Core portfolio quarterly report
Core portfolio - Sterling quarterly report - 31 December
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 fourth quarter has seen sterling
range from $1.58 to $1.68. Having drifted lower just before
Christmas, sterling then strengthened fuelled by comments from
Andrew Sentence, a Bank of England policy maker, that interest
rates may have to rise later in the year. This came on top of the
UK Producer Price figure in December jumping twice as much as
forecast. However, such talk seems premature and rates are very
unlikely to move from their current lows in the next quarter. It is
worth remembering that Japan has now had low rates for nearly 20
years and central banks are likely to wait until the green shoots
have become saplings before applying the brakes.
Model Return in 2009
#
0.87%
Standard Deviation^ (12 month
rolling)
0.07%
Current
Weighting
45.45%
Bonds: The diversity of the bond market was
highlighted this quarter as corporate issues continued their
positive trend, while government bonds suffered on-going weakness.
Over the three month period gilts, as measured using the IBOXX Stg
Gilts All Maturities Index, lost 2.19%, compared to the IBOXX
Sterling Corporate Bond All Maturities Index which returned 1.02%.
For the year, corporate debt has benefited from the normalisation
of extreme dislocation in asset prices, helping investment grade
bonds to significantly outperform to the tune of 15.80% versus
gilts (based upon the two indices above). High yield issues have
performed even better delivering a massive 57.27% in additional
return (using the Barclays Global High Yield GBP H Index) compared
to UK government bonds. As concerns regarding corporate defaults
dissipated, it was sovereign credit risk's turn in the spotlight.
First, with the near default of what had been perceived as
quasi-sovereign risk in Dubai and, subsequently, the on-going
concerns regarding Greece's fiscal deficit, resulting in downgrades
by all three rating agencies which pushed bond yields higher.
Looking ahead, the spectacular returns we have enjoyed from
corporate bonds in 2009 are unlikely to be repeatable and there
will be a need to be more discerning in order to identify the
attractive relative value in the year ahead. Monitoring sovereign
risk will be imperative and the up-coming UK General Election,
which may unsettle markets near-term, will provide direction to
both the gilt market and to sterling. Irrespective of the outcome,
the new government will be faced with an unenviable fiscal
position. The large scale borrowing needs are projected to drive
the public debt to GDP ratio to a shocking 78% by 2014 - 2015
(source: Invesco). For these reasons we have a long-term negative
outlook for gilts and are seeking better value in non-sterling
fixed income investments.
Model Return in 2009
#
13.89%
Standard
Deviation^
5.40%
Current
Weighting
16.20%
Equities: Despite renewed credit concerns in
Dubai, equity markets were able to continue their advance during
the final quarter supported by corporate earnings and a generally
improving economic picture. During the quarter, the MSCI World
Index increased by 2.67% and reached 13.97% for the year in
sterling terms. 2009 will be remembered as the year of stimulus and
bail out, and markets recovered strongly after the first quarter on
renewed confidence a financial meltdown had been averted and that
so much government money was underpinning asset values. Policy
makers now face a huge challenge to remove stimulus in a way that
supports continued growth, against the need to manage substantial
fiscal deficits. If they get the balance right then we can expect
to see improving economic indicators with rising employment,
consumption and corporate earnings growth. Against this backdrop it
can be argued that market valuations are not stretched and it is
reasonable to expect continuation of the equity rally into 2010.
Investors, however, will seek evidence that the economic recovery
is sustainable and, specifically, evidence that strong corporate
earnings will be achieved through revenue growth rather than cost
cutting. In other words, they will require assurances that the
private sector is strong enough to maintain the recovery in the
absence of government liquidity. We expect that there are many
bearish catalysts and potential aftershocks that could derail the
recovery, and there is much reliance on China which is in the
driving seat of global economic recovery. The Chinese authorities
face their own challenges in terms of managing interest rate and
currency levels, and there is a risk that the potential emergence
of protectionist measures could seriously hamper projected growth
rates. Similarly, many commentators are confident that the US
consumer will once again deliver on the optimistic side but the
outlook for the banking and property sectors is far from certain.
We are cautiously optimistic that the rally in global equities will
continue into 2010 and recent actions by the Chinese authorities
should reassure investors that they have appropriate controls in
place and are prepared to use them. Accordingly, we are actively
considering defensive opportunities for reintroducing an element of
equity risk in the portfolio.
