OVERVIEW
December turned into a very volatile month as somewhat bizarrely, the falling price of oil depressed the markets. I say bizarrely, as a drop in the price of oil is good for consumers, good for business, good for inflation, good for the economy and hence, good for the stock market. Yet share prices fell. What was going on?
The issue is a geopolitical one. The price of crude oil fell so fast that it is going to have an impact beyond finance and economics. A number of countries face bankruptcy, financial collapse and hence political upheaval, with unknown consequences. The fall in oil prices will also have some negative impact, for example much of the spending round the globe by Arab nations has been derived from petrodollars. Closer to home the residents of Aberdeen will hardly be jumping for joy and face a bleak new year.
Fortunately, the rout in markets was quickly reversed as the traditional “Santa Rally” kicked in; with the result that December was only a marginally negative month for most markets, with gains being posted in the US on the back of outstandingly strong economic numbers.
Fixed-interest securities and commercial property generated modest gains.
Stop Press
At the time of writing (Friday 09 December) markets have just bounced back from a Greek-inspired sell-off. Concerns have resurfaced about “Grexit”, or the Greek exit from the Eurozone, which would have big implications for a number of major banks in Europe. However, the fact that prices are now falling across Europe (deflation) means that positive action by the European Central Market is far more likely, and this caused markets to bounce back!
Here is the chart of the FTSE 100 index for the last six months;
…and the last five years, which puts this into perspective;
FUND PERFORMANCE
I enclose tables showing the performance of the portfolios over various periods of time to the end of December;
Short-term Performance
| Parmenion Portfolio/Index | One monthPerformance to 30 December 2014 | One year performance to 30 December 2014 |
| Income Portfolio | +0.1% | +8.4% |
| Average Mixed Investment fund (20-60% shares) | -0.3% | +4.8% |
| Balanced Portfolio | -0.4% | +8.5% |
| Average Mixed Investment fund (40-85% shares) | -0.4% | +4.8% |
| Tactical Portfolio | -0.5% | +8.4% |
| Average Flexible Investment Fund | -0.6% | +4.8% |
| MSCI UK | -2.2% | +0.5% |
| MSCI World (£) | -1.0% | +12.5% |
| IBOX Gilt | +1.3% | +12.2% |
Long-term Performance
| Parmenion Portfolio/Index | Three year performance 30 December 2014 | Five year performance to 30 December 2014 |
| Income Portfolio | +36.9% | +50.1% |
| Average Mixed Investment fund (20-60% shares) | +23.6% | +31.7% |
| Balanced Portfolio | +35.8% | +47.5% |
| Average Mixed Investment fund (40-85% shares) | +32.0% | +40.6% |
| Tactical Portfolio | +38.5% | +47.8% |
| Average Flexible Investment Fund | +32.3% | +38.3% |
| MSCI UK | +31.1% | +44.4% |
| MSCI World (£) | +55.7% | +70.8% |
| IBOX Gilt | +32.2% | +41.5% |
(Source; Parmenion Capital Partners LLP)
PORTFOLIO REVIEW
All Portfolios
Our portfolios turned in modest losses in December (with the exception of the Income Portfolio) reflecting a fall in global markets over the month.
Income Portfolio
The Income portfolio gained +0.1% in December, out-performing its benchmark (the average mixed investment (20-60% shares) fund) which fell by -0.3%.
Most of our equity holdings fell by around -1.0% whilst property and fixed income investments made modest gains, which more than offset the stock market losses.
Balanced Portfolio
The Balanced portfolio lost -0.4% in December, in-line with its benchmark (the average mixed investment (40-80% shares) fund) which also fell by -0.4%.
Most of our equity holdings fell by around -1.0%, with the exception of the US market which posted decent gains, whilst property and fixed income investments made modest gains.
Tactical Portfolio
The Tactical portfolio fell by -0.5% in December, marginally out-performing its benchmark (the average flexible fund) which fell by -0.6%.
