Present market conditions
Since our last review the markets have grown through July then dropped back in August, but they are still showing a slight profit over the last 2 months. This is consistent with the performance expected in late cycle and the portfolios are showing a profit year on year.
The political situation has worsened since June with the US and China increasing the trade war and BREXIT still unresolved, leaving the UK in ‘limbo’. Despite this uncertainty the markets have been resilient.
The US economy still looks reasonable but is predicted to slow over the next 2 years. The Asian economies are still growing, they have slowed due to the trade war however the markets have still slightly risen. Europe and the UK remain sluggish again partly due to Brexit. There is a possibility of a global slowdown next year, but many analysts are predicting this may lead to further US base rate cuts which in turn may stimulate the markets.
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. So, 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.
Yet again nearly all our portfolios have outperformed their sector average over the past 12 months. This we believe has been due to our timing into gold and global infrastructure as we appear to have entered the market at just the right time and have experienced all the recent substantial rises. Furthermore, we switched more into low cost bond trackers which have also performed well. So overall the decisions we have made have been positive.
Gold and infrastructure have risen significantly over the past 2 months, this has led to a natural increase of 2% extra holdings in Black Rock Gold and 0.5% in M&G Infrastructure within the portfolio. Despite the vast increases in these markets we intend to make small increases with regards to these holdings as we still believe market conditions are in their favour.
Asset Class Review
The world equity markets have grown selectively this year due to late cycle natural rises in the US, contrasted with the UK and the EU showing falls due to the political unrest and the Italian banking crisis. The US still has a strong economy and most of our equity holdings are in this sector. UK and European equities only represent a small proportion of our portfolio because of BREXIT and the potential for a general election. We will still hold a small amount of assets in this sector in case of a positive outcome, but we are reducing the UK and the EU equities further as we are not sure if a positive outcome is now possible as either a hard Brexit or a Corbyn government would be detrimental to markets. Asia remains resilient as the economies are still growing faster than the west but slowing down due to the trade wars.
Bonds / Government Debt
This market is recovering well now and thrives on insecurity so should rise more in the future. The US is still performing well and may reduce rates, and there is no evidence that the rest of the world has any plans to increase interest rates. This can therefore be a good environment for bonds, so we feel positive about this sector.
Overall gold prices have risen significantly due the fact the Fed has suggested that it may reduce interest rates later which should cause the dollar to fall. Gold often thrives in times of a falling dollar and a medium-term potential for a global slowdown. The market has risen substantially, and Black Rock Gold has risen 40 % since early June. Despite the market looking high the fundamentals are still in its favour, so we still feel moderately positive about this area.
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 actually expect this market to be out of political favour, so we intend to avoid this sector completely.
This market overreacts to negative news and if there are some signs of a global slowdown then this could detrimentally affect this sector. We are only prepared to invest into these regions via Asia or Global funds at present and not directly.
In our lower risk portfolio’s the level of cash is already relatively high due to all the uncertainty in the markets. We intend to keep relatively high holdings in this sector although small reductions will happen naturally to balance out the portfolio’s.
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.
In the past few months the markets have risen significantly, levelling out recently with the return of volatility. The political situation is insecure due to trade wars and awful politics in the UK. There is no predicting the outcomes yet, good or bad. Therefore, we are attempting to structure the portfolio in such a way as to add assets which perform well in late cycle. 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.
Please note and read portfolio 7 & 8 Clients.
A discrepancy has occurred on our portfolios 7 & 8. As we have allocated more high-risk assets such as gold, the risk profiles have actually fallen, so in effect the 8 is now a mid 7 and 7 is now a high 6 when tested on the FE risk profiler. We were perplexed as we have actually purchased more high-risk assets, but after more research into how the risk profile is calculated we have concluded that the hedging effect of gold in effect makes the overall portfolios lower risk, this despite gold being classed as a high-risk asset.
Most of our recent growth has come from a gold fund and the markets are still positive about gold. If you are not happy with this situation then please let us know and we can have a meeting and increase the risk profile accordingly. Otherwise, please be aware that in risk 7 and 8 your risk profiles are now naturally lower. We will obviously change this once the world political situation has stabilised and it will be reviewed again at our next meeting, but until normal volatility returns to the markets the risk profile of these portfolios may well stay below their natural risk scores of 7 and 8
Our fund performances are before certain product charges and have been rounded down to the nearest 0.5% over both 1 and 3 years as of 1st September 2019
- Portfolio 3 has grown by 6.5% and 13.5%
- Portfolio 4 has grown by 8% and 19.5%
- Portfolio 5 has grown by 8% and 22.5%
- Portfolio 6 has grown by 7.5% and 27.5%
- Portfolio 7 has grown by 8% and 31%
- Portfolio 8 has grown by 7.5% and 33%
All our portfolios are showing a profit over 12 months despite a background of extreme volatility and the FTSE being lower. We have kept the philosophy the same as at the last review with reduced costs, due to a combination of good quality fund managers and trackers. The economic and political background has not changed, and we believe our portfolios still have the right asset allocation for the current market conditions.
For our Portfolio Clients, Recommended fund adjustments:
Portfolios 5, 6, 7 and 8 only
Lindsell Train Global Equity. This fund has the top FE 5 Crown rating and a Silver morning star rating and has performed in the top quartile over 1 and 3 years. The fund has been chosen to diversify our reliance on Fundsmith into a high rated fund with a different global asset allocation. This fund has performed at 178% over 5 years compared to its sector average of 67% and is second only to our other fund, Fundsmith.
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.
Funds to sell
Investec Global Special Situations. We are selling this fund as the fund has fallen from glory over the last 12 months and has now been outperformed by the sector average over 1 and 3 years. The fund has lost significant amounts over 3 short periods and whilst there have been recoveries, we don’t believe these instances are good for a quality fund. The crown rating has dropped to 2 crowns. We have been keeping an eye on this fund and have finally lost our patience with it.
FP Crux Special Situations. This fund has lost its way somewhat again and is now a 2-crown rated fund. The fund manager is rated an alpha fund manager, so the fund is still potentially a decent fund. However, we believe its sensible to reduce our exposure to Europe due to the fact the EU economy is not performing well and they are also facing Brexit.
Funds to increase
We are recommending putting more into the Gold fund as it has been a spectacular success so far and this asset class often rises when the world is insecure. Furthermore, as the US shows potential signs there may be a recession in the future, then interest rates may fall and this normally reduces the value of the dollar and Gold is generally negatively correlated to the value of the dollar. We therefore think that gold may still be well placed despite the impressive returns of the fund over the last 12 months 60%.
M&G Global Infrastructure. This fund is a new fund which invests primarily into large scale building projects, building roads, rail, and even dams. Often if a recession occurs governments invest into infrastructure projects which create jobs and invest money into Infrastructure, a classic example is the Hoover Dam which was built after the 1929 crash in the 1930s.
All except 8
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 as a low-cost, lower risk fund which provides the lower risk side of clients portfolio’s.
Funds to reduce
Portfolio’s 5, 6, 7 and 8 only
Vanguard UK Tracker. This fund has been slightly reduced simply to reduce exposure to the UK facing BREXIT and a possible election.
Cash has been reduced to switch some capital into the Vanguard 20% Equity fund to increase exposure to bonds which have a better potential return. This will further diversify risk on the portfolios that it is part of.
Portfolio 7 only
Fundsmith. We are reducing the asset allocation to this fund simply to diversify within the global equity sector. As previously mentioned we have included the new fund Lindsell Trains Global Equity to our portfolio’s.