Model Return in 2009
#
-19.76%
Standard
Deviation^
19.93%
Current
Weighting
0.00%
* Asset class exited on 2 March 2009
Property: With the residential property market
in the UK up 5.9% over 2009, many investors are considering whether
property is now a good investment. We choose to invest in
commercial property and while this has some similar influences to
residential property, investors are wise to consider them as
different asset classes, with commercial property much more
influenced by the level of economic activity. UK commercial
property ends 2009 4% higher than it started and late in the year
the investment committee decided to allocate capital to this asset
class. However, as with many asset classes, there was a rally late
in the year causing us to defer our investment for a point that we
believe will show better value than we are able to buy at the
current time. Therefore, while we expect UK commercial property to
outperform cash over a 12 month period, our faith this will occur
is more marginal at current valuations. However, we expect to take
advantage of a buying opportunity within the next three months and
have identified an appropriate fund.
Model Return in 2009
#
0.00%
Standard
Deviation^
0.00%
Current
Weighting*
0.00%
* Asset class exited on 19 February 2008
Alternative investments: Hedge funds: Hedge
funds, as measured by the HFRX global hedge fund index (US dollar
terms), delivered returns of 2.15% through the final quarter of
2009. This completed the best calendar year for the asset class for
10 years (+13.40%) and the first double-digit returns since 2003.
Following the severe losses in 2008 (-23.25%), this provided at
least some sign of a recovery in the fortunes of less constrained
asset managers, although it should be noted that more conventional
risk assets - notably equities and corporate bonds - provided
greater rewards through the year. Anecdotal evidence from
established hedge fund managers suggests that fund inflows
continued through the year as the sector regained some of its
lustre, although it is not thought to have repaired aggregate fund
values following the massive withdrawals after the events of 2008.
Efforts by the industry to enhance its marketability through more
transparent and better regulated fund structures became evident
through 2009 as managers seek new ways to build assets under
management.
Alternative investments: Commodities: Benchmark
commodities registered strong positive movements in the fourth
quarter with Brent crude oil gaining 14.08% and gold appreciating
8.86% (both US dollar terms), locking in rises of 84.87% and 24.36%
respectively for the full year 2009. Commodity prices have
certainly benefited from a weakening dollar with the currency
falling by circa 11% against sterling through the year by way of
example. The prospects of a return to economic growth - however
anaemic - in the US and other developed economies has clearly
played a role in advances across energy and industrial raw
materials. Opinion is now split as to the near-term economic
fortunes of the larger economies of the world and the impact this
may have on productive commodities. The future path of gold as the
classic safe haven asset may also depend on its use as a hedge
against the fortunes of major developed currencies, which face
pressure from the weight of huge government borrowing in the years
ahead. The investment committee has retained the core portfolio
allocation to a hedge fund focused on commodity investments but we
remain out of more general hedge fund exposures. Following the
commitment made to a global total return bond fund through the
second quarter of 2009, we have added a further specialist bond
fund to the alternatives allocation. This is a UK focused fund with
relative insensitivity to interest rate risk and a current strategy
geared towards careful credit selection in the corporate bond
space. We are now fully invested to alternatives.
Model Return in 2009
#
20.27%
Standard
Deviation^
7.97%
Current
Weighting
38.35%
Manager's comment: Risk appetite continued to
rise through the final quarter of 2009 as corporate earnings
surprised on the upside and macroeconomic data continued to support
the view Western economies were emerging from their period of sharp
contraction which began in 2008. Policymakers have been buoyed by
the progress made, however, they recognise this is a direct result
of unprecedented stimulus which will have to be tempered during
2010. At the same time, fiscal deficits and servicing the interest
accruing thereon will be a significant constraint on growth.
Monetary, fiscal and regulatory policy issues are set to dominate
the minds of investors and we sense volatility may return as news
flow is avidly analysed and assessed. Against this backdrop, we
will maintain our cautious stewardship of the assets within the
core portfolio and use the tools available to us to maximise risk
adjusted returns.
Quarter 3 asset allocation
Quarter 4 asset allocation
Performance vs benchmark
|
|
2005
|
2006
|
2007
|
2008
|
2009
|
Rolling 12 months
return
|
Since inception** |
|
Total model
portfolio performance
|
10.21%
|
8.58%
|
2.01%
|
-18.96%
|
6.76%
|
6.76%
|
7.54%
|
|
Cash rate*
(benchmark)
|
4.49%
|
4.48%
|
5.39%
|
4.64%
|
0.87%
|
0.04%
|
21.90% |
|
Standard
deviation^
|
4.15%
|
3.56%
|
5.46%
|
9.12%
|
1.90%
|
1.90%
|
6.02% |
# 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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Fairbairn Private Bank (IOM) Limited is licensed by the Isle of
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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.