Investment Report July 2016

OVERVIEW

July turned in a much more pleasing set of figures than June with all world markets making gains and the UK enjoying a really positive post-Brexit bounce. During July the FT100 share index rose by +4.0%

The saving grace of the UK stock market is Sterling, where a weakened currency has boosted the value of overseas earnings. In a typical UK focused investment portfolio 50% of the earnings are derived from overseas operations or exports and the value of these has risen considerably.

Even for a UK focused business the outlook is not all doom and gloom. Immediately after the referendum the initial assessment was that the UK would move into recession. However, the Government got itself reorganised very swiftly and the Bank of England made it clear that firm action would be taken to be supportive. This turned out to be a cut in interest rates and a large dose of quantitative easing, which went down really well in the UK market.

The UK commercial property market has been in the news as almost every property fund suspended trading as investors rushed for the exit. However, outflows have slowed considerably now and one or two funds are now allowing investors to withdraw funds.

After an initial plunge in the value of the property funds most managers have written the values back up again. It must be remembered that property values are a matter of valuer’s opinion and not fact. The true value of a property is only known when it is sold – as the value is the price that is achieved in the open market.

Since the referendum there have been very few property transactions on which the valuers rely to determine a fair assessment of price. Anecdotally 3/5ths of all the transaction lined up before the referendum have proceeded to a conclusion without an adjustment. 1/5^th were cancelled and 1/5^th completed but on a reduced price. These price reductions have been modest.

The upshot is that once the dust settles valuations are likely to be 5-10% downwards.

Fixed-interest securities, which make up a large proportion of lower risk portfolios, have performed well. This is because of the action taken by the Bank of England which is very supportive of these investments.

Gilts appreciated by +2.1% over the month and corporate bonds gained a remarkable +5.2%.

 

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

The tables below show the performance of the portfolios over various time periods to the end of June;

Short-term Performance

 

Long-term Performance

(Source; Parmenion Capital Partners LLP)

 

PORTFOLIO REVIEW

All Portfolios

All portfolios stormed ahead in July taking advantage of a major recovery in the UK market, further weakness in Sterling which pushed-up the value of overseas equities, strong gains in fixed-interest securities and a rebound in the UK commercial property market.

Income Portfolio

The Income Portfolio gained +3.7% in July and slightly under-performed the benchmark (the average mixed investment (20-60% shares) fund) which gained +3.8%. Our exposure to UK commercial property held us back a little.

All asset classes contributed to positive gains with the exception of commercial property which was slightly down over the month.

No funds were traded during the month.

Balanced Portfolio

The Balanced Portfolio gained +4.5% in July, under-performing the benchmark (the average mixed investment (40-80% shares) fund) which gained +5.0%. Our exposure to UK commercial property held us back a little.

All asset classes contributed to positive gains with the exception of commercial property which was slightly down over the month.

No funds were traded during the month.

Tactical Portfolio

The Tactical Portfolio gained +6.7% in July, out-performing the benchmark (the average Flexible fund) which gained +5.3%.

The portfolio did well due to our heavy exposure to Emerging and Asian markets which were very strong in July.

No funds were traded during the month.

 

OUTLOOK

The world now seems to be a very uncertain place. It’s not just the UK and the implications for Brexit, which apart from an obvious short-term slowdown are somewhat unknown. Looking further afield there is an election looming in the US, Europe has to deal with Brexit and there are still obvious problems south of the “Olive belt”. China still suffers growing pains as it attempts to rebalance its economy away from manufacturing and the emerging economies are having to cope with a period of low commodity prices.

Against this backdrop a very diversified portfolio seems to be the best solution. Unusually in July all asset classes made strong gains – but this is really unusual. Normally a broad diversity of investments smooths returns. In this uncertain world of ours, such an approach appears to be the best approach.

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”.