OVERVIEW
November saw the markets continue their recovery from the October sell-off. The US market was very strong with investors basking in very strong growth numbers combined with rapid job creation and a complete absence of inflationary pressure.
The European markets also enjoyed good returns with thoughts that Mario Draghi was poised to unleash full blown quantitative easing (QE) in the region.
At home the UK market reported decent gains, but these were more modest than in other developed markets. The UK market is heavily exposed to the commodity sector with many global names in the oil and mining business located here. These companies (such as BP, Shell and Rio Tinto) conspired to hold the UK market back.
Commercial property continued to march ahead as demand from overseas buyers in the city and elsewhere proves to be insatiable.
Low risk fixed-income securities made strong gains as the markets took on board comments from the Bank of England and others that interest rates would remain lower for longer.
Some Emerging Markets have been performing well, specifically India and China. The Indian market continues to move ahead due to the election of Narendra Modi, who is laying the foundations of a multi-year investment story. In China there was a surprise cut in the lending rate by 0.4%, taking the key rate down to 5.6%. The deposit rate was trimmed leaving it at 2.75%.
Stop Press
At the time of writing the oil price has slipped under $60 a barrel. This is the lowest price for over five years and is almost a halving from the peak this time last year of $115 a barrel. This is excellent news as it will have a positive effect on economic growth around the world, not to mention being a boon for motorists. However, over the short term it has had a negative impact on the markets which have fallen sharply round the world.
I’ll discuss the impact of the fall in price in the outlook section of this report.
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 November;
Short-term Performance
| Parmenion Portfolio/Index | One month
Performance to 30 November 2014 |
One year performance to 30 November 2014 |
| Income Portfolio | +2.0% | +9.2% |
| Average Mixed Investment fund (20-60% shares) | +2.3% | +5.6% |
| Balanced Portfolio | +2.4% | +9.6% |
| Average Mixed Investment fund (40-85% shares) | +3.2% | +6.0% |
| Tactical Portfolio | +2.7% | +9.8% |
| Average Flexible Investment Fund | +3.2% | +6.2% |
| MSCI UK | +2.9% | +4.4% |
| MSCI World (£) | +4.3% | +14.8% |
| IBOX Gilt | +3.2% | +11.2% |
Long-term Performance
| Parmenion Portfolio/Index | Three year performance 30 November 2014 | Five year performance to 30 November 2014 |
| Income Portfolio | +39.8% | +53.7% |
| Average Mixed Investment fund (20-60% shares) | +25.7% | +34.2% |
| Balanced Portfolio | +39.0% | +52.6% |
| Average Mixed Investment fund (40-85% shares) | +34.9% | +44.6% |
| Tactical Portfolio | +41.7% | +54.3% |
| Average Flexible Investment Fund | +35.2% | +44.3% |
| MSCI UK | +35.9% | +54.1% |
| MSCI World (£) | +59.2% | +78.5% |
| IBOX Gilt | +12.8% | +35.3% |
(Source; Parmenion Capital Partners LLP)
PORTFOLIO REVIEW
All Portfolios
All portfolios produced good returns in November as world markets recovered from the sell-off in October. Unusually, every asset class posted positive returns.
Income Portfolio
The Income portfolio gained +2.0% in November, under-performing its benchmark (the average mixed investment (20-60% shares) fund) which gained +2.3%.
All investments performed well this month, with the US and European markets leading the charge. Our focus on commercial property detracted from returns.
During November we took a more defensive stance and sold Veritas Global Equity Income, Schroder & Newton Asian Income, increasing exposure to the defensive Invesco perpetual Income, Vanguard UK Equity Income and newton Global Higher Income funds. The Asian funds have produced super returns for us over the years and I was sad to let them go.
We took out a position in the Vanguard UK Gilt Index fund thinking that interest rates would be lower for longer and this investment could produce modest returns for little risk.
This leaves the Income Portfolio looking more defensive than it has done for many years.
Balanced Portfolio
The Balanced portfolio gained +2.4% under-performing its benchmark (the average mixed investment (40-80% shares) fund) which increased by +3.2%.
All investments performed well this month, with the US and European markets leading the charge. Emerging and Asian markets were also strong. Our focus on commercial property detracted from returns.
During November we took a more defensive stance and sold Veritas Global Equity Income and Schroder Asian Income funds, increasing exposure to the defensive Invesco perpetual Income and newton Global Higher Income funds. The Asian Income fund has produced super returns for us over the years and I was sad to let it go.
We took out a position in the Vanguard UK Gilt Index fund by trimming our holdings in the Vanguard UK Equity Income and Marlborough Multicap Income funds, thinking that interest rates would be lower for longer and this investment could produce modest returns for little risk.
We also commenced a position in the Aberdeen Japan fund by selling Aberdeen Emerging Markets. The thinking was emerging market currencies could come under pressure when interest rates rise in the US.
This leaves the Income Portfolio looking more defensive than it has done for many years.
Tactical Portfolio
The Tactical portfolio gained +2.7% in November, under-performing its benchmark (the average flexible fund) which also grew by +3.2%.
Our focus on Japanese, Asian and US equities boosted performance along with strong returns from European funds. Our exposure to UK commercial property detracted from returns.
During November we trimmed our position in Jupiter Europe as the fund seemed to have lost its way a little. We also sold Aberdeen Emerging markets thinking that emerging market currencies could come under pressure when interest rates rise in the US.
We increased exposure to Japan on hopes of economic recovery, and boosted exposure to Schroder Recovery which has been performing well.
Finally we swapped the HSBC US equity tracker for a similar product from Vanguard due to Parmenion having negotiated super-low charges with the later.
OUTLOOK
The outlook appears to have improved somewhat compared with last month due to the fact that the oil price has collapsed.
The reason for the plunge in the price of crude was due to the fact that Saudi Arabia decided to maintain current production levels at the last OPEC meeting, which was a couple of weeks ago now. There has been speculation as to why this occurred along with all sorts of conspiracy theories;
· Was Saudi in collusion with the Americans to put the squeeze on Russia?
· Was Saudi in collusion with OPEC members to put the squeeze on American shale oil producers (who can’t produce oil economically at the new lower price).
· Was control of the oil price no longer an option?
The last point seems to be the issue. The oversupply of oil was so large that Saudi Arabia simply couldn’t cut production sufficiently to bring supply back into line with demand, with the result that the price has gone into freefall.
Apart from the obvious pleasure we will all have when refueling at the petrol pumps, what are the implications for investors?
- Short-term its bad news. Oil and gas companies have seen their share prices slashed and that has resulted in a drop in markets. Also, some nations who are large exporters of oil have had to sell investments to shore up their balance sheets, which has added to the downwards pressure on markets.
- Longer term its good news as a falling oil price reduces inflation world-wide and boosts economic growth, as oil is an element of the cost of everything we consume. Consumers and businesses have more money in their pockets and countries that import oil will have a better balance of payments.
- There are also other concerns; the dramatic fall in price will have geopolitical consequences. Many countries will face near bankruptcy – what will the upshot of this be? The balance of power could shift dramatically in the Middle East.
- Some regions (such as Scotland and Canada) may face black spots of unemployment as the oil boom ends.
All this was very unexpected, but not unwelcome.
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.
