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7. December 2015 23:41
by Irene
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November Market Commentary

7. December 2015 23:41 by Irene | 0 Comments

November saw minor tailwinds in equities, but will also be known for major falls in many commodities, with Brent oil falling 11%. Global equity markets (MSCI All-Country World) gained 1.9% in GBP (-0.8% in USD) while the Eurozone outperformed other equity markets with the hope of more quantitative easing coming in December.

United Kingdom

Despite the fall in oil prices, the FTSE 100, with a fairly high allocation to energy, returned 0.4% for the month of November. Inflation came out negative for the UK at -0.1%, while real wages got a slight boost with the unemployment rate now down at 5.3%, a seven year low. Growth in the UK slowed to 0.5% in the third quarter, down from a 0.7% expansion seen in the previous quarter. A rate increase is seen to be pushed out well into next year, but all eyes are now on a possible Brexit, which could interrupt investments in the UK for some time.

Europe

Over in Europe, Draghi had re-emphasized his ‘whatever it takes’ for the ECB, providing the Eurozone with a well-deserved boost of 2.7% for the Euro Stoxx 50 (1.2% in GBP). While quantitative easing is continuing to last, the Eurozone is seen in a modest recovery mode, with growth expected to be 1.9% this year, 2.0% in 2016 and 2.1% in 2017.

United States

The US is getting closer to the first rate hike for nearly a decade with markets currently pricing in a 70% probability of a rate hike in December. This brought the Dollar up and US equities slightly down. Economic data is still a somewhat mixed bag, with disappointing manufacturing numbers, but jobs increased more than expected in November.

Emerging Markets

Emerging markets lagged their developed counterparts as the stronger Dollar weighed on Emerging Market currencies and the renewed commodity price weakness also had a negative impact on commodity producing counties. After some positive gains in Emerging Markets equities in October, stock markets reversed again in November to -3.9% (-1.3% in GBP). The slowdown in China does not help and the pending rate rise in the US neither.

Fixed Income

In Fixed Income we saw the divergence between US and Eurozone sovereign yields continue, with US government yields rising while those in the Eurozone declined. Countries like Italy and Spain saw their 2-year yields drop to negative territory, which means an investor is now paying these countries to be allowed to hold their debt. With a rate rise for the UK less likely, gilts, inflation-linked gilts and UK corporate bonds were up for the month. US high yield bonds were down as around 10-15% are in the energy sector, with the low oil price increasing the risk of defaults in the shale gas exploration sector.

Market Returns Overview



Source: Markit, Twenty20 Investments, as of 30 Nov 2015, all returns in GBP.

5. November 2015 10:55
by Irene
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October Market Commentary

5. November 2015 10:55 by Irene | 0 Comments

After the volatile summer in markets, October finally saw some positive tailwinds. Developed equities, MSCI World, finished stronger across the board, returning 7.9% for the month in USD (5.7% in GBP), while MSCI Emerging Markets also enjoyed a relief rebound to the sell-off in the third quarter, having gained 7.1% in October in USD (5.0% in GBP). The VIX Index, a gauge for fear, has fallen to its pre-August levels of 15%, from its top at 41% at the end of August. One could say it is perfectly rosy out there, but that is probably not exactly true.

United Kingdom

The UK has also seen a very good performance in equities while the economic data was mixed. The preliminary estimate of UK GDP for the third quarter showed economic growth slowing to 0.5% and factory orders suffered their biggest fall in three years in the three months to October. On the positive side, housing buoyed, the manufacturing PMI suddenly rose to a 16-month high of 55.5 and export orders recovered, tempering the concern that the economy is losing steam after two years of gains. A rate rise this year does not seem that likely for the UK, but when the US finally starts rising its rates, the UK might not be far behind. The UK’s Chancellor of the Exchequer received a blow at the end of October, when the House of Lords rejected the cuts in tax credits. This could mean more spending, more austerity or just a revised bill – or a mix of all three.

