Core portfolio quarterly report
Core portfolio - Sterling quarterly report - 31 March 2009
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: The global economic environment
deteriorated further during the first quarter of 2009 and the
world's major governments and policy makers have the challenging
task of stimulating their domestic economies. The UK base rate has
been cut to an all time low of 0.50% but it has become clear
standard monetary policy tactics are inadequate to arrest the
current rate of economic decline. Quantitative easing has been
introduced with the objective of ultimately boosting household and
corporate spending. If it works, inflation will return alongside
rising interest rates.
Actual return in 2009 YTD
0.41%
Standard deviation^ (12 month rolling)
0.44%
Current weighting
50.15%
Bonds: The most significant news for bond
markets this quarter was the announcement by a number of major
governments - including the UK - that they were adopting
unconventional strategies in the form of quantitative easing. The
term refers to a policy by which the government buys bonds and/or
corporate securities in order to try and drive down the longer end
of the yield curve and reduce borrowing costs. Policies have also
been introduced to eliminate toxic assets on banks' balance sheets.
Not surprisingly, the fixed income markets reacted positively to
the news - with the ten-year gilt experiencing the largest one-day
rally since the Bank of England was granted independence in 1997.
This positive sentiment had a lesser impact on the corporate bond
market, where prices fell over the quarter on continued risk
aversion and deleveraging by participants. As a consequence, at the
end of the first three months of 2009, UK government bond prices
were down by 0.23%, having recovered most of their losses after a
poor start to the year; whereas sterling corporate bonds fell
8.18%. This underperformance of the corporate sector can be largely
attributed to the market's significant weighting in financials,
whose subordinated debt continued to sell-off over concerns that
some issues may be restructured via debt-for-equity swaps. In this
context, the two actively managed investment grade bond funds we
are invested in have performed relatively well, falling by 0.59%
and 1.89%. We currently have a 30% allocation to bonds within the
core portfolio. We remain confident that, at current levels,
investment grade bonds offer good value and attractive yields, with
the potential for capital gains when prices improve in the medium
term.
Actual return in 2009 YTD
-0.70%
Standard deviation^
8.81%
Current
weighting
29.96%
Equities: As expected, equity markets continued
to follow a volatile and downward path during the first quarter,
with the MSCI falling by a further 10.6% in dollar terms and 12% in
sterling. This was despite a rally in March when markets saw a
tentative improvement in some leading indicators as a positive sign
that policy actions were starting to work. The degree of fiscal,
monetary and quantitative easing that governments are applying, as
most recently evidenced by the G20 outcome, is unprecedented but
the impact remains uncertain both in terms of the size and the
nature required. Consequently, we expect markets to remain volatile
and renewed downward pressure can be expected should the eventual
outcome of these actions become doubtful. During the quarter we
reduced the equity allocation to nil to protect the portfolio
against the potential for further downside. Looking ahead, it
remains to be seen whether or not the positive sentiment witnessed
in March is part of a lengthy bottoming process and this will be
determined by economic data over the next few months. Some
consolidation can be expected sooner rather than later, especially
if quarter one corporate earnings disappoint, with forecasts
already set at low levels. In order to commence reinvesting we will
require confidence of a more sustained recovery and this in turn
will require firmer signs of a brighter outlook than are currently
available.
Actual return in 2009 YTD
-19.87%
Standard deviation^
21.99%
Current weighting
0.00%
Property: The investment committee has
continued to allocate a zero weighting to property in the current
environment. The performance for property during the first quarter
as measured by the investment property data bank UK all property
sector index was -6%. As the economy continues to remain
challenging, we predict property will likewise continue to suffer
in this environment and investors are unlikely to be rewarded above
cash, even with the very low cash rates available. Therefore, we
continue to watch the market for signs of a recovery but do not
feel ready to invest yet.
Actual return in 2009 YTD
0.00%
Standard deviation^
0.00%
Current weighting*
0.00%
* Asset class exited on 19 February 2008
Alternative investments: Hedge funds: The much
anticipated Darwinian process within the hedge fund arena whereby
the weakest strategies fail has been evident although, as one may
expect in such an opaque industry, this has been far from clear
cut. Fewer players chasing trading opportunities will likely
benefit from reduced competition and the unprecedented capital
market disruption through late 2008 has eased somewhat, even if
volatility has not. All of this has helped the broad hedge fund
industry to post positive returns for the quarter with the HFRX
Global Hedge Fund Index returning 0.80% for the year to 31 March.
We have taken the opportunity to further reduce our exposure to the
asset class by selling into this relative strength. Restrictive
dealing terms for hedge funds and extended settlement periods, that
were imposed by many managers following heavy redemption levels due
to investor nervousness, have begun to ease and a clearer picture
will undoubtedly emerge about the state of the industry going
forward. Nevertheless, the big question of future regulation
remains unanswered with many governments believing action is
required.
Alternative investments: Commodities:
Sterling-referenced broad commodity returns, as shown by the Dow
Jones AIG Commodity Index gaining 0.68% through the quarter, mask
interesting dynamics within the asset class. The quarter was
dominated by the governments of major economies seeking solutions
to the global recessionary environment. Massive Keynesian stimulus
announced by the US and China has helped to support industrial
metals as production data improves. Global oil prices have also
received a boon from this news with the benchmark West Texas
Intermediate gaining 11.3% over the first quarter. Gold reinforced
its status as the backstop asset in times of crisis with a 4% US
dollar gain over the same period and significant investor flows
through the quarter as equity markets gyrated wildly.
Actual return in 2009 YTD
10.18%
Standard deviation^
15.85%
Current
weighting
19.89%
Manager's comment: We entered 2009 very nervous
of the fast deteriorating global macroeconomic environment. It was
clear corporate news flow would be weak and the prospect of rising
unemployment would be an issue to focus the minds of policy makers
around the world. To their credit we have witnessed an
unprecedented coordinated monetary and fiscal response, which has
left investors with no doubts about their determination to remedy
the position. Where doubts do lie is whether the response is
adequate enough or whether the action being taken is simply stoking
up a wave of further problems to come. This ambiguity is leading to
volatile markets and has led us, as managers, to continue focusing
on capital preservation.
Quarter 4 asset allocation:
Quarter 1 asset allocation:
Performance vs benchmark:
|
|
2005
|
2006
|
2007
|
2008
|
2009
YTD
|
Rolling 12 months
return
|
Since
inception** |
|
Total model
portfolio performance
|
10.21%
|
8.58%
|
2.01%
|
-18.96%
|
0.03%
|
-14.60%
|
0.77% |
|
Cash rate*
(benchmark)
|
4.49%
|
4.48%
|
5.39%
|
4.64%
|
0.41%
|
3.75%
|
21.34% |
|
Standard
deviation^
|
4.15%
|
3.56%
|
5.46%
|
9.12%
|
N/A
|
9.27%
|
6.42% |
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. 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.
Notice: 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
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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
Bloomberg.