Investments Update: Q2 2019

Market Overview

The second quarter of 2019 has continued the trend of the previous 12 months and seen a significant level of volatility but with markets mostly positive.

In our last update we were able to report on a blockbuster first three months to the year, which had made up for a lot of the falls we had seen during the significant market turbulence at the end of 2018. April saw the continuation of this move upward in the global stock markets. However, by the end of the month and into May investors were given another reminder that complacency should be avoided with falls of around 4.5% in Sterling terms. This was mainly driven by fears over lack of progress in the US-China Trade talks and fears over what this might mean for global growth. 

Yet again, as has been the case since the financial crisis, markets were pushed higher again by talk of further monetary intervention by central banks. The US Federal Reserve indicated that their stance on interest rates had changed and that instead of looking to push these higher, their next move would most likely be downwards. This is down to several factors but perhaps most prevalent are the reduction in business confidence in the US (trade wars and Brexit do not help with this!), a slowing of global economic growth and a lack of inflationary pressures coming through.

The intervention of central banks was not limited to the US, with the European Central Bank (ECB) hinting that it may reduce the current -0.4% deposit rate even further. By the end of the quarter, over U$13 Trillion of debt was trading with negative yields. This is unheard of. The effect of all of this was to see a rebound in the equity markets in June, especially in the US, where their main market rose by nearly 7.5% in Sterling terms over the month.   

Despite these positive returns (or perhaps because of them) there is still a degree of caution amongst investors in the US. Economic fundamentals are currently quite mixed; weak industrial and survey data is currently combined with strong consumer and employment numbers. The bond market remains unconvinced, with prices now implying a significant loosening of monetary policy over the next 18 months. The Federal Reserve seems focused on possible impacts on the economy should the trade negotiations fail, but the economic data doesn’t really support the need for several rate cuts. Any message to this effect from the Federal Reserve will likely see a decline in US stocks, with news rather than fundamentals seemingly the most significant thing driving markets upwards or downwards this year! 

Closer to home, UK economic growth seems to have stalled in the second quarter. Industrial and survey data has been weak. Despite real wage growth and robust employment data, the consumer is in a cautious mode. Sterling has come under renewed pressure, reflecting the weakening economic fundamentals and the continuing uncertainty over Brexit, which was not particularly helped by the search for our new Prime Minister.

UK equities did not keep up with either the US or Europe in local currency terms, reflecting a lack of global investor confidence.  As a result, UK equity valuations remain subdued by historical standards, with a trailing dividend yield north of 4% and the significant gap between equity and gilt yields, the like of which has not been seen since the early 1950s. The unpredictable political backdrop does not help, with Brexit, a new Prime Minister and the emergence of four party politics all adding uncertainty to the outlook. Now that the election is over and Boris has been confirmed as our next Prime Minister we would hope that some of the uncertainty will go away although, given the characters now involved, I would not bet on a quiet quarter on the political front!

The industrial and manufacturing side of the European economy continues to have a rough time, particularly Germany. The consumer is holding up better and it is this which is keeping Europe in the feeble growth, rather than recession, camp. As mentioned above, the ECB has raised expectations of further Quantitative Easing and this has helped drive German bond yields to record lows. This has then spilled over into other European bond markets, with French 10-year bond yields turning negative at the end of the quarter. German politics look as unpredictable as the UK and there remains the risk of an unscheduled election later this year. In Asia, the US China trade dispute has cast a long shadow. Trade data has been weak across the region and the strong US Dollar has proved a headwind for investors in the Emerging Markets. 

Bond markets soared on the anticipation that weaker economic data would trigger rate cuts in the US and more Quantitative Easing (QE) in Europe. It is often said that equity managers are optimists and bond managers are pessimists, but the scale of the downward moves in bond yields (which is caused by prices rising) and the extent to which this has created a huge wall of negative yielding assets would suggest an extreme level of pessimism within bond markets, which should not be ignored.

In our view, investment markets remain prone to periods of turbulence, such as we saw early in 2018, then again in the last few months of last year and again in May this year. The politics are unpredictable, Brexit is yet to be resolved one way or another and the Bond market continues to signal trouble ahead. 