Europe

Macro-economic indicators for Europe are still positive, but the Eurozone seems to only remain in a recovery mode as long as it is fuelled by QE. The next ECB meeting on 3 December will be closely watched as it hinted that it will consider further quantitative easing which can help provide a cushion for banks to start lending more to businesses, thus in term helping the overall economy and equity markets.

United States

Over in the US, the October meeting and the Fed speak afterwards were interpreted that a lift-off is still in play for December. Data like GDP prints (Q3 real GDP was at 1.5%, which is low), the jobs report in November and early indicators like inventory levels and business and consumer confidence levels will be closely watched. Once the Fed does raise rates, it will be more about how quickly or slowly this happens, with a slow lift-off much more likely.

Emerging Markets

Emerging Markets equities did very well in October, boosted by the interest rate hold in the US, the improvement of economies in developed markets and a decrease in rates in China. One country that is not doing so well is Brazil, although the woes seem to be more home-made.

Fixed Income

In Fixed Income, credit markets did well in October, gaining back approximately what they had lost in September. With the low oil price there is still risk for US High Yield, as there are around 10% to 15% of high yield bonds in the energy sector, many of them related to shale gas exploration and potentially at higher risk to default if the oil price remains low. Prices for government bonds will depend very much on central bank decisions. With the Euro area more on the QE end and the Fed potentially tightening soon, the rate differential has already widened in government bonds; 10-year Treasury rates were up 10bps for the month to 2.16% whereas 10-year German bunds were down 4bps to 0.5%.

Market Returns Overview



Source: Markit, Twenty20 Investments, as of 31 Oct 2015, all returns in GBP.

21. October 2015 10:35
by Allan
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Three things you should ask about your risk rated model portfolios

21. October 2015 10:35 by Allan | 0 Comments

As the era of model portfolios is now well established and more and more financial advisers are now outsourcing their investment process to Discretionary Fund Managers on WRAP platforms, the topic of how these portfolios should be characterised from a risk perspectives is perhaps more important than ever. With the financial advisory market employing a framework of self-regulated risk rating methodologies it is perhaps worth spending a moment reviewing the key aspects of the proposition to better understand which factors one needs to look at to calculate – and forecast - risk.

It seems only yesterday that the FCA introduced the Retail Distribution Review in the UK and as this occurred after the 2008 global financial crisis, most discretionary fund managers may not have experienced a full investment cycle to see how well the process of managing a portfolio on a risk targeted or risk rated basis holds up. Testing your risk rating process in the summer of 2015 though has afforded every one the perfect opportunity.

How well has your risk framework performed during the recent market volatility?

After the recent market sell off, strategic model portfolios that are only re-balanced once or twice a year have not surprisingly turned the focus back onto the benefits of tactical asset allocation. As spikes in market volatility resulted in forced or unforced re-balancing, this will have put pressure on the robustness of the risk rating process. Of particular interest is whether any drawdowns realised during that period and the standard deviation of returns is commensurate with the risk rating? To be sure this does require transparency of that information before and after the event. We recommend that your investment manager should provide this information.

How does one risk rate a tactically allocated model portfolio?

To estimate what the level of investment risk might be very much depends on the holding period. Most of the literature on the methodologies used to risk rate model portfolios are based on the assumption that most portfolios are fairly static in nature and are not re-balanced too often. Under more detailed inspection though one quickly realizes that in some limited sense even a strategic portfolio needs actively managing, especially when market risk changes. However, the assumptions that are typically applied to low turnover portfolios will not work with tactical portfolios, instead one needs to look at the full history of the tactical portfolio construction to ensure the desired risk properties are being met, whereas in the case of a strategic portfolio it mostly suffices to look only at the current weights of the portfolio.

How does the SRRI risk band framework differ from other risk rating models?

