Present market conditions

Since our last review the markets have fallen from their highs then made a small recovery. Overall, the markets are still down over the past two months. The pound has risen on the news that a no deal BREXIT is less likely and could strengthen even more if the election sees a Conservative government and a decent deal on BREXIT.

The political situation has become more unpredictable since September with the US and China having still not declared a truce in the trade war. As for the UK, we are in a more uncertain position than before due to the election.

The US economy still looks reasonable but is predicted to slow over the next two years. The Asian economies are still growing even though they have slowed due to the trade war. However, they perhaps offer a little more value for money. Europe and the UK remain uncertain, but the forthcoming UK election is giving a greater probability of a Conservative win which may settle BREXIT and hopefully create some level of certainty. If Labour win, then this would be catastrophic for the UK markets as business certainly do not like the idea of a Corbyn led government. We need to base our asset allocation on the probability of the election results, of which current markets believe a Conservative majority is more likely.

There is mixed news on where the world economy currently sits within the economic cycle. The experts are also split on whether we are mid or late cycle, either way this may still represent some potential equity growth for the year ahead.

With regards to property, this asset class is subject to the potential for fund managers to instantly reduce the price and possibly suspend any money in or out of a fund as a protective move. If things go badly over Brexit, then the money would be stuck in declining frozen funds, so we have no intention to go into this market right now. Furthermore, if Labour win, then the property market is likely to move down significantly as they are planning on a full-scale attack on this market. The risk to this sector is simply not worth the risk at this moment.

Our portfolio’s are still ahead of the benchmarks over the past 12 months. This is due to our effective asset allocation. Most of this was due to gold and infrastructure, but over the past two months these funds have fallen back somewhat. Gold and infrastructure have risen significantly over the past 12 months; however, this was mainly due to many unresolved issues on the world markets. If the UK can sort itself out as well as a USA and China truce, then things could return to normal cyclical trading conditions.

Asset Class Review

Equities

World equity markets have actually risen over the past 12 months but have fallen back from their peaks over the past 2 months. Despite the uncertainty, the future is by no means predictable and with UK elections issues and the continuing trade wars, then anything could happen. However, we are cautiously optimistic for the next couple of months due to the reasonably high probability of a Conservative win and a reasonably possibility of a trade truce between China and the US. As a result, we are slightly more optimistic in the UK than previously, owing to the fact that the Pound has strengthened and should strengthen more with any potential good news. As such we intend to increase UK equities a little.

Bonds / Government Debt

This market has recovered well now and performs well in poor market conditions. As we are not out of the woods with bad news, then we obviously still need to help hedge the markets and keep a high proportion in low risk assets. This market is still a very important part of the portfolio to provide diversity which is essential in this uncertain world.

Gold Miners

Overall, gold share prices have fallen back in the past two months despite US interest rate cuts. This has demonstrated that this market probably became overheated thus causing some profit taking. Gold generally thrives in times of a falling dollar and a medium-term potential for a global slowdown. The Fed have suggested that they won’t cut interest rates in the next few months so no further stimulus for gold from the dollar. However, there is still a medium-term chance of a global slowdown, so we are more neutral on gold at this review. Gold funds can also be extremely volatile and thus the movements in this fund could affect the overall portfolio more then we would like. We are planning to cut back on this market as the gold story right now is not as good as it was.

Property

With regards to property, this asset class is subject to the potential for fund managers to instantly reduce the price and potentially suspend any money in or out of a fund as a protective move. If there is a general election and this is won by Corbyn, then we would expect this market to be out of political favour, so we intend to avoid this sector completely.

Emerging Markets

This market overreacts to negative news and if there are some signs of a global slowdown then this could affect this sector detrimentally. We are only prepared to invest into these regions via Asia or Global funds at present and not directly.

Cash

In our lower risk portfolio’s, the level of cash is already relatively high due to the uncertainty in markets. We intend to keep relatively high holdings in this sector although small reductions will happen naturally to balance out the portfolio’s.

Absolute Funds

These funds ‘hedge’ the volatility of the market by buying long and selling short so reducing the overall risk, protecting against the falls and thus reducing the volatility. This sector seems to be showing some signs of better performance perhaps due to the exploitation of volatility due to holding long term equities and short selling some.

