Core portfolio quarterly report
Core portfolio - Sterling quarterly report - 31 March 2010
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 enjoyed a recovery towards
the end of March both against the dollar and the euro. In the case
of the latter, this is due to the Greek debt crisis and the wider
implications this may have across the eurozone. With the outcome of
the forthcoming UK general election currently too difficult to
call, the near-term future direction of sterling will be heavily
influenced by the political landscape post 6 May. As for interest
rates, the futures markets are now pricing in a rate rise in the
final quarter of this year, although fluctuating economic releases
make it difficult to predict this with any confidence. The recovery
in the UK remains fragile and policymakers will want to maintain an
accommodative interest rate environment for as long as they
can.
Model Return in 2010
#
0.12%
Standard Deviation^ (12 month
rolling)
0.11%
Current
Weighting
30.42%
Bonds: The first quarter proved to be a good
one for fixed income assets in general. As a consequence of cash
rates remaining low, investors continued their reach for yield most
notably in credit and emerging markets. This helped lead to an
outperformance of both investment grade corporate bonds, with the
IBOXX Sterling Corporate Bond All Maturities Index returning 4.63%
over the period, and high yield as reflected in the Barclays Global
High Yield GBP Indexed which delivered an impressive 5.53%.
Unlike the last three months of 2009, UK government debt also
had a positive quarter as near-term inflationary concerns
dissipated contributing to a 1.20% rise in the IBOXX Stg Gilts All
Maturities Index. This was despite the ongoing negative sentiment
towards developed country sovereign debt as a consequence of the
deteriorating fiscal dynamics. The ongoing developments relating to
the peripheral European countries continued at a frenzied pace with
the rating agency Fitch downgrading Portugal to AA- and the ECB and
EU providing support to Greece. Greek debt spreads remained very
volatile and their issuance of a seven year bond was not well
received.
For the UK, the next few weeks will be dominated by the general
election. We expect that sterling and gilts will remain under
pressure in the run-up to 6 May, however, the longer term outlook
will largely be dependent on whether the UK's budget deficit is
addressed quickly. A loss of confidence in the new government's
commitment to doing this would see the currency sell-off, perhaps
putting pressure on the bank to tighten monetary policy in spite of
weak growth. However, should decisive action occur it could lead to
a significant rally for both sterling and gilts.
Model Return in 2010
#
4.84%
Standard
Deviation^
3.42%
Current
Weighting
42.58%
Equities: The global economic recovery
continued into 2010 with the MSCI World Index achieving growth of
4.16% in dollar terms and 9.4% in sterling terms during the first
quarter. Economic dataflow is positive indicating an improving
picture with many commentators raising their forecasts for world
GDP.
Equity markets are being driven by earnings which continue to
surprise on the upside and also the strong recovery in corporate
balance sheets due to cost cutting and low interest rates. With
improving dividend payouts, share buy backs and increasing mergers
and acquisitions activity it is not surprising that equity markets
have the wind in their sails and it is reasonable to expect further
upside while these conditions persist.
Despite this positive picture the macro concerns remain and in
particular the deflationary risks stemming from the high levels of
debt still facing both Western governments and consumers.
Therefore, in the medium term, investors will continue to watch
earnings and for signs that companies can continue to meet earnings
expectations or whether potential falls in consumer spending will
lead to sharp downward revisions in earnings forecasts in the
coming years.
In summary, we are witnessing a strange dichotomy between a
strong private sector and weak government finances - at this stage
of the cycle the economic outlook remains far from clear.
In early January, we reinvested 15% of the portfolio back into
equity markets via a defensive equity income fund reflecting our
view of further momentum-based upside in the near term, with a more
cautious medium-term outlook.