Our exposure to Japanese, Asian and European equities detracted from performance whilst our US and UK exposure helped offset this. Commercial property also was a positive item in the mix.
THE EFFICIENT FRONTIER – A NEW INVESTMENT HORIZON
There is a raft of academic research available now on what makes a good investment. Modern investment theory is underpinned by something called the “efficient frontier”. We use this theory, in conjunction with our investment partner, Parmenion Capital Partners LLP, to help guide asset allocation decisions.
The theory results in the determination of an optimum asset allocation for each “risk grade” which is based on asset class volatilities over the previous 20 years. Parmenion re-run their statistical analysis of volatilities every year in January, with a resultant adjustment in the investment models in use by Hunter Aitkenhead over the next 12 months.
Parmenion use well established risk control techniques to blend more and less risky assets to construct a broad spectrum of risk graded portfolios. These portfolios display increasing volatility (and return) from a low risk level at Risk Grade 3, right up to a Risk Grade 8 portfolio, which behaves in a way consistent with its aim to deliver higher risk, higher return investment.
The bedrock for this portfolio construction process is the analysis of historical risk/return data across over 70 discrete sub asset classes over a period of 20 years. The basis for selecting that period of time is that it extends sufficiently far back to capture a host of relevant key events in recent market history.
For example, if we were to cast our minds back 20 years, where were we? 1995 opened with the collapse of Rumbelows the domestic retailer. In the Far East, Nick Leeson brought the 200 year old Barings Bank to its knees in February, with the loss of £800m through unauthorised derivatives trading. The Government of John Major was hanging on to power with just a wafer thin majority in the House of Commons. Cool Britannia was still a couple of years away. In the stock market, 1995 was a different story and compared to 1994 a complete transformation. The FTSE100 share index rose 25% against a loss in the previous year of 13%. Quite some swing.
Similarly a brief survey of the intervening years brings to the top of one’s mind the Russian debt default, the dotcom boom and bust, 9/11, the second Iraq war, the credit bubble, the Credit Crunch and the Euro Crisis. All the while China grew and grew and grew.
Roll forward and we anticipate seeing a marked realignment of our Risk Framework to account for a year in 2014, which overall delivered mediocre returns across many asset classes. The background to this was the 1.0% fall in long term US interest rates to 2.5%. The effect of a large fall in such a key rate is to bolster both the capital value of debt securities, thereby boosting share prices.
Our risk graded portfolios are designed to sit close to the ‘Efficient Frontier’. This is because for medium to long-term investors we believe in the merits of asset class diversification to deliver superior risk adjusted returns (see chart below).
The Efficient Frontier
The notable feature in the chart is that the ‘Efficient Frontier’ constructed using 20 years data to the end of 2013 has a kink in it, as risk grades 9 and 10 show declining returns for the additional risk they incur. Indeed, our experience has been that since the credit-crunch, investors have not been properly rewarded for taking high levels of risk, whereas lower-risk investors have enjoyed unexpectedly decent gains.
The concept that risk and reward are inextricably linked is at the heart of our investment process. This helps us assist in assigning a suitable risk graded portfolio to match clients’ individual tolerance for risk and capacity for loss.
You won’t be surprised to see us re-visit this issue at your annual review, to ensure that your investments meet your appetite for risk and time horizon.
THE YEAR IN NUMBERS
$57; the price of a barrel of Brent crude on the 31st December – down nearly 50% over the price a year ago.
$178,000,000,000; Total fines paid by major global banks in the wake of the financial crisis.
510,000,000Km; Distance from earth when the European Space Agency’s Philae probe landed on the 67P comet in December.
300,000,000; Active users of Instagram in December, compared with 284,000,000 users on Twitter.
26,020,000; British households with a television set at the end of 2014, the first ever fall in television ownership in the UK.
$4,100,000; Price paid for James Watson’s Nobel Prize medal for discovering the double helix structure of DNA. The buyer returned it to the scientist!
