rounding off a dismal annual performance with a fall of 42.08% in
dollar terms. In sterling terms, the MSCI World Index fell by 3.52%
during the quarter and by 19.81% annually, reflecting the sharp and
rapid decline in the value of sterling. Governments and central
banks have continued in their attempts to revive the global economy
with the US Federal Reserve in particular reducing dollar interest
rates to zero, extended bail out plans, and the new president-elect
Obama hinting at significant fiscal stimulus packages. In spite of
these efforts, to date economic and corporate news continues to
disappoint with rising unemployment, deflationary pressures and
rising volumes of profit warnings confirming a continued slowdown.
With the recent addition of major financial scandals and the return
of geo-political tensions, market conditions are expected to remain
challenging and volatile in the short term and could fall further
on fears about the global outlook. Stock markets are of course
forward-looking as investors attempt to anticipate future prices,
and the key question now is whether equities price in the scale of
the economic downturn. Clearly, investors will be looking for
evidence of a more certain outlook and, in particular, for signs of
positive growth in the US economy, which some commentators
anticipate could occur at some point in the second half of this
year. Accordingly, any increase in allocation would require an
increase in confidence for a rebound in late 2009 and we intend to
maintain our underweight position in the short term.
Actual return in
2008
-38.74%
Standard
deviation^
21.82%
Current
weighting
16.27%
Property: UK property, both
residential and commercial, had a very difficult time throughout
2008. The investment property databank which monitors the value of
UK commercial and residential property has fallen 8.3% in the final
quarter, giving a total fall of 16.86% for 2008. In anticipation of
a difficult time for property in 2008, we have not been invested in
this asset class for most of the year. Looking forward, the outlook
for residential property remains difficult for 2009. There is an
inevitable conflict between the steps taken by the Bank of England
and the Chancellor of the Exchequer to invigorate the economy and
the caution felt by clients brought about by the recession. Most
property commentators expect a negative year in 2009 but with a
recovery forecast to start towards the end of the year. Commercial
property is expected to have an equally difficult time through 2009
with its recovery linked directly to the performance of the wider
UK economy. We do not intend making any immediate investments into
property and will continue to monitor the markets to determine if
and when the time will be right for re-entry through 2009. We do
not currently consider property will outperform cash over a
12-month period, even with cash rates expected to remain very
low.
Actual return in
2008
-0.24%
Standard
deviation^
0.19%
Current
weighting*
0.00%
* Asset class exited on 19 February 2008
Alternative investments: Hedge
funds: The final quarter of 2008 capped a miserable year
for the hedge fund sector. In addition to posting poor returns -
the HFRX Global Index fell 13.99% in sterling terms and finished
22.82% down for the year - the sector witnessed the biggest
corporate fraud totalling an estimated US$50bn. The allegations
against Bernard Madoff have raised fundamental questions about the
future of hedge funds in their current guise, especially from a
regulatory perspective. A report by Barclays Capital estimates that
these negative events will contribute to a contraction of 70% to
80% in the aggregate value of funds managed through 2009 and this
will undoubtedly have serious implications for the industry.
However, an irony may be that those surviving managers will find
opportunities for active trading and arbitrage easier to come by in
a less crowded market and it is likely that the best will survive.
Nevertheless, other issues remain, including a reduced appetite for
the provision of leverage to hedge fund managers and therefore the
short-term outlook remains uncertain at best. Against this
backdrop, we reduced our exposure to funds of hedge funds by 10%
during the quarter.
Alternative investments:
Commodities: Concerns over global growth intensified
through the quarter leading to downward pressure on many consumable
commodities. Notably, crude oil finished the year at a level most
commentators assumed would never be seen again and the prediction
for US$200 oil now seems a long way off. Collapsing demand has led
to production cuts by the OPEC oil cartel and calls for these to
continue are intensifying. The negative political impact of lower
oil prices are being felt in many countries, most notably in Russia
where the energy boom to bust has registered markedly with a
collapse in its currency and an increase in unemployment. A
marginal rise in the price of gold (+1.3% in US dollar terms)
seemed at odds with the heightened asset volatility and consequent
risk aversion observed through the fourth quarter. However, this is
misleading for sterling investors as the currency weakened some 18%
against the US dollar making the effective gain more
significant.
Actual return in
2008
-24.44%
Standard
deviation^
11.98%
Current
weighting
29.58%
Manager's comment: The final
quarter of 2008 was a traumatic one for capital markets as the
world's banking sector teetered on the edge of failure. A series of
globally coordinated measures were introduced by governments and
central banks in an attempt to stabilise the position and prevent a
complete collapse in the financial system. This tumultuous period
has left all investors scarred and delivered the worst returns from
equity markets since the Depression of the 1930s. Rising market
inefficiencies and abnormal liquidity issues have severely impacted
hedge fund managers, and collapsing earnings coupled with worsening
credit conditions have maintained the strong headwinds against
commercial property. Only cash and government debt provided
investors shelter during 2008, as capital migrated to short-dated
issues given their safe haven status. Inevitably, the core
portfolio has not escaped these unprecedented and challenging
conditions although we have sheltered investors from the very
worse. The global economy has entered 2009 in recession with the
key questions being how severe will it be and how long will it
last. We expect to see further corporate failures and rising
unemployment in the months ahead and we also expect further
intervention from policymakers as every effort is made to stimulate
economic activity. Against this backdrop, we intend to maintain a
very cautious approach to asset allocation with overweight
positions in cash and exposure to the high quality corporate bond
sector building steadily. Heightened volatility will continue to be
a theme through the year and we will remain determined to manage
this risk on behalf of our investors.
Sterling asset
allocation:
Performance vs benchmark:
|
|
2005
|
2006
|
2007
|
2008 YTD
|
Rolling 12 months
return
|
Since inception**
|
|
Total model portfolio
performance
|
10.21%
|
8.58%
|
2.01%
|
-18.96%
|
-18.96%
|
0.74%
|
|
Cash rate* (benchmark)
|
4.49%
|
4.48%
|
5.39%
|
4.64%
|
4.64%
|
20.85%
|
|
Standard deviation^
|
4.15%
|
3.56%
|
5.46%
|
9.12%
|
9.12%
|
6.61%
|
Performance figures are for the sterling core
portfolio model (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 core portfolio model.
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
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.