Model Return in 2010
#
3.46%
Standard
Deviation^
4.20%
Current
Weighting 15.05%
Property: We have remained uninvested into UK
commercial property throughout the quarter. We have contemplated
making an allocation, however, the economic frailties in the UK
could require decisive and swift action to return to cash if the
recovery turns out to be a little too exuberant too early. Property
is an illiquid asset class and is unlikely to allow a swift
reversal and, therefore, we are remaining cautiously uninvested
while continually monitoring the economic position.
Model Return in 2010
#
0.00%
Standard
Deviation^
0.00%
Current
Weighting* 0.00%
* Asset class exited on 19 February 2008
Alternative investments: Hedge funds: The
industry benchmark HFRX Index delivered returns of 1.63% (US dollar
terms) for the year to 31 March, which lagged many underlying asset
classes including global equities that gained 2.74% by comparison
(MSCI World, US dollar terms). While the hedge fund industry has
never been marketed on the basis of keeping track of equity bull
markets, many investors need convincing of hedge funds' ongoing
role in portfolio construction given the negative experiences of
2008, both from performance and liquidity perspectives. There is a
wide spread between the promise of hedge funds, measured by the
HFRI Index and the reality delivered of the investable HFRX Index.
This lack of transparency is driving the growth in hedge funds
adopting the highly regulated UCITS III structure and hedge fund
replication products. It is nevertheless interesting to note
relative value strategies such as those exploiting market
inefficiencies (arbitrage) have performed relatively well in recent
times suggesting such opportunities exist for skilled managers and,
most importantly, they have the means of exploiting them.
Alternative investments: Commodities: The Dow
Jones UBS Commodity index had a fall of 5.05% in the general price
of commodities (US dollar terms) through the first quarter.
However, this hides a positive trend in energy prices with Brent
Crude oil gaining 5.31% over the same period and breaching the $80
per barrel level. Technical analysts point to a level above $90 per
barrel being the next critical price target. Such energy rises are
exacerbated in the UK environment given sterling's fall of 5.93%
against the US dollar and press reports suggest that petrol prices
are now at record highs - an added headwind to economic recovery.
The emergence of this positive price trend in energy has raised
fears of cost-push inflation, which is at odds with many economists
who are sanguine about inflationary pressures in Western economies,
given assumed spare capacity. This debate is likely to rage for
some time before it becomes clear whether inflation materialises in
earnest and investors should be wary.
The investment committee decided to remove the core portfolio
allocation to commodities through Ermitage Resources, which is a
long-short specialist fund. While the fund has proved effective
through the turbulence of recent years, near-term performance has
not been compelling so an alternative solution is being sought
ahead of the proceeds, which are due at the end of May.
Model Return in 2010
#
-3.074%
Standard
Deviation^
2.45%
Current
Weighting
11.95%
Manager's comment: The mindset of the
investment community can currently be split into two camps. The
first captures those investors who are focused on the long-term
structural problems facing Europe and the US caused by the huge
public and private sector indebtedness. In the second camp lie
those investors who are encouraged by the positive economic and
corporate news flow and, in particular, the growth in earnings and
profitability currently being delivered by the corporate sector.
During this quarter we have introduced more equities to the
portfolio but remain alive to the downside risks which could
materialise, given the fragility of the recovery and set against
the context of the huge stimulus which still has to be
withdrawn.
Quarter 4 asset allocation
Quarter 1 asset allocation
Performance vs benchmark
|
|
2005
|
2006
|
2007
|
2008
|
2009
|
2010
|
Rolling 12 months
return |
Since
inception** |
|
Total model
portfolio performance
|
10.21%
|
8.58%
|
2.01%
|
-18.96%
|
6.76%
|
2.19%
|
9.06%
|
9.89% |
|
Cash rate*
(benchmark)
|
4.49%
|
4.48%
|
5.39%
|
4.64%
|
0.87%
|
0.12%
|
0.51% |
22.04% |
|
Standard
deviation^
|
4.15%
|
3.56%
|
5.46%
|
9.12%
|
1.90%
|
1.51%
|
1.51% |
5.90% |
# 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
other sources.