Investment Newsletter July 2013
Mysterious Markets Markets continue to move in mysterious ways! We wrote last month about the bout of volatility we were seeing, brought on by rumours of the withdrawal of monetary stimulus (quantitative easing). This volatility has continued since our last newsletter, although happily we have seen more ups than downs since then! In the last edition we explained that the FTSE 100 had hit 6,840 on 22 May, but then dropped back to 6,336 on 6 June. Unfortunately, after our newsletter was issued the market kept on falling, getting as low as 6,029 on 24 June. We are pleased to report that the FTSE has since recovered much of its losses and as I write (18 July) it stands at just under 6,600. This means it is still above the level it was at the beginning of May, even if it not quite back to its peak. The US market has beaten its previous levels with both the Dow and the S&P 500 now trading at record highs. As always, we aim to buy low and sell high – these are investing basics but in reality quite hard to do! We therefore topped up equities for most clients as markets fell by buying a FTSE Allshare index tracker. We were not able to time the bottom of the market accurately but for most model portfolios we purchased at a market level of around 6,240. Given the recovery since then this investment is typically up around 6% and we may well sell this again should markets rise much further.
Getting QEasy I am starting to get somewhat tired of writing about central banks! Investing in the long term should be about fundamentals. How well are companies doing, are their earnings increasing which should mean an increase in share price or dividend pay-outs? How secure is the company from whom we’ve bought a corporate bond, what interest rate will they pay us and will they be able to repay our loan? How secure is the tenant in a commercial property, will they continue to pay their rent and how attractive is the rental yield? These are the main drivers of returns in equity, fixed interest, and property respectively. Yes, the economy affects all of these and one of the jobs of the central banks is the ensure stability of the economy. However, trying to second guess how much stimulus or otherwise they are going to add in the short term is nigh on impossible. Investors need to stop trying and remember what’s important. Based on fundamentals, we still think equities should provide decent returns for some time, short term volatility aside. Equally, as we showed last month, we are becoming more interested in property funds as the economy improves. We are less positive about fixed interest and have reduced exposure while altering the type of fund we hold. Although we think our fixed interest funds should still provide a reasonable return in the short term, we may well reduce exposure again in the near future. If we do so, we then need to decide where should we invest instead? Equilibrium Asset Management LLP (a limited liability partnership) is authorised and regulated by the Financial Conduct Authority. Equilibrium Asset Management is entered on the Financial Services Register under reference 452261. The FCA regulates advice which we provide on investment and insurance business; however it does not regulate advice which we provide purely in respect of taxation matters. Copyright Equilibrium Asset Management LLP. Not to be reproduced without permission
Investment Newsletter | July 2013
At this time, we generally do not want to increase equity or property exposure, as we feel our holdings are about right for the current environment. We may therefore increase the amount of cash held in portfolios in the short term, whilst we await other opportunities. We may also invest in very low risk but typically lower return funds, which we think will protect portfolios and beat cash, but may not do much more than this. It is important that you allow us to hold cash or cash-like funds for you at times where we feel it is necessary. It is vital that we balance those holdings with higher risk and higher potential returns (such as equity), with other holdings to reduce this risk and provide stability to the portfolio. Fixed interest is primarily meant to beat cash and inflation, as well as provide a balance against equity risk. It is an asset which typically ought to do ok if equity markets fall, meaning we can switch out to top up equities at a lower market level. If we are less convinced that fixed interest will achieve all of its main functions, we are forced to choose between funds which could provide a return or funds which should provide stability. Given we already have significant equity risk, we would be likely to choose stability in the short term. Any cash holdings will typically be relatively short term, and will be used to buy other assets as and when an opportunity arises. For example, if equities dip we could top up again, or if fixed interest became more attractive after a fall, we could buy back in.
Complex Products When meeting with new clients, we are increasingly coming across very complicated structured products in their portfolios. We have serious doubts about the suitability of some of these products. For example, clients who previously invested with the private banking arm of one particular high street name seem to have all been sold the same complicated product. This product is designed to capture trends in equities, property or commodities. Effectively, the idea is it invests in those asset classes that are in an up-trend and switches out of those assets classes that are in a down-trend. Sounds great in theory. This product suffers from several major drawbacks, not least of them being that it does not work! The product has lost money at a time when equity markets have risen substantially. This is because it only switches into each asset class once it has already starting rising and only sells an asset once it has started falling. It is reactive rather than proactive. Any gains that the product did make are also taxable as income which for some of the clients who have been sold the product would mean paying 40% tax on gains. Last and not least, the product is far too complex. Frankly, we have found it a task to understand how it works and if we find it difficult the typical bank customer will have no chance. Investing is, at heart, quite simple. Portfolio management requires time, hard work, and discipline, but it does not need to be complicated. One of the main way investors come unstuck is by trying to be too clever.
Mike Deverell Investment Manager Equilibrium Asset Management LLP Brooke Court Lower Meadow Road Handforth Dean Wilmslow Cheshire SK9 3ND United Kingdom Visit us at www.eqasset.co.uk t : +44 (0)161 486 2250 f : +44 (0)161 488 4598 e : askus@eqasset.co.uk Equilibrium Asset Management LLP (a limited liability partnership) is authorised and regulated by the Financial Conduct Authority. Equilibrium Asset Management is entered on the Financial Services Register under reference 452261. The FCA regulates advice which we provide on investment and insurance business; however it does not regulate advice which we provide purely in respect of taxation matters. Copyright Equilibrium Asset Management LLP. Not to be reproduced without permission
Market Views | July 2013
General Economic Overview The UK and Japanese economies have picked up sharply, whilst Europe has also improved. In the US and emerging markets, growth remains positive but less so than before. Inflation has increased again and remains well above the Bank of England’s 2% target. We do not expect interest rate rises for at least 12 months. QE may start to be withdrawn in the US by the end of this year. Asset class key + positive - negative = neutral (normal behaviour)
+5 -5
strongly positive strongly negative
Outlook Equity Markets After the recent setback we have upgraded our outlook, as we believe the outlook for many companies is improving. However, we expect some short term volatility with concerns about QE.
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Fixed Interest It seems likely that the 30 year rally in government bonds has now come to an end. This could drag down corporate bonds in turn, although there is value in selected funds. We have already reduced risk within fixed interest and reduced exposure, and may do so again in the near future.
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Commercial Property Capital values appear to have stabilised and may even be marginally increase. Should this continue, the asset class could produce reasonable returns primarily from the rental yield.
Cash With interest rates remaining at record lows, returns on cash could remain below average for some time.
Balanced Asset Allocation For a typical balanced portfolio we are overweight equity and alternative equity, underweight fixed interest and hold up to 10% in property. A neutral score (=) means we expect the asset class to move in line with our long term assumptions: 10% pa for equity, 7% for property, 6% for fixed interest, 5% for residential property, and 3% for cash. A +5 score means we think the asset class could outperform by 50% or more. A -5 score means we think it could underperform by 50%. A negative score does not necessarily mean we think the asset class will fall.
These represent Equilibrium’s collective views. There are no guarantees. We usually recommend holding at least some funds in all asset classes at all times and adjust weightings to reflect the above views. These are not personal recommendations so please do not take action without speaking to your adviser.
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