Core portfolio quarterly report
Core portfolio - Sterling quarterly report - 30 June 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 UK base rate has remained at its all
time low of 0.50% over the course of the last quarter. An effective
stimulative package to encourage lending / spending is still to be
sourced by the UK government with further quantitative easing
measures likely to be introduced through the remainder of
2009.
Model Return in 2009 YTD
#
0.50%
Standard Deviation^ (12 month rolling) 0.55%
Current
Weighting
42.78%
Bonds: The second quarter of 2009 saw a very
strong rally in corporate bonds. Credit spreads on both investment
grade and high yield issues contracted significantly, as improved
risk sentiment saw investors moving into the sector to take
advantage of the attractive yields on offer. The IBOXX Sterling
Corporate Bond All Maturities Index delivered 11.28% for the
three-month period and is now up 2.17% for the year to date. The
record-breaking supply of new issues continued as, with bank
lending severely restricted, companies turn to the capital markets
to provide their funding needs. Going forward, we do not believe
returns will be as impressive, however, we still see value in
holding investment grade credits and anticipate the market will be
well supported by continued inflows into the asset class. We expect
to see a significant increase in default rates, due to the on-going
weak economic conditions, and consequently careful bond selection
will be key to good investment returns.
In global government bonds, volatility was once again the
dominant factor as the focus swung from concerns over the weight of
government bond supply to a return to risk aversion. The UK
government bond market was particularly volatile, as the actions of
the Bank of England regarding quantitative easing lead to on-going
questions regarding the structure, validity and depth of the UK
market. The IBOXX Sterling Gilts All Maturities Index returned to
-1.42% for the quarter and the yield on the 10-year gilt rose 52.2
basis points to 3.68%. The consensus is that, given the uncertainty
and the significant future funding requirements, gilts offer little
value at current level.
Model Return in 2009 YTD
#
4.10%
Standard
Deviation^
8.40%
Current
Weighting
30.90%
Equities: The second quarter proved to be a
positive one for global equities as markets rallied on the
so-called "green shoots". Specifically positive macro indicator
surprises leading to increased expectations of economic recovery.
Markets were also supported by the continued intervention of
central banks which helped boost confidence in the banking sector
and improve liquidity. The MSCI World Index ended the quarter up
15.4% in dollar terms and 4.2% in sterling terms. Year to date the
index is up 3.2% in dollar terms and down 8.2% in sterling. As
previously reported, during the first quarter we reduced our equity
exposure to zero in order to limit the potential for further
downside and we are now looking for evidence of a sustained
recovery in the global economy before committing to the asset
class. The recovery in global equity markets began to stall in June
with the notable exception of the Asia Pacific region. Signs of an
imminent economic recovery were not helped by the latest release of
unemployment data in the US and concerns that any meaningful
recovery in the US housing market still lies some way in the
future. Whilst it is clear the coordinated action taken by
governments and central banks has supported financial stability and
liquidity, concerns have emerged as to the level of further support
required to sustain the recovery, which has prompted inflation
worries. Therefore, investors still have much to ponder and all
eyes will be on corporate earnings as the second quarter reporting
season commences. In June it appeared that investors were ready to
pause for breath and take profits, and they will require strong
earnings reports to convince them that there is potential for
further upside in the near future. It is clear that the global
economic picture has improved since the start of the year but risk
aversion, driven by rising US unemployment, housing and consumer
spending, is likely to continue in the short term. In this
environment, we expect volatility to remain high and buying
opportunities could therefore emerge.
Model Return in 2009 YTD
# -19.76%
Standard
Deviation^
19.79%
Current
Weighting
0.00%
Property: Throughout the second quarter, the UK
economy has continued to contract, and commercial property has
fallen further in value due largely to the supply dynamics and the
rising rate of tenant defaults. It is expected that this
environment will persist throughout the third quarter although
recovery is expected by some property investors towards the end of
this year or the beginning of next. Within a six-month window, we
do not expect property to provide a positive return with any degree
of certainty and therefore currently remain 0% allocated. This may
change as the year moves on and if the prospects for a sustained
economic recovery grow.
* Asset class exited on 19 February 2008
Model Return in 2009 YTD
#
0.00%
Standard
Deviation^
0.00%
Current
Weighting*
0.00%
Alternative investments: Hedge funds: The
performance of global stock markets (eg, MSCI World Index +19.73%
in US dollar terms) was not wholly reflected in performance of
hedge funds through the second quarter (HFRX Global Hedge Fund
Index +4.85% in US dollar terms). However, the comparison is more
favourable on a year to date, for which the figures are +4.76% and
+5.56% respectively. The lower correlation perhaps reflects the
changing positioning of hedge fund of fund managers who seem to be
favouring relative value strategies over their more directional
peers. The debate over the future regulation of the alternative
investments market has emerged as a major story in the hedge fund
sector, with a plan to tightly regulate on a pan-European basis
drawing fierce criticism from industry players. As London is the
major centre for the hedge fund industry, this will likely lead to
the mobilisation of a powerful lobby group against such plans.
Alternative investments: Commodities: Similar
to equity investors, those who committed capital to this asset
class through the second quarter of the year have enjoyed excellent
returns - the Dow Jones UBS Commodity Index returned +11.62% (US
dollar terms) over the period. However, sentiment turned more
cautious through June as doubts over the strength of economic
recovery have surfaced coupled with clear evidence that Chinese
inventory purchases, a key driver behind price rises, have been
curtailed. This shift in sentiment has hit mining shares, with the
sector being the worst performer in the FTSE World Index through
June. The gold spot price fell 5.4% over the month, although the
price of oil continued to rise - Brent Crude spot rose 5.2% and was
63.6% year to date by the end of June. Our allocation to
alternative investments has risen during the quarter, however, we
have not built positions in hedge funds or commodities. We have
introduced a global bond fund which affords the manager a very
flexible mandate to capture investment returns. This includes the
opportunity to commit capital to domestic emerging nation debt
markets and thus take currency positions. The unconstrained nature
of this mandate has led us to categorise this allocation to our
alternative investments sector.
Model Return in 2009 YTD
#
11.56%
Standard
Deviation^
15.77%
Current
Weighting
26.32%
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 1 asset allocation:
Quarter 2 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%
|
1.81%
|
-12.87%
|
2.57% |
|
Cash rate*
(benchmark)
|
4.49%
|
4.48%
|
5.39%
|
4.64%
|
0.50%
|
0.38%
|
21.45% |
|
Standard
deviation^
|
4.15%
|
3.56%
|
5.46%
|
9.12%
|
N/A
|
9.26%
|
6.27% |
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.
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Source: All data has been provided by Fairbairn Private Bank and
Bloomberg.