Investment Update – Autumn 2016
Donald Trump’s recent victory in the United States presidential race has meant that financial markets are, once again, having to digest the impact of an unexpected election result – first ‘Brexit’ and now a likely change to the way in which the US is governed.
This continued political uncertainty has meant that identifying reliable sources of return, whilst keeping volatility within an acceptable range, has become a challenge for investment managers. We believe, however, that good portfolio diversification continues to be an effective tool and, as we anticipate further instability in investment markets in the next few months, this will continue to be our key strategy.
Doubts are starting to emerge about the effectiveness of Central Bank policies such as Quantitative Easing (QE) in the US, UK, Japan and Europe and fiscal stimulus, whereby Governments attempt to boost economies through lower taxes or capital projects such as infrastructure spending, would appear to be the new order of the day. Interest rates continue to remain very low or even negative whilst the prospect of inflation has once again resurfaced in certain economies. There is also continuing political change which will impact on investment markets as, in addition to the US & UK positions, there are a number of European elections due in 2017.
We are pleased, however, that despite these difficult economic conditions investors have been well rewarded for holding ‘risk’ assets in 2016.
The MMM portfolios have been adjusted post ‘Brexit’ with the changes detailed in our latest Portfolio Factsheets. We are, of course, aware that further modifications will be required as the full implications of ‘Brexit’, the US election and future European elections become clearer. In the short term it is probably too early to assess the impact of the US election, although we are already conscious of the intention to reduce personal and corporate taxes, revisit trade agreements, increase defence and infrastructure spending and to reform healthcare. How much of this will be possible remains to be seen but the US economy is at least showing signs of improvement with real economic growth and good employment statistics. Further key considerations will be the intention to repatriate funds held overseas by US companies along with the relationship with China who are, of course, significant investors in US Treasuries.
Our ongoing research and regular dialogue with fund management groups will continue as this will enable us to monitor market developments and make appropriate portfolio adjustments as required.
We continue to examine our overall investment approach in order to ensure that it remains the most appropriate way to manage portfolios. Our current practice is to adopt long term strategic asset allocations and to apply short term tactical adjustments in response to current economic conditions. This asset allocation strategy has proven to be highly effective and we remain convinced this diversified approach will continue to serve our clients well.
Within our portfolios we are currently uncomfortable with Government Debt as an investment as we feel this asset is overvalued. We prefer to hold a mix of flexible bond, absolute return and ‘real asset’ type funds as the defensive aspects of the portfolios. We have already reduced our exposure to those areas of the UK economy considered susceptible to ‘Brexit’ and introduced more funds which concentrate in export focussed international businesses. We have strategic allocations in the main equity markets including US, Europe, Asia Pacific and Emerging Markets and believe that a bias towards ‘cyclical’ or ‘value’ type shares which are more responsive to economic stimulus is currently appropriate. Finally, and taking into account the current uncertain environment, the portfolios have been adjusted to include more active fund management rather than exposure to passive or tracker strategies.
In summary therefore, and whilst there are a number of challenges ahead over the next few months, we believe our approach will continue to provide good returns for investors.