We have witnessed a remarkable period of both stock and bond market volatility throughout 2015. These events are, perhaps part of a new lesson that recovery from a great recession by way of quantitative easing and loose money policies provides us. QE is an untried economic experiment that is without previous experience.
With this in mind and in order to provide investors with consistent and as attractive returns as possible for any given risk profile, we have diversified portfolio assets in order to spread both opportunity as well as risk.
On the whole, we believe that global markets are poised to benefit in 2016 from economic expansion in the major economies of the US, Europe and Japan; economic stability in China; low oil prices and an abundance of liquidity from the ECB and the BoJ. The picture for 2016 is an improving one, as compared to a disappointing 2015, mainly due to the end of austerity measures in advanced economies. In the developed world, only the UK will be pursuing fiscal cutbacks next year as our government seeks to further reduce government spending. However after November’s Autumn statements many of the proposed cutbacks have been either slowed or cancelled.
The fortunes of the emerging markets will be boosted by the fact that China, while continuing to see a deceleration, will still maintain a reasonable rate of GDP growth at around a “real” 5% pa.
International companies have robust balance sheets and generally improving trade conditions. The developing opportunities for these companies to sell their goods and services will ultimately translate into investor returns.
As of 1st December 2015, our best performing funds held within our portfolios over the last 12 months have been;
|Old Mutual UK Mid Cap
|Old Mutual UK Smaller Companies
|Aberdeen Property Shares
|Baring Europe Select
|Axa Framlington Biotech
The main reasons behind these positive returns have been the significant growth in the US, European and UK, particularly in mid and small cap markets.
While our poorest performing funds were;
|Blackrock Pacific ex Japan Index
|Aberdeen Indian Equit
|Schroder Asian Income
The main reasons for these disappointing performances were the general sell off in Asia and emerging markets as a result of the China crisis.
‘Collectively our eight portfolios outperformed their respective benchmarks on 39 out of 41 occasions’
As far as the 24th Edition of our portfolios is concerned, seven of the funds from the 23rd Edition have been substituted. Our asset allocation remains broadly in line with that of previous editions in order to retain the portfolios risk profile. However, they have been tilted towards sectors which we feel offer better prospects going forward. We continue to hold meaningful levels of cash and property across the portfolios to help dampen volatility.
In general, we hold a positive outlook for equities particularly for the UK, Europe and Japan for 2016 as both European and Japanese equities have earnings growth potential.
We remain neutral over US equities. We are concerned about a potential lack of earnings growth as price-to-earnings ratios in US large corporations are over 20. We have therefore in most portfolios marginally reduced our holdings. We see the US as a growth economy and are happy to remain invested.
We believe that China is over the worst of its troubles giving a boost to Asia and emerging markets as the region is generally heavily dependent upon China. We will retain our current holdings in Asia, India and China. Profits are returning to those markets and prospects look favourable in 2016. We remain negative over the majority of smaller emerging markets until the impact of US interest rate rise has been assessed as well as a return to commodity demand.
In the short term we expect returns on government bonds to be reasonable, particularly if further ECB QE suppresses yields and supports prices. Credit risk and liquidity has improved in Europe. There is some concern over high yield defaults in the US and reduced liquidity in this asset class in general. For this reason, we remain cautious and underweight in corporate bonds and high yield bonds. With inflation expectations still some way off, we prefer fixed rate over index linked gilts. The general strategy for 2016 is to hold some short dated corporate bond funds to negate the US interest rate rise.
We remain negative on commodities and commodity producing countries such as Russia and Brazil mainly due to an ongoing lack of demand and their overall dependence upon China. The level of oil production is starting to be controlled by the major OPEC countries which should put support behind the current oil price. Since the summer, the Brent Crude oil price has consistently stayed below US$50pb. This low oil price does however continue to support consumer spending.
We remain positive and overweight in UK commercial property which has contributed well to overall portfolio returns this year. We are confident this sector can continue to provide meaningful returns to investors.
We are once again pleased to report that the gross performance of our portfolios in each of our current eight portfolios up until 1st December 2015, as measured against the associated national benchmark, has been very satisfying. The relative performance is measured over six time periods from 6 months, 1 year, 2 years, 3 years, 4 years and 5 years and all of our portfolios showed up well. Collectively the eight portfolios outperformed their respective benchmarks on 39 out of 41 occasions. This is one of our highest outperformances in the twelve years we have been running them.
The portfolios were tested during the equity falls of August. Our defensive, cautious and balanced portfolios held up well, protecting investors from the worst of the volatility. The post China crisis returns have also been robust and ahead of the relevant national averages in all cases.