OVERVIEW

 

The year has certainly got off to a good start with the FTSE 100 share index continuing to make decent progress through February. Indeed, all world markets were positive, basking in the rosy glow of additional monetary stimulus from the ECB.

 

The deal brokered between the EU and Greece regarding an extension of the country’s bail-out terms also helped sentiment.

 

Meanwhile, amidst the tensions surrounding Greece, healthy economic data provided support to European equity markets. Over the last three months of 2014, Germany’s economy grew faster than the consensus forecasts, boosted by consumer spending and investment. It would appear that the Euro region has turned the corner and is on the road to recovery – although there is plenty of scope for the Greeks to derail this later in the year.

 

In the US further signs of a strengthening domestic economy were observed. The employment report released earlier in the month showed steady job gains that beat market expectations. Furthermore, the US manufacturing and services sectors also painted a positive picture.

 

Asian equity market performance was generally positive in February, with monetary policy easing being a key economic theme supporting markets. Market sentiment in Japan also remained positive, with many companies having delivered profits that were better than expected. Elsewhere, Australia’s central bank surprisingly cut interest rates which lifted market sentiment.

 

Fixed interest securities all lost money as did corporate bonds. This reflected the stronger economic backdrop which implied that interest rates could rise sooner than expected.

 

Commercial property continued to make modest gains over the month, especially in the regions where demand for space is growing.

 

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

 

Short-term Performance

 

Parmenion Portfolio/Index

One month

Performance to 28 February 2015

One year performance to 28 February 2015
Income Portfolio

+0.4%

+9.8%
Average Mixed Investment fund (20-60% shares)

+0.9%

+7.0%
Balanced Portfolio

+1.0%

+11.4%
Average Mixed Investment fund (40-85% shares)

+1.7%

+8.2%
Tactical Portfolio

+2.3%

+12.9%
Average Flexible Investment Fund

+1.7%

+8.8%
MSCI UK

+3.2%

+5.3%
MSCI World (£)

+2.8%

+18.1%
IBOX Gilt

-4.5%

+12.3%

 

Long-term Performance

 

Parmenion Portfolio/Index

Three year performance to 28 February 2015

Five year performance to 28 February 2015
Income Portfolio

+32.6%

+52.9%
Average Mixed Investment fund (20-60% shares)

+22.0%

+35.2%
Balanced Portfolio

+31.1%

+51.3%
Average Mixed Investment fund (40-85% shares)

+28.9%

+45.7%
Tactical Portfolio

+36.6%

+54.0%
Average Flexible Investment Fund

+27.7%

+44.2%
MSCI UK

+31.3%

+54.0%
MSCI World (£)

+52.1%

+72.8%
IBOX Gilt

+14.3%

+41.5%

(Source; Parmenion Capital Partners LLP)

 

 

PORTFOLIO REVIEW

 

All Portfolios

 

Our portfolios turned in modest gains during the month, with the lower-risk mandates producing the least returns, as these have heavy exposure to fixed- interest securities which were weak in February.

Income Portfolio

 

The Income portfolio gained +0.4% in February, under-performing its benchmark (the average mixed investment (20-60% shares) fund) which gained +0.9%.

 

The portfolio suffered a little due to exposure to the gilt market which was weak. However, this investment is held to guard against the risks of deflation.

 

No changes were made to the portfolio this month.

 

Balanced Portfolio

 

The Balanced portfolio gained +1.0% in February, under-performing its benchmark (the average mixed investment (40-80% shares) fund) which gained +1.7%.

 

The portfolio suffered a little due to exposure to gilts and our Asian investments were weak due to currency factors.

 

No changes were made to the portfolio this month.

 

Tactical Portfolio

 

The Tactical portfolio gained +2.3% in February, out-performing its benchmark (the average flexible fund) which gained +1.7%.

 

Our investments in Europe and the US market contributed to gains and our Asian investments were weak due to currency factors.

 

No changes were made to the portfolio this month.

 

 

UK BUDGET UPDATE

 

 

The budget introduced a number of well-trailed changes affecting pensions and investments;

 

The Pension lifetime allowance to be reduced from £1.25m to £1.0m from next year.

 

Commentary; This will largely affect high-salaried public sector employees who have the benefit of a generous government backed pension.

 

Annuitants will be able to sell their annuity to release capital.

 

Commentary; This will create a secondary market in annuities. Ironically those who are most likely to want to sell their annuity (people in poor health) will get the least for them. There are concerns that some may become poverty stricken in their old age.

 

The tax-free personal allowance is to rise from £10,600 in 2014-5 to £10,800 in 2015-6 and £11,000 in 2016-7.

 

Commentary; A modest tax-break for all earners.

 

The threshold at which people start paying 40p tax to rise by above inflation from £42,385 to £43,300.

 

Commentary; Those on middle incomes have been heavily squeezed in recent years. Higher-rate tax payers used to number a few hundred thousand, now there are millions of them.

 

Help to buy ISA; The Government will boost ISA contributions by 25% up to £12,000 if the proceeds are used for a first time house-purchase. It will be available on properties priced up to £250k outside London and £450k within the capital. Savers can withdraw capital from the account, but the bonus only becomes payable at the point the home is purchased.

 

Commentary; An interesting idea to encourage home ownership. In reality a modest boost that might cover the costs of the move. Grandparents might like to take advantage of this for their grandchildren.

 

ISA allowance increases
to £15,240PA

 

£1,000 of savings interest will be tax-free for basic-rate payers, £500 for higher-rate payers.

 

Commentary; A modest, but nonetheless welcome boost given that savings rates are so low.

 

“Fully flexible” ISA will allow savers to withdraw money and put it back later in the year without losing any of their tax-free allowance.

 

Commentary; this is a great idea and will actually be of real use to some – usually people moving house in our experience.

 

Conclusion; No complaints, although for us and our clients the big changes (relating to pensions) were announced in the last budget and the autumn statement. One wonders how long the new measures will remain on the statute books though, given that the election is only two months away. We have ignored one or two measure that don’t have a direct bearing on finances, like the paperless tax return.

 

 

OUTLOOK

 

The main issue facing markets now is when the US Fed will’ hike interest rates? This might have more serious implications for countries round the globe other than the US. The reason? Much borrowing is in US dollars and a rise in interest rates increases the cost of debt to an overseas borrower.

 

The IMF has flagged up the risks to Asian and Emerging Markets that an increase in US ‘rates poses. It is for this reason that we are relatively light in such investments, even in the higher-risk Tactical fund, preferring to focus on the major economies (the UK, US and Europe) where there will be a more modest impact.

 

It’s good news indeed that Europe seems to be coming out of the doldrums, but there’s plenty of scope for a derailment if Greece leaves the EU – who knows who might follow their lead – the UK perhaps?

 

This leads nicely into strategy; we are trimming UK exposure a little thinking that the economic prospects for Britain post-election are not so great; the chancellor has a budget hole to fill and this must mean a hike in taxes and cuts in public expenditure. Then there’s all the uncertainty that a hung parliament could engender. Then there’s the risk of us leaving the EU…