Overall

In the past few months the markets have fallen back and remain volatile. The political situation is very insecure due to the trade war and awful politics in the UK. There is no certainty over any of the outcomes good or bad. Therefore, we are attempting to structure the overall portfolio in such a way as to add assets which perform well in late cycle but are diverse to reflect the insecurity. We are making small increases to the UK and Asia to diversify the portfolio further. Over the next few months the political landscape could change significantly and if this occurs we may have an emergency portfolio review so please keep an eye on your emails.

Our fund performances before certain product charges and are rounded down to the nearest 0.5% over both 1 and 3 years have been 1st November 2019

  • Portfolio 3 has grown by 7.5% and 12.0%
  • Portfolio 4 has grown by 9.5% and 16%
  • Portfolio 5 has grown by 11.5% and 17.5%
  • Portfolio 6 has grown by 12% and 21%
  • Portfolio 7 has grown by 12.5% and 22%
  • Portfolio 8 has grown by 14% and 23.5%

Summary

All our portfolios are showing a profit over 12 months despite the background of the extreme volatility and a recent fall back. We kept the philosophy the same at the last review with reduced costs with the combination between good quality fund managers and trackers. The economic and political background have not yet changed, and we believe our portfolios will have a sufficiently diverse asset allocation for the current market conditions.

For our Portfolio Clients, Recommended fund adjustments:

New funds

We are not adding or selling any new funds right now merely adjusting asset allocation of our existing funds

Funds to increase

All Portfolio’s

Vanguard UK FTSE All Share index we are increasing the UK a little as there is potential for issues such as the election and BREXIT to be closer to a resolution, however we are only making a very small increase due to the future still being very much uncertain. Furthermore, if the Pound strengthens further then UK assets may well provide better value for money than other asset classes. In summary we are remaining cautious but slightly increasing our UK risk exposure.

Fidelity Asia Opportunities this is a highly rated fund; it has performed very well over the last 12 months and has fallen less than other equity classes over the past couple of months. We believe the market may have a little more potential than other markets, as the economies are more resilient that that of the west. We intend to increase our holdings in this fund to create a little more diversity.

Portfolio 3 and 4 only

Vanguard Life Strategy 20% Equity. This fund holds mainly Bonds which are a lower risk asset. The fund has performed in the top quartile over 1, 3 and 5 years, despite the fact this fund is a blend of tracker funds it still has a FE 3 crown rating. This fund is being used a low-cost lower risk fund which provides the lower risk side of client’s portfolio’s which is essential in these uncertain terms.

Portfolio 5, 6, 7 and 8 only

Lindsell Train Japanese Equity. This fund also has the top FE 5 crown rating and a Silver morning star rating. The fund has performed in top quartile over 1, 3 and 5 yrs. Over 5 years the fund has grown at 148% as opposed to its sector average of 70% and is the 2nd best performing fund in its sector over 5 years. We are recommending this fund as a high-quality fund to diversify away from the UK and Europe which it has done well since we introduced it at our last review meeting.

Funds to reduce

Blackrock Gold & General. We are recommending a reduction in this fund but certainly not selling out. We merely feel that this fund needs reducing due to the fact its volatility can increase even more than it has recently. Also, the Infrastructure fund has a loose correlation to gold, thus we believe the portfolio may be a little too hedged and could choke off any growth if the markets rises.

Fundsmith. We are reducing this fund solely due to the volatility and the unpredictability of the present political and economic situation. We have a very high amount of assets held in this fund and the fund holds only 27 different shares. By reducing the holdings and spreading the assets into other funds, we will increase the diversity of our overall portfolio’s. This fund remains a superb fund and we may increase the asset allocation into this fund if the future starts becoming a little less ‘foggy’.

Brooks Macdonald Defensive Capital

Jupiter Distribution

Fundsmith Equity Fund

Fidelity Asia Pacific Opportunities

Vanguard US Equity Index

Vanguard FTSE Developed Europe ex-UK Equity Index fund.

Baillie Gifford American B Acc Fund factsheet

Vanguard LifeStrategy 20% Equity

Blackrock Gold & General

M&G Global Listed Infrastructure

Vanguard FTSE UK All Share Index

Vanguard Lifestrategy 40% Equity

Vanguard UK Investment Grade Bond Index

Fidelity Cash

Lindsell Train Global Equity

Lindsell Train Japanese Equity

Jupiter India

Schroder US Smaller Companies

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