Core portfolio quarterly report
Core portfolio - Sterling quarterly report - 30 September
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: Sterling has been coming under increasing
pressure after reaching a recent peak against the dollar in May.
While there have been some positives within the plethora of
economic releases, especially as far as the housing market is
concerned, there have also been negatives with the most recent
being the Industrial Production numbers which fell 2.5 % month on
month. Notwithstanding this, there is an acceptance the economic
outlook has improved, a view recently endorsed by the International
Monetary Fund who raised the UK's growth forecast for 2010,
estimating that GDP will increase by 0.9%, up from July's
prediction of 0.2%.
With regard to interest rates, the UK base rate has remained at
its all time low of 0.5% over the course of the last quarter. It is
very unlikely that we will see any near- term change in policy from
the Bank of England and its quantitative easing programme is set to
continue.
Model Return in 2009 YTD
#
0.72%
Standard Deviation^ (12 month rolling)
0.46%
Current
Weighting 44.78%
Bonds: It was another stellar quarter for
corporate bonds, with particularly strong performance from issuers
in high yield and subordinated financials, as investors continued
their "reach for yield". The IBOXX Sterling Corporate Bond All
Maturities Index returned 11.52% for the three-month period and is
now up 13.94% for the year. The supply of new issues continued
unabated and was met by strong demand from investors. The on-going
inflows into corporate bond funds and lack of liquidity in the
secondary market helped ensure the "hottest" deals attracted order
books many multiples of their issue size.
The positive liquidity flows have also been supportive for
global government bonds. Gilts had a strong quarter - helped in
part by the announcement, in August, that the Bank of England would
be expanding its quantitative easing by purchasing an additional
£50 billion in government and corporate debt. The IBOXX Sterling
Gilts All Maturities was up 3.22% for the three months and 1.52%
for 2009. In contrast, sterling suffered over the same period,
losing 7.1% versus the euro and 2.7% versus the US dollar. Concerns
remain as to the ballooning UK budget deficit and associated supply
of future government debt. As a consequence, the majority of market
participants are of the view that over the coming months, the risk
for both sterling and gilts is to the downside, with the potential
for a small amount of further tightening in credit spreads. The
main topics for debate are: when and how the bank will implement
its quantitative easing exit strategy; the on-going vulnerability
of the banking sector and the risk of triggering inflation by
delaying rate rises. One thing is for sure, going forward, bond
investors will need to consider the risk-return equation more
carefully.
Model Return in 2009 YTD
#
11.86%
Standard
Deviation^
7.25%
Current
Weighting
32.06%
Equities: Equity markets continued their
advance during the third quarter as government stimulus around the
world helped to further restore confidence and an increased
appetite for risk. During the quarter the MSCI World Index
increased by 20.3% and now stands at 10.4%, up on a year to date
basis in sterling terms.
Some commentators have named this recovery the 'Cash for
Clunkers' rally referring to the action taken to support the US
economy. Investors are encouraged to invest in capital markets in
the knowledge that market valuations are not stretched, cash
returns are near zero, and perhaps most importantly, that a
collapse in value is unlikely while government money is
underpinning asset values. Second quarter corporate earnings also
surprised on the upside as companies were able to reduce costs at a
level which more than compensated for the expected falls in
consumer spending.
As we enter the third quarter reporting season, investors will
require further evidence that the rally can be sustained. The
corporate cost cutting exercise achieved in the previous quarter
was a one off and any improvement in future earnings will depend
much more on sustainable economic improvement and confidence that
predicted growth rates can be achieved. At this point the evidence
suggests that orders and consumer demand have only improved at
modest levels and rising unemployment levels will not provide any
support in the short term.
There is a wall of money sitting on the sidelines that investors
will use to buy the dips but there is also evidence of several
bearish catalysts which lie not too far behind the scenes. The
economic newsflow can best be described as mixed in terms of
sentiment and concerns grow particularly in the US and the UK of
rising unemployment, fiscal deficits and what will support the
economy when the government stimulus pot is empty.
Sentiment has clearly recovered but it may soon start to stall.
We continue to maintain our core equity weighting at zero accepting
that the rally may continue in the short term but we believe with
ever increasing conviction that the potential upside is smaller
than the downside. Accordingly we continue to seek capital
preservation and diversification, and will continue to do so until
we can see that value opportunities are starting to cyclically
emerge.