7,857; the number of people who had died of Ebola according to the WHO by 27 December.
10,000,000; i-phone sales achieved by Apple in their first weekend in September.
20,000,000; Podcast downloads of “Serial”, an intimate telling of a true-life murder investigation.
55; the percentage of Scottish voters who voted “no” to Scottish independence.
36; the percentage fall in the Rouble against the Dollar on “Black Tuesday” (December 16) as the oil price crashed.
8; Number of times Argentina has defaulted on its debts, after its latest default this summer.
$15; the new minimum hourly wage in San Francisco, double the national US minimum wage of $7.25.
7-1; Final score in the Brazil-Germany world cup semi-final.
63; Philip Hughes’ cricket score for South Australia when he was hit in the neck by a bouncer. He died two days later at a Sydney hospital.
22; New Zealand’s unbeaten run of rugby union matches before losing to South Africa 27-25 in October.
$100,000,000; Sum paid by Formula One chief executive Bernie Ecclestone in August to settle his bribery case in Munich, over the sale of an F1 stake to CVC Partners.
75,000,000; People who have seen the 22 productions worldwide of The Lion King. The musical’s global gross earnings exceed that of any film or entertainment title in box office history.
6,900,000; Subscribers to Zoella’s YouTube channel. The internet star set a record for debut sales of a novel in the UK, selling 78,000 hardback copies in its first week.
+0.8; Percentage rise in the FT100 share index in 2014 including reinvested dividends.
+8.5; percentage rise in the Hunter Aitkenhead Income Portfolio in 2014.
OUTLOOK
This month there is no outlook. I will cover this off next month with a reading of the runes for 2015. Instead, let’s look back over 2014;
2014 turned out to be a bit of a disappointment for investors as markets generally were pretty flat, with the exception of the US market which posted strong gains.
The US economy is in a sweet spot; decent economic growth has followed extensive monetary engineering by the Fed’. The economy will benefit from low energy prices due to all the shale oil and fracking going on in parts of the country. The US is also regarded (rightly so) as a safe haven in a troubled world. What with a strong $ the market returned +9.3% to a UK investor.
The European markets were pretty flat reflecting the fact that the region is entering recession for the third time since the credit crunch in 2008. There is a battle going on between the ECB and the German Central Bank over whether monetary easing (QE) should take place. So far Germany has won the debate and so the economy is stagnating. This was reflected in markets which only gained +1.0% over the year.
Emerging markets were mixed with Russia and Brazil posting negative returns and India and China well into positive territory. This dichotomy reflected the impact of the fall in the oil price; good for importing nations, bad for exporters – especially Russia which is facing severe austerity.
Most investment managers made decent calls on Emerging Markets, it was easy to avoid Brazil and Russia and to spot that India was going to be a winner. However, the resurgent Chinese market was less obvious to identify as the country suffered a property collapse this year and economic growth is slowing rapidly. Nonetheless the stock market boomed, catching everyone out.
Investors in fixed interest securities made money this year. This was a surprise as for years the professionals have been calling this area of investment a disaster waiting to happen. The strength in the fixed-income markets reflects the fact that we live in a disinflationary world – one where price increases are almost non-existent, due to falling food and energy costs (note, these have yet to arrive in the UK, but are on the way!).
Finally this leaves the bright spot for 2014; UK Commercial property. The market was in excellent form reflecting;
- A shortage of properties in the City
- Strong demand from overseas buyers
- A buoyant UK economy
- Lack of new building following the credit crunch
- The strong rental income produced by properties in a yield-hungry world
- The fact that at the start of 2014 commercial property prices were still 30% below levels last seen just before the credit crunch
We are pleased to say that both the Income and Balanced Portfolio’s benefited from heavy exposure to commercial property, which explains the good returns enjoyed last year.
PS Don’t forget the usual risk warning for all long-term investments; the value of units can fall as well as rise, and past performance is no guarantee of future performance. The value of income payments from investment funds is not guaranteed and can fall as well as rise.
