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The Vintage Investment Committee held its quarterly review meeting on 27th February. This Report summarises the main points that were discussed during that meeting.

 

MARKET REVIEW

Global equity markets endured a difficult time in 2018, resulting in the first calendar year of negative returns since 2008. The main indices in the five largest markets produced the following returns in 2018.

From the low point reached on Christmas Eve, the FTSE 100 Index has since rallied by more than 8%, whilst the FTSE 250 Index is up more than 11%. Even more impressively, the Dow Jones Industrial Average has risen 19% from its December low, as has China’s Shanghai Composite Index. Elsewhere, the main indices in Germany and Japan have each recovered by 11% since December.

 

MARKET OUTLOOK

It is pleasing to note the strong recovery of share prices over the past two months. The committee discussed the reasons for the improvement in investor sentiment and the following conclusions were reached;

 

• The prospects of a no-deal Brexit have reduced since December.
• Recent economic data from the USA indicates interest rates are likely to rise at a slower pace in 2019 than previously feared, if at all.
• Although China’s economic growth continues to slow, China has taken action to “slowdown the slowdown”.
• Investors are hopeful of a positive resolution to trade negotiations between the USA and China.

 

Although the risks associated with the above have seemingly receded, it would be premature to dismiss these risks altogether. We should also remain mindful of the potential for other issues to arise throughout the year. Nevertheless, there was a strong consensus on the Committee that many forecasts were overly gloomy and that the prospects for investment portfolios over the next twelve months are positive. This optimistic view was based on factors including;

 

• At least some of the risk to UK companies from Brexit is already priced in, with share prices trading below long term average price to earnings ratios.
• Any outcome aside from a no deal Brexit would likely be deemed a positive for UK share prices.
• Even in the event of a no deal Brexit, portfolios should benefit from a degree of currency protection, in so far as further depreciation of Sterling will benefit overseas investments, as well as some UK companies that generate significant profits from operations abroad.
• Any panic selling that might occur in the event of a no deal Brexit is expected to be short-lived.
• The global economic outlook remains positive and could be boosted by a trade deal between the USA and China.

 

In conclusion, investors became increasingly nervous as the storm clouds gathered during 2018, but we are hopeful that the actual storm won’t be as bad as many feared. If that proves to be the case, the recent recovery in share prices should be maintained.

 

PORTFOLIO COMPOSITION

The Committee reviewed the asset allocations of our Model Portfolios and there was unanimous agreement that the current allocations remained suitable. However, we discussed at length whether cash should be part of each model, or if we should exclude cash from the models altogether. We agreed that the cash element of each client’s portfolio should be decided on an individual basis, taking into account the client’s personal preferences, overall objectives and income needs. There was further debate about how the cash currently allocated to the models should be re-allocated but we agreed to give this matter further consideration ahead of the next meeting when a final decision will be made.

The Committee also discussed potential risks in the fixed interest sector. In this respect, it was noted that 51% of corporate bonds are now rated at BBB, compared to only 16% in 2008. This brings additional risk as these bonds could be downgraded to high yield status, pushing up yields and bringing down prices. The Committee, therefore, debated the merits of reducing risk within the sector by increasing exposure to lower yielding bonds, such as Gilts. It was agreed that this would be a sensible strategy to adopt and therefore we will look to introduce more diversification within this asset class over the next quarter.

We also considered further diversification in the equity sector with a view to reducing portfolio volatility. Again this was deemed to be desirable and therefore a plan was put in place to look at introducing extra funds into the Model Portfolios over the next quarter, to complement rather than replace existing holdings.

 

FUND/PERFORMANCE REVIEW

The majority of funds (84%) held within our Model Portfolios have above average track records over 3 years. Of a total of 31 funds, 20 are ranked within the top quartile within their respective sectors, with a further 6 funds in the second quartile. This is reflected in the overall performance figures, with all of the Model Portfolios outperforming their benchmarks over the past 3 years. The 5 funds that are ranked below average over the past 3 years have recently shown signs of improvement, but we will continue to closely monitor these funds to ensure that they remain suitable for the Model Portfolios.

Over the past year, performance has been a little more mixed. This is to be expected due to the challenging investment climate, especially with some of the more aggressively managed funds we have selected. Nevertheless, the Balanced, Moderately Adventurous and Adventurous Portfolios have all surpassed their benchmarks, by 0.28%, 1.25% and 0.75% respectively. The only disappointment is the Moderately Cautious Portfolio, which underperformed compared to the benchmark by 0.81%. The Committee discussed this under-performance and the consensus was that relative performance would improve with a more positive investment climate. We also felt that the additional diversification mentioned in the previous section would be beneficial in terms of the performance of the Moderately Cautious Portfolio. As a result, the Committee decided that no immediate changes would be made to the selected funds, however, potential improvements would be considered over the next quarter.

The information in this guide was correct as at 27th February 2019 and may be subject to change. This article does not constitute as personal advice and guidance should be sought to ensure that any investment meets your individual circumstances including risk tolerance and capacity for loss. The value of investments can fall as well as rise and you may get back less than you pay in. Past performance is not a reliable guide to future performance.

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This post was written by Steven Hodgson