OVERVIEW
In spite of the old adage “Sell in May” markets were in reasonably good form last month. A lot of this reflected enthusiasm for the much heralded June policy meeting at the European Central bank where great things were expected. At the time of writing the meeting was a little disappointing, but nonetheless, the ECB has increased efforts to get the Eurozone’s economies moving again.
Things are slowing down in China, but the Government there seems to be managing things in such a way that the need to contain credit growth is more of an easing than a halt.
It was another upbeat month for UK commercial property with the market returning around 1.0%+. While rental growth remains lacklustre, robust investor demand and a limited supply of prime assets have ensured that prices continue to rise. As a result, buyers are now willing to take on more risk in order to achieve higher yields.
Investor demand for smaller properties (secondary assets), particularly in the office and industrial sectors, is increasing.
STOP PRESS
After last week’s speeches by the Bank of England, Mark Carney and the Chancellor George Osborne, it’s pretty clear that interest rates will be increasing later this year, albeit in a gradual and controlled way. This has implications for the markets which I will discuss in my next bulletin.
Here is the chart of the FTSE 100 index for the last six months;
…and the last five years, which puts things in perspective;
FUND PERFORMANCE
We enclose tables showing the performance of the portfolios over various periods of time to the end of May;
Short-term Performance
| Parmenion Portfolio/Index | One monthPerformance to 31 May 2014 | One year performance to 31 May 2014 |
| Income Portfolio | +1.2% | +7.4% |
| Average Mixed Investment fund (20-60% shares) | +1.4% | +3.7% |
| Balanced Portfolio | +1.6% | +6.3% |
| Average Mixed Investment fund (40-85% shares) | +1.7% | +4.6% |
| Tactical Portfolio | +2.3% | +8.0% |
| Average Flexible Investment Fund | +1.9% | +3.8% |
| MSCI UK | +1.4% | +7.7% |
| MSCI World (£) | +2.7% | +7.4% |
| IBOX Gilt | +0.9% | +0.5% |
Long-term Performance
| Parmenion Portfolio/Index | Three year performance to 31 May 2014 | Five year performance to 31 May 2014 |
| Income Portfolio | +24.2% | +73.9% |
| Average Mixed Investment fund (20-60% shares) | +16.7% | +47.3% |
| Balanced Portfolio | +22.2% | +71.8% |
| Average Mixed Investment fund (40-85% shares) | +20.3% | +60.0% |
| Tactical Portfolio | +21.4% | +75.6% |
| Average Flexible Investment Fund | +16.6% | +59.3% |
| MSCI UK | +27.8% | +85.3% |
| MSCI World (£) | +33.1% | +89.3% |
| IBOX Gilt | +16.8% | +31.5% |
(Source; Parmenion Capital Partners LLP)
PORTFOLIO REVIEW
All Portfolios
All portfolios made reasonable returns in May. Unusually all asset classes contributed to the positive returns with overseas and Asian markets being particularly strong.
Income Portfolio
The Income portfolio gained +1.2% in May marginally under-performing its benchmark (the average mixed investment (20-60% shares) fund) which gained +1.4%.
This month we sold a long-standing holding in the Kames High yield bond fund switching into a more “main-stream” bond fund run by Vanguard, thinking that High yield bonds were past their best.
We also sold another long-term holding; Artemis Income, switching into another passive investment fund run by Vanguard which produces an attractive income from an investment in UK equities. This deal was done to reduce management costs.
Finally, we increased exposure to UK commercial property further by buying Henderson UK property using the cash we had from last month’s sale of L&G Dynamic Bond fund.
Balanced Portfolio
The Balanced portfolio gained +1.6% in May just out-performing its benchmark (the average mixed investment (40-80% shares) fund) which posted a return of +1.7%.
Overseas investments led the way with UK focussed growth shares either treading water or falling away a little.
This month was busy with a lot of trades being implemented; we sold a long-standing holding in the Kames High yield bond fund switching into a more “main-stream” bond fund run by Vanguard, thinking that High yield bonds were past their best.
We also sold another long-term holding; Artemis Income, switching into another passive investment fund run by Vanguard which produces an attractive income from an investment in UK equities. This deal was done to reduce management costs.
We capitulated on our holding in M&G Recovery after another bad year for the fund and bought Schroder Recovery instead.
Finally, we increased exposure to UK commercial property further by buying Threadneedle UK property using the cash we had from last moths sale of L&G Dynamic Bond fund.
Tactical Portfolio
The Tactical portfolio had a strong month growing by +2.3%, out-performing the benchmark (the average flexible fund) which grew by +1.9%.
Our focus on Emerging markets and Asian shares boosted returns and more than offset a modest weakness in UK growth shares.
This month we reinvested the cash realised last month from the sale of the Marlborough UK Micropcap fund. We purchased Aberdeen Japan’ to capitalise on the Japanese economic recovery and a spread of property funds (for diversification) buying L&G and Threadneedle UK property and Premier Pan European Property share.
Finally we capitulated on out holding in M&G Recovery after another bad year for the fund and bought Schroder Recovery instead.
ACTIVE V PASSIVE
We undertook a thorough review of all three investment portfolios last month. We wanted to see what had delivered the investment returns achieved – our asset allocation (the choice of what types of investment to hold in each portfolio) or the selection of individual investment managers.
We compared the returns achieved with what the returns would have been had we selected passive investment funds where possible. Passive funds are low-cost investment solutions that usually track an index, such as the FTSE 100 share index, but there is no chance of out-performing the market.
The conclusion was that the decisions regarding asset allocation drove most of the returns. So the choice between cash, equities, property and fixed income securities affected outcomes for investors to a significant degree.
What was disappointing was how little was added to returns due to the choice of investment manager. For our Income and Balanced Portfolios the active investment managers added approximately 0.5% to returns after charges over a three year period.
On balance, we would prefer to invest in passive funds with lower management fees and have the certainty of lower costs whilst giving up the chance of out-performing the market. Don’t forget, we can achieve out-performance with successful asset allocation.
For some investments no passive funds exist. One such investment is a UK commercial property fund. However, for many other investments suitable passive funds are available and over the next year or so we intend to increase exposure to these vehicles with a useful reduction in cost to be paid by the investor.
One area where our active managers succeeded very well was in our higher risk Tactical Portfolio. Here the active managers added around 3.0% to returns achieved over the three years, which was a worthwhile gain. We will stick mainly to active managers in this portfolio. It’s noticeable that specialist areas, such as Emerging or Asian markets, or Smaller Company shares benefit more from active management – even if it costs more.
OUTLOOK
The outlook has clouded somewhat as action by the ECB was more moderate than predicted; markets barely moved as they had more than anticipated what was delivered in the end.
The oil price is moving up, driven higher by sectarian violence in Iraq.
It looks like interest rates will be increasing in the UK later this year and I would bet that the US isn’t far behind.
These factors are negative for equities, but economic growth is now coming through strongly in the UK and US economies, so I’m content to remain invested with an overweight in Europe, which is behind the curve, so to speak. Investors are also faced with Hobson’s choice – they have nowhere else to go for income than long-term investments.
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.
