Investment Report for May 2016

OVERVIEW

May was a flat month for the UK market as investors started to focus on the forthcoming EU referendum. The market ended May at almost exactly the same level as it started.

Bond markets gave small positive returns driven predominantly by a growing concern over the outlook for UK growth. In this environment, the returns from both the low-risk portfolios and higher-risk portfolios have been fairly similar.

There were no major events in the markets during May. Global economic data continued to show modest rates of growth, which were superior to that of Q1 2016, but there was a slight slowing in the UK. From a policy perspective, the US Federal Reserve became slightly more hawkish, and the probability of a US interest rate rise in the coming months began to increase.

There was little of note to report from overseas markets, although it’s interesting to see that the US market is within a whisker of its all-time high compared with the UK market which is languishing around 13% from its previous peak. Investors globally have been selling UK equities as the EU referendum approaches.

UK commercial property had a flat month but returns were hit by an adjustment in the pricing basis of some funds which switched from the offer to the bid price. This reduces the quoted value of the funds and occurred as some investors had withdrawn money in anticipation of the EU referendum.

STOP PRESS

At the time of writing (20 June) it is only a few days before the EU referendum. Markets have become very volatile and have moved dramatically as various polls have reflected firstly a marginal swing first towards us leaving the EU and then a reverse towards the remain camp.

Sterling has also bounced around on the foreign exchanges as investors worry about how the UK will fund its “twin deficit” in the event of a Brexit. Ironically, weakness in Sterling increases the

value of overseas investments.

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

Long-term Performance

(Source; Parmenion Capital Partners LLP)

PORTFOLIO REVIEW

All Portfolios

All portfolios trod water in May as UK investors stood on the side-lines waiting for the EU referendum.

Income Portfolio

The Income Portfolio gained +0.1% in May under-performing the benchmark (the average mixed investment (20-60% shares) fund) which gained +0.2%.

Our exposure to UK commercial property held us back a little over the month.

There were significant changes in May as we positioned the portfolio so that as best as we could make it the referendum would have a minimal impact whatever the outcome.

We sold Standard Life GARS which invests globally and also reduced our UK commercial property funds, buying M&G Corporate Bond fund as a nice lower-risk investment, as corporate bonds looked cheap.

Balanced Portfolio

The Balanced Portfolio gained +0.1% in May, under-performing the benchmark (the average mixed investment (40-80% shares) fund) which gained +0.3%.

Our exposure to UK commercial property held us back a little over the month.

There were significant changes in May as we positioned the portfolio so that as best as we could make it the referendum would have a minimal impact whatever the outcome.

We reduced our UK commercial property funds, adding to Liontrust Special Situations – a successful UK growth fund. We reckoned UK equities were cheap and added to our exposure.

We also swapped Henderson European Focus for Premier Pan European Property Share as quoted property companies had dropped in value. Also, the Premier fund hedges currency risks and this allowed us to trim the balance between UK and overseas investments from a currency point of view.

Tactical Portfolio

The Tactical Portfolio gained +0.6% in May, out-performing the benchmark (the average Flexible fund) which was unchanged. The portfolio’s heavy exposure to overseas currencies boosted performance.

We sold our UK commercial property funds, adding to Liontrust Special Situations – a successful UK growth fund and a long-term favourite; Marlborough Multicap Income. We reckoned UK equities were cheap and added to our exposure.

We also made a couple of trades to trim up the fund prior to the referendum and we needed to reduce overseas currency exposure. Thus we swapped Henderson European Focus for Premier Pan European Property Share as the Premier fund hedges currency risks, even though it is denominated in Euros.

We also sold half of our US$ denominated Vanguard US Equity tracker fund buying Woodford Equity Income.

OUTLOOK

With just days to go before the Referendum investors need to know where they stand;

• If we “Brexit” then UK shares will fall along with the currency – which will bear the brunt of a sell-off. The UK market shouldn’t be hit too hard as 70% of earnings in the UK market are derived overseas. As Sterling weakens the value of these income streams increases, which would help offset a weaker outlook for the UK econo.

• Any fall in Sterling boots the value of overseas investments. This demonstrates the value of a balanced portfolio as in these circumstances, whilst UK shares may fall, overseas investments will increase in value.

• If we “Remain” then here will be a relief rally in the UK market offset by a corresponding fall in the value of overseas investments as Sterling strengthens in value.

• As best as we can judge, its sensible to hold more UK shares than overseas investments as the impact will be more severe on the currency markets, for the reasons mentioned above. Thus fewer overseas investments are needed to neutralise the impact of a falling UK stock market.

• UK commercial property will be negatively impacted if we Brexit as there’s likely to be a recession and prices could well fall. In these circumstances we would sell and maybe buy cheap UK equities or hold cash for a while.

Either way, Friday promises to be an exciting day!