The Synthetic Risk & Reward Indicator (SRRI) has been introduced to assess the riskiness of all UCITS funds. It is in many ways much simpler to understand compared to other competing risk rating models. SRRI calculates the realized historical volatility of any model portfolio when determining which of the seven non-overlapping risk bands it resides in. This calculation uses 5 years’ worth of weekly return data to calculate the level of risk. While this is a very straight-forward and comparable process, it does have the drawback that 5 years may be too short to capture a full investment cycle. As it happens, this is currently the case with the global financial crisis now seven years behind us.

For that reason, it does not entirely reflect the potential expected loss that an end investor might incur. In Twenty20’s opinion, a suitable metric for mapping the outcome from many of the popular risk questionnaires to one’s portfolio risk control one needs to augment the SRRI classification with some empirical estimates of the model portfolios’ maximum drawdown. For a strategic portfolio this can be estimated by calculating the weighted average from the full list of asset class exposures in the solution. For a tactical portfolio one can only reasonably do this by accessing the risk over the simulated path which includes all rebalancing processes, thus testing the investment process’ ability to control the risk of the portfolio across all economic regimes.

11. October 2015 15:50
by Allan
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Are you missing out on the benefits of Socially Responsible ETFs?

11. October 2015 15:50 by Allan | 0 Comments

Like most things in life, overnight success often takes ten or more years to come to fruition, and so it is with Socially Responsible Investing, SRI. Figures published in 2014 by the Forum for Sustainable and Responsible Investment, a US association comprising institutions and organizations, suggest an estimated $6.57 trillion of assets in the US tracking SRI strategies.

 

 

Screening on Social, Environmental and Corporate Governance

Hardly a drop in the ocean as this accounts for more than one sixth of all assets held by professional managers in the US. No wonder there has been a push by MSCI into this space with their ESG, Environmental Social Governance, family of indices. This in turn has seen UBS throw their hat in the ring as their ETF division partnered with MSCI to benchmark their products.

The methodology by which each index provider has designed their SRI screening of companies on one level can be nuanced, but on another is very straight forward to understand: if as a company you are not acting in a socially and environmentally-friendly manner, you are not allowed in as your name is not on the list! Interestingly, none of the MSCI indices includes Volkswagen, but to get a flavour, just look at the top 5 holdings of the ETF providing exposure to the UK large cap sector and this includes Astra Zeneca, GlaxoSmithKline, Reckitt Benckiser, Vodafone and Prudential.

The MSCI SRI equity indices are re-balanced quarterly and comprise those companies with a ‘Best-In-Class’ ESG rating and who are not involved in the following industries; Military Weapons, Nuclear Power, Adult Entertainment, Tobacco, Alcohol, Civilian Firearms, GMOs and Gambling. The weightings of each constituent match the sector and regional weighting of the parent MSCI ACWI index, thus avoiding any unnecessary systematic risk introduced by the SRI filtering process. The ESG rating framework itself is very rigorous, scoring a company on a scale from AAA to CCC, with 37 key issues monitored on an annual basis contributing to the rating. Other screening processes, like for the iShares Sustainability ETFs, work on a similar basis.

The history of socially responsible investing in the UK can be traced back to the FTSE4Good set of indices which were launched in 2001, but it wasn’t until early 2011 that the first SRI ETF was listed on the London Stock Exchange, the iShares Dow Jones Europe Sustainability Screened UCITS ETF. With a family of six ETFs tracking the MSCI Socially Responsible indices, UBS is the clear market leader. More recently they have listed a corporate bond ETF with SRI screening, the UBS Barclays MSCI US Liquid Corporates Sustainable UCITS ETF, (Bloomberg Ticker UC98), which is very welcome as this offers the opportunity to implement a diversified SRI portfolio solution using ETFs.

