16 February 2016
Investment Report for January 2016
OVERVIEW
As highlighted in last month’s report, January was a dismal month for investors with everyone running for the hills. Once again, it’s all about the Chinese.
The issue has been the level of the Yuan on foreign exchanges and the underlying strength of the Chinese economy. The level of the Yuan is managed by the Chinese Government, but it is clear that this is slowly falling, even after (or perhaps because of) Government intervention. Weakness in the Chinese currency (which is a measure to boost competitive strength in export markets) puts other countries under pressure and aggravates international relations.
The other issue is the strength of the Chinese economy. All the news coming from the country is negative, with particular weakness in the manufacturing sector. The upshot of weak growth in China is a major contribution to the slump in commodity prices that we are seeing now and a reduction in economic growth around the globe, with the obvious impact on share prices.
Thus the FTSE 100 share index fell by -2.5%, the S&P 500 index in the US fell by -5.0% and the Eurostoxx50 index fell by -7.3%.
Gilts and Corporate Bonds (fixed income securities) made strong gains as these investments are regarded as “safe haven” assets with returns of around 2.2% on average.
UK commercial property grew by a modest 0.3%, which implied no capital growth but receipt of rental income only.
STOP PRESS
Unfortunately, widespread selling took place in the markets during the early part of February, except that the focus shifted away from China and instead switched towards the strength of the world’s largest banks.
It is a fact that all the world’s major banks are much stronger than they were during the credit crunch, but doubts persist whether this new found strength is sufficient to withstand another major crisis. Further concerns have been raised about the ability of banks to make money should interest rates and inflation remain very low, which they may well do.
As with oil & gas and mining shares, the UK market also has a disproportionately large number of banks in it, which has had the sad result of impacting disproportionately on the UK stock market.
By way of demonstrating how difficult it is to call markets over the short-term, the last few days have witnessed a surge in share prices as bargain hunters have re-entered the fray and HSBC announced that they were to stay in the UK.
Here is the chart of the FTSE 100 index for the last six months to the year end:
…and the last five years, which puts this into perspective;
FUND PERFORMANCE
I enclose tables showing the performance of the portfolios over various time periods to the end of January;
Short-term Performance
| Parmenion Portfolio/Index |
One month Performance to 31 January 2016 |
One year Performance to 31 January 2016 |
| Income Portfolio |
-2.4% |
-1.3% |
| Average Mixed Investment fund (20-60% shares) |
-2.4% |
-3.4% |
| Balanced Portfolio |
-2.8% |
0.0% |
| Average Mixed Investment fund (40-85% shares) |
-3.7% |
-3.5% |
| Tactical Portfolio |
-3.5% |
+0.9% |
| Average Flexible Investment Fund |
-4.2% |
-4.6% |
| MSCI UK |
-2.3% |
-7.0% |
| MSCI World (£) |
-2.3% |
+1.1% |
| IBOX Gilt |
+3.8% |
-0.6% |
Long-term Performance
| Parmenion Portfolio/Index |
Three year Performance to 31 January 2016 |
Five year Performance to 31 January 2016 |
| Income Portfolio |
+19.4% |
+36.8% |
| Average Mixed Investment fund (20-60% shares) |
+9.4% |
+20.5% |
| Balanced Portfolio |
+20.3% |
+35.2% |
| Average Mixed Investment fund (40-85% shares) |
+13.2% |
+24.3% |
| Tactical Portfolio |
+23.9% |
+32.5% |
| Average Flexible Investment Fund |
+11.2% |
+19.2% |
| MSCI UK |
+6.7% |
+23.3% |
| MSCI World (£) |
+34.2% |
+52.2% |
| IBOX Gilt |
+16.8% |
+40.2% |
(Source; Parmenion Capital Partners LLP)
PORTFOLIO REVIEW
All Portfolios
All portfolios fell heavily in January dropping with the markets.
Income Portfolio
The Income Portfolio lost -2.4% in January in-line with benchmark (the average mixed investment (20-60% shares) fund) which also lost -2.4%.
The portfolio was weak due to the general malaise in the world’s equity markets.
There were no changes to the portfolio during the month.
Balanced Portfolio
The Balanced Portfolio fell by -2.8% in January and out-performed its benchmark (the average mixed investment (40-85% shares) fund) which lost -3.7%.
Our overseas investments in Europe detracted from performance whilst our exposure to UK Property was a boost.
There were no changes to the portfolio during the month.
Tactical Portfolio
The Tactical Portfolio lost -3.5% in January and out-performed its benchmark (the average Flexible fund) which fell by -4.2%.
The out-performance is attributable to careful fund selection as although we have considerable exposure to Asia and the Emerging Markets the fund managers chosen turned in much better relative returns than their peers.
There were no changes to the portfolio during the month.
OUTLOOK
Rather than reacting to bad news we fear that the markets are in the process of creating it. By this we mean that it is quite understandable for markets to fall if the outlook for the world of business and commerce has deteriorated. What is depressing is that the falls in asset prices themselves could create the slow-down in economic activity that they are meant to be predicting. It becomes a self-fulfilling prophecy.
What to do in these circumstances? We have no option but to sit-tight. Asset prices can reverse at the drop of a hat and no-one can call short-term movements in the markets. All our portfolios are “rebalanced” every quarter, which means that we sell investments that have done well and buy the weaker ones, which gives a boost to performance when fortunes improve. In the meantime, the investment income that many rely on continues unaffected.
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”.
Category: Investment Report, News
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