Model Return in 2009 YTD
#
-19.76%
Standard
Deviation^
3.72%
Current
Weighting*
0.00%
Property: We have maintained a nil exposure to
UK property throughout 2009, however, as we turn into the fourth
quarter, we have recently decided to use some of the cash held in
portfolios to invest into commercial property.
With the UK commercial property sector down significantly from
its highs and with yields in cash at almost zero in comparison to
an average of around 7.5% in UK commercial property, we now believe
the asset class will outperform cash over the next 12 months.
With this in mind, we are seeking an appropriate vehicle to
provide an investment into UK commercial property. Our research
will be based on those managers actively seeking to invest in
sectors that, in their opinion, are likely to hold value through
the remainder of the recession, and therefore have some
sustainability.
Model 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: Hedge
funds in general delivered modest returns once again through the
third quarter (HFRX Global Index gained 5.15% in US dollar terms)
when compared to other risky markets - principally equities and
corporate bonds. Even those segments within the hedge fund space
with the ability to participate in equity market rallies (eg,
equity long-short funds) failed to deliver surely reflecting a
nervousness about how far markets have moved since March this year
and the sustainability of the rally. One concern for investors may
be connected with defensive positioning being so poorly rewarded
that managers eventually capitulate and look to increase
directional exposure at a time when greater risk aversion returns.
Despite general concerns regarding the sector, anecdotal evidence
regarding an increase in investor appetite for hedge funds is
emerging with meaningful net inflows being reported for hedge fund
providers that provided shelter through the market storms of
2008.
Alternative investments: Commodities: Broad
commodity returns as measured by the Dow Jones UBS Commodity Index
(US dollar terms) showed gains of 4.20% in the three months to 30
September. A notable laggard within the index was energy with
benchmark Brent Crude oil recording a price drop of 3.15% (in US
dollars) over the same period - perhaps an underlying sign of
concerns emerging over the picture for global growth. By contrast,
precious metals (gold and silver both gained 8.75% and 22.34% in US
dollar terms respectively) surged ahead and this begs the question
of whether commodity markets are giving investors different
economic signals to those apparent in equity markets. Significant
increases in the price of gold is classically a sign of heightened
risk aversion and yet the two appear to be positively correlated
right now. Only time will tell which of these signals proves
correct or if new dynamics are emerging. One theory relates to risk
free (ie, cash or equivalent) returns being so poor that investors
are being attracted to a wide range of risky assets in a quest to
add returns - this increased demand across the board could explain
unusual positive correlations.
Model Return in 2009 YTD
# 16.92%
Standard
Deviation^
2.07%
Current
Weighting*
23.16%
Manager's comment: Capital markets rallied
strongly during this third quarter and the multi-asset class core
portfolio has delivered its strongest three months return since
quarter four in 2006. Notwithstanding this, we have maintained a
defensive asset allocation throughout the quarter, as we believe
the economic recovery has to overcome challenging structural
imbalances before policymakers and investors can be confident
sustainable global growth has returned. The near term success of
extraordinarily loose monetary policy and coordinated government
stimulus is there for all to see, however, the imbalances caused by
years of easy credit to the household and corporate sectors, and
the subsequent ballooning of public finances as a cost for averting
the collapse of the global financial system, will take years, not
months, to repair. We are concerned western consumer spending will
be weak as debts are repaid and savings are rebuilt; we are equally
concerned low capacity utilisation, rising commercial property
vacancy rates and a banking sector unwilling, or unable to lend,
will not result in a meaningful pick up in business investment.
These factors, coupled with the challenge faced by central bankers
to exit current strategies neither too soon nor too late, make us
believe it is right to err on the side of caution as we deploy risk
capital within the portfolio.
Quarter 2 asset allocation
Quarter 3 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%
|
5.39%
|
-4.88%
|
6.17% |
|
Cash rate*
(benchmark)
|
4.49%
|
4.48%
|
5.39%
|
4.64%
|
0.72%
|
0.46%
|
21.71% |
|
Standard
deviation^
|
4.15%
|
3.56%
|
5.46%
|
9.12%
|
N/A
|
9.10%
|
6.16% |
# 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 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.
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Financial Services Commission to carry on deposit-taking and
investment business. 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
other sources.