Core portfolio quarterly report
Core portfolio - Sterling quarterly report - 30 June
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: During this reporting period the Monetary
Policy Committee has maintained interest rates at a record low of
0.5% and the quantitative easing programme at £200bn. The newly
elected coalition government has started its tenure determined to
tackle the fiscal and budget deficits, imposing tax rises and cuts
in public spending. This has been well received by capital markets
and sterling has strengthened, particularly against the euro, as
investors have seen the gilt market as a relative safe haven.
Model return in 2010
#
0.20%
Standard deviation^ (12 month
rolling)
0.10%
Current
weighting
22.96%
Bonds: Bonds had a relatively good quarter,
both on an outright basis and versus most other asset classes.
Government debt continued the rally it has enjoyed since the start
of the year, as a convergence of risks undermined confidence and
drove a flight to quality. The European debt crisis intensified,
and along with it the stresses to its banking system. In addition,
economic releases disappointed and led market participants to
conclude that the tentative global recovery was losing steam; just
at a time when governments are withdrawing their stimulus programs
and fiscally retrenching.
In the UK, gilts and sterling rallied after the election result
and government bonds took further solace from a tough budget;
although some have expressed concerns that the latter was too
aggressive and risks tipping the UK back into recession. The bond
market pushed down inflation expectations, effectively re-pricing a
'V' shaped recovery into what PIMCO likes to call the "New Normal"
world of muted growth. Yields fell across the curve and for the
quarter gilts returned 4.75% to deliver an impressive 5.94% in the
year to date.
Returns from fixed income spread products were more mixed. The
IBOXX Sterling Corporate Bond All Maturities Index was up 3.66%
over the period, however, high yield suffered from the risk
aversion, especially in May, as reflected in the Barclays Global
High Yield GBP (H) Index which fell 0.27%. In emerging markets,
external debt spreads widened as the recent trend toward
differentiation continued with high quality countries
outperforming. Nevertheless, over the long-term investment horizon,
and given their strong balance sheets, we continue to favour
emerging market government debt - in particular local currency
issues, where investors have the additional opportunity to benefit
from anticipated currency appreciation.
Looking ahead, we anticipate that volatility will remain a theme
of bonds markets for the balance of 2010 and thus careful
management will be imperative. With yields at all-time lows,
developed government debt would seem to have little upside from
here. However, with falling default rates, low cash yields and
little near-term risk of inflation, selective areas of spread
product (including specific sectors of the high yield, investment
grade and emerging markets) remain relatively attractive on a
risk-adjusted basis.
Model return in 2010
#
3.86%
Standard
deviation^
5.44%
Current
weighting
37.71%
Equities: Equity markets suffered a significant
set back during the second quarter with the MSCI World Index
dropping by nearly 12% in sterling terms. At the end of June the
index was down around 4%.
Despite the continuation of strong corporate earnings, the
markets were rattled as macroeconomic concerns took over.
Specifically investors were concerned with the euro debt crisis and
also disappointing data from the US, suggesting that the US is
losing momentum and raising fears of a double-dip recession.
Additional fears of a slowing Chinese economy placed further stress
on the global recovery.
In the short term, it is reasonable to expect markets to stage a
recovery based on the forthcoming earnings reporting season and
valuations which are now looking more attractive, but in the longer
term much will depend on how the macro events in the eurozone, US
and Asia unfold.
Our decision to invest in the growth as opposed to value stocks
is delivering outperformance relative to the broader market and
will in our view be the correct position to deliver earnings growth
in what at best will be modest recovery in terms of global economic
growth.
Model return in 2010
#
-2.04%
Standard
deviation^
7.62%
Current
weighting
14.21%
Property: During the quarter, the investment
team decided to make an allocation of 10.25% across the core
portfolio into UK commercial property. We have selected a fund
which invests into primary, commercial property with financially
strong covenants, as tenants with the property portfolio are
diversified across the whole of the UK and in varying sectors. The
expectation is that yield (income) should make the majority of
returns and, while there could be a small amount of movement in
capital values, we anticipate much of the revaluation from their
oversold position has already occurred and we are investing here
for the opportunity of the income outperforming cash.
Model return in 2010
#
0.00%
Standard
deviation^
0.00%
Current
weighting*
10.25%
Alternative investments: Hedge funds: The
second quarter saw fundamental concerns returning to asset markets,
which is reflected by a near doubling of the Vix Index - a
commonly-used measure of implied equity volatility often referred
to as the 'fear index'. Despite the drop in global equities of
13.26% over the same period (as measured by the MSCI World Index,
US dollar terms), some hedge fund strategies are able to thrive
when volatility spikes occur. While hedge fund investors as a whole
have seen negative returns through the quarter - specifically a
fall of 2.79% for the HFRX Index (US dollar terms) - they have
found some protection from much larger falls elsewhere. Investors
are increasingly looking for downside protection in the current
environment and, while this is potentially costly and erodes
overall returns, the expense is deemed worthwhile. Hedge fund
strategies offering this return profile are receiving capital from
global asset allocators and this trend is set to continue. The
industry as a whole is repairing its damaged image, particularly
through vehicles which afford investors liquidity and
transparency.
The investment team made an allocation to an equity market
neutral fund during the period, which is capable of generating
returns using equity exposures in most market conditions.
Alternative investments: Commodities: Market
risk aversion appeared to elicit a seemingly rational response from
commodities markets through the quarter; the gold price advanced
11.59% (US dollar terms) and oil declined 9.14% (Brent crude, US
dollar terms). The latter reflects fears of the second leg of a
double-dip recession (ie, the demand for energy will suffer), and
the former indicates wider systemic concerns, with the potential
for a European sovereign crisis weighing heavily. The broad
commodity benchmark, the Dow Jones UBS Commodity Index, lost 4.85%
over the period and, therefore, continued the bearish theme. This
serves to endorse the views of central banks that inflation remains
under control for now.
The investment team took a position in gold through the quarter.
Gold is our preferred hedge against future inflation, financial
market instability and a collapse in confidence in the fiat money
system.
Model return in 2010
#
-5.35%
Standard
deviation^
2.83%
Current
weighting 14.87%
Manager's comment: The cautious asset
allocation we have maintained within the core portfolio has
protected our client's capital during what has been a difficult
quarter for markets. Continued fears over a potential sovereign
default in the eurozone and the threat this would bring to the
solvency of commercial banks in the region has drained investor'
confidence. Disappointing economic news in the US has further
shredded nerves and deflationary forces appear to be building. This
set back has not come as a surprise to us as we suspected markets
had got ahead of themselves given the challenging environment faced
by the global economy. The significant fall in asset prices has
created attractive valuations, both on an absolute and relative
basis, and we are well placed to take advantage of these once the
outlook becomes less opaque.
Quarter 1 - asset allocation
Quarter 2 - 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%
|
0.71%
|
5.60%
|
8.30% |
|
Cash rate*
(benchmark)
|
4.49%
|
4.48%
|
5.39%
|
4.64%
|
0.87%
|
0.20%
|
0.54% |
22.13% |
|
Standard
deviation^
|
4.15%
|
3.56%
|
5.46%
|
9.12%
|
1.90%
|
2.88%
|
2.88% |
5.83% |
# 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 and Fairbairn Private Bank
Limited.
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Authority in respect of regulated mortgage contracts only.
UK Financial Services Authority registration numbers:
Fairbairn Private Bank (IOM) Limited 313189
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Source: All data has been provided by Fairbairn Private Bank and
other sources.