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The Vintage Investment Committee held its quarterly review meeting on 11th June, with a follow-up meeting on 21st June to finalise proposed changes to our model portfolios.  The main points discussed during the meeting are summarised below.

MARKET REVIEW

Over the twelve months to 31st May 2019, the main global equity indices produced negative returns, with the notable exception of the Dow Jones Industrial Average, which produced a nominally positive return.

FTSE 100 -6.4%

FTSE 250 -9.6%

Dow Jones Industrial Average+0.7%

Shanghai Composite-6.2%

DAX 50-8.2%

Nikkei 225-7.1%

Although equity returns over the past year have been disappointing, performance over the past quarter has been encouraging, with the main indices consolidating gains made since the start of 2019.

MARKET OUTLOOK

The committee discussed various issues currently impacting on investor sentiment and concluded that political uncertainty had increased over the past quarter.  The main concerns of the committee at this time are as follows;

At the previous meeting, 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 remained positive.  This view has perhaps softened in view of the aforementioned concerns.  We continue to hold an optimistic view over the medium to long term, but we are wary of the potential for short term volatility to increase.

PORTFOLIO COMPOSITION

The Committee reviewed the asset allocations of our Model Portfolios and, once again, agreed that the current allocations remain suitable.  Following on from the previous meeting, where it was agreed that the cash element of each client’s portfolio should be decided on an individual basis, the Committee decided that the cash element previously included as part of the model asset allocations would be reallocated across other asset classes on a pro-rata basis.

At the Q1 meeting, the Committee considered potential risks in the fixed interest sector and discussed increasing exposure to lower-yielding bonds, such as Gilts.  The problem with including narrowly managed Gilt funds is that, whilst they act as a diversifier against high yield bonds, which have some correlation with equities, these low-risk funds can sometimes display reasonably high volatility.  It was therefore proposed that a more desirable approach would be to increase exposure to bond funds managed on a strategic basis, thereby delegating the decision to invest more in Government Bonds to skilled fixed interest managers.  A second proposal to reduce bond risk was to include a short-dated bond fund, where prices are far less sensitive to the interest rate outlook.

Another issue carried over from the Q1 meeting was the desire to reduce portfolio volatility.  In view of the increased political uncertainty, the committee agreed that the timing was right to introduce extra funds into the Model Portfolios so that the portfolios are less exposed to fund manager risk.  The high profile troubles of Neil Woodford in recent weeks are a timely reminder that no fund manager is infallible and can experience periods of poor performance.

Finally, a proposal was made to the Committee to introduce passive funds to the model portfolios.  The active versus passive debate was revisited and whilst Vintage remain strong proponents of the active approach to fund management, passive funds certainly have their merits.  It was therefore agreed to include up to 10% of the model portfolios in passive funds, in order to reduce costs without diluting the performance.

FUND/PERFORMANCE REVIEW

The majority of funds (84%) held within the Model Portfolios still 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.  The funds that are ranked below average in the sectors remain on our watchlist and we hope to see signs of improvement over the next 3-6 months.

Although previously a very consistent performer, the concerns about the Artemis Global Income Fund extend beyond the 4th quartile record over 1 and 3 years.  Equally concerning is that this fund is one of the more volatile performers in its sector.  The Committee, therefore, felt that it would be appropriate to remove this fund and introduce a less volatile fund in its place.

Although the Artemis Global Income Fund is the only fund to be removed, the Investment Committee has decided to introduce the following funds to the model portfolios over the next quarter.

• M&G Short Dated Corporate Bond Fund

• Jupiter Strategic Bond Fund

• Vanguard UK All Share Tracker Fund

• Lindsell Train Global Equity Fund

• Vanguard FTSE Developed World Ex-UK Equity Index Fund.

The changes to the model portfolios will take effect from 1st July and advisers will be writing to clients over the coming weeks with specific recommendations.

The information in this guide was correct as at 25th June 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