With this in mind we believe that investors need to remain cautious but also continue to diversify properly to mitigate some of the risks that are out there whilst also seeking the positive returns that we feel are still available in different areas of the market. 

The view we expressed 3 months ago seems still to resonate. Back then we stated ‘One thing we can be sure of is that the increased volatility of 2018 is likely to continue through the rest of 2019’.  Looking back over the last 3 months would suggest that we were correct and nothing we can see would change our views at this stage.

John Lamb Portfolios

Given the above, our investment team have continued to be relatively cautious, particularly in our Wealth Preservation range of portfolios. 

During May we rebalanced our models and introduced some additional diversification within the defensive ‘Core’ portion of the portfolios. We have been continuing to seek assets that do not correlate strongly with the other investments we hold, with the aim of seeking lower levels of volatility overall. We have added one fund to this part of the portfolio, which is the Close Select Fixed Income Fund – a fixed interest fund that specialises in the unrated part of the market. This adds a further layer of diversification, whilst also adding another extremely highly regarded manager to our portfolios. We have removed the inflation linked bonds that were previously in the models as concerns over increases in inflation have subsided for now. The investment did very well for us but it was felt that this protection was not necessary in the immediate future.  

Within the growth oriented ‘Satellite’ area of our Wealth Preservation portfolios, we removed two of the holdings and reallocated amongst the other existing funds held. The Axa High Yield fund, which had been introduced in December 2018 as a stabiliser to the Satellite, has been removed, having done exactly what it was introduced to do. The other removal is the Neptune Japan Opportunities fund. We have reduced our Japanese equity weighting overall and currently prefer the more domestically focused Legg Mason fund.

The exposure to UK equities within the models has been slightly increased through a further allocation to the Vanguard FTSE Allshare tracker fund. This gives us cheap exposure to the whole UK equity market and in the view of our investment team, offers some further protection against adverse currency movements in the months ahead. 

We have been pleased with the performance of the models in a period of continued volatility.  We have managed to capture a good amount of the increase in markets during the positive periods, however we have also been able to protect during the market falls in May. A table highlighting the performance of the portfolios for the second quarter of 2019 is shown below:

John Lamb Portfolios – 1st April 2019 to 1st July 2019

Performance*

Decumulation Strategies

Portfolio : John Lamb Risk Profile 1 Cautious

1.70%

Portfolio : John Lamb Risk Profile 2 Cautious

1.90%

Wealth Preservation Strategies

Portfolio : John Lamb Risk Profile 3 Cautious to Moderate

3.06%

Portfolio : John Lamb Risk Profile 4 Moderate 

3.38%

Portfolio : John Lamb Risk Profile 5 Moderate

3.88%

Portfolio : John Lamb Risk Profile 6 Moderate to Adventurous

4.40%

Accumulation Strategies

Portfolio : John Lamb Risk Profile 7 Moderate to Adventurous

5.31%

Portfolio : John Lamb Risk Profile 8 Adventurous

5.86%

*Performance shown is calculated using Financial Express and is net of underlying fund charges and discretionary management fees.

John Lamb advice fees and platform charges are not included which means investor returns will be slightly different to those shown above – these are for illustrative purposes only.

 

By way of comparison the world stock market has seen a rise of 7.59% over the same period, in Sterling terms, while the UK stock market has risen by 3.67%. The out performance of the world market can be attributed to the fact that it is formed with nearly 60% being invested in the US, which has continued its meteoric rise. It is also important to note the impact of currency on the returns from overseas; the return of the global stock market over the quarter in local currency terms was just 3.41%.

Within the ‘Satellite’ portion of our Wealth Preservation range the stand out performers were the Miton US Opportunities fund (9.25%), the Legg Mason Japan Equity fund (8.16%) and the Investec Global Strategic Equity fund (7.41%).  

The ’Core’ or defensive part of the portfolios also saw pleasing returns. Unsurprisingly it was the more directional holdings that performed best with the Galatea fund again the standout performer, returning 3.48% with low levels of volatility. The JPM Global Macro Opportunities fund also performed well, rising 3.02% over the period. 

Our investment team will continue to monitor the portfolios as ever, however they are quite comfortable with our current positioning for the quarter ahead and do not envisage any further changes at this time.