ETFs with SRI screening

Source: Twenty20 Investments, as of 11 October 2015

There are two reasons why an investor might want to get exposure to SRI. The first is the obvious one, it hopefully makes us feel good to invest in ‘good’ companies. The other belief is that companies are included in the index because it is deemed that displaying attributes of good corporate governance, and social and environmental responsibility are good drivers of long term investment returns, and yes I do personally believe that as well. Looking at the ESG-screened MSCI UK equities index, as of 30 September 2015, the one year net index performance reported by MSCI is 2.2% compared to that of the standard MSCI UK index which was down 5.9% during the same period. A nice surprise indeed, but please do not expect this kind of outperformance all the time.

It strikes me that the whole SRI story could easily become re-enforcing as the finance services industry continues to shore up its reputation. With an ever growing number of institutional investors increasing their allocation to SRI benchmarked strategies, on a ‘sticky money’ basis alone, it is time to pay attention.

5. October 2015 16:23
by Irene
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September Market Commentary

5. October 2015 16:23 by Irene | 0 Comments

September has been another volatile month for equities and bonds. Just as everybody thought that the Fed was upbeat on the economy, it decided to leave US interest rates unchanged. A hold on rates was more or less priced into the markets, but what spooked investors was Fed Chair Yellen’s speech afterwards, highlighting uncertainty in the markets with particular concern about the growth in China and Emerging Markets. As all the financial press reported, Q3 2015 was the worst for global equities since 2011.

United Kingdom

The FTSE 100 index fell 2.9% for the month of September, and is down 6% for Q3 2015. Funding issues at Glencore did not help, with the stock down nearly 30% in September alone and about two-thirds wiped off its value in Q3, but there were somewhat weaker numbers coming from the UK with the Markit Services and Manufacturing PMI numbers and the ZEW Economic Sentiment Index all declining over the last three months. Both PMI numbers are still above 50, signalling growth, but the trend is slowly reversing.

Europe

Macro-economic indicators for Europe have generally been positive, with business and consumer surveys providing reassurance about the euro area’s growth momentum in the face of the slowdown in China. It is notable that European growth is now being driven by an increase in domestic demand and less by net trade. With nine months of consecutive quarters of growth, the relative immunity of the European economy to the Greek crisis and the Chinese slowdown is encouraging. That is, if one does not look at the actual equity markets, with the Euro Stoxx 50 down 5.1% in September, the DAX down 5.8% and the CAC down 4.1%. Indicators for Germany still signal a healthy economy, but may not have priced in the woes of Volkswagen yet. One of the countries that is showing signs of growth again is France, with economic reforms slowly filtering through. The ECB is most likely to continue its QE programme with at least the same speed and most likely also buying asset-backed securities.

United States

September started with good news for the US economy as figures for July confirmed that the trade deficit was the lowest for five months. As the month progressed and volatility increased in the markets, the likelihood of a rate increase seemed to diminish once and for all. News on the jobs front was somewhat muted with the US economy adding less jobs in August than expected. With the end of month data showing that more than half of all asset classes ended September in the red, Yellen’s dovish comments on the US economy and its dependency on Chinese volatility and falling commodity prices seemed to have influenced the serious wobble seen in the markets.

Emerging Markets

Over in Emerging Markets, equity markets in Brazil and Russia were down 5% and 3% respectively in local currency terms. The flight away from EM currencies meant that weaknesses for EM were compounded in Dollar and Sterling terms. Inevitably, the slowdown in China, coupled with still-high supply, did not help falling commodity prices, which in turn continued to hurt commodity-exporting emerging markets. Commodities remain the worst performing asset class for Q3, with emerging markets not far behind.

Fixed Income

The only positive news came from Fixed Income with UK gilts up 1.2% in September. With the US keeping rates on hold in September, US Treasuries were also a winner, gaining 2.9% in GBP, which was also helped by a devaluation of Sterling. Corporate bonds were flat or slightly negative with US high yield the most negative, losing around 3%.

Market Returns Overview



Source: Markit, Twenty20 Investments, as of 30 Sep 2015, all returns in GBP.

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