OVERVIEW
October was a difficult month for investors as there was a large sell-off in all markets followed by a reasonably strong re-bound.
The market falls occurred as a result of very poor figures emerging from Germany indicating that the country was heading for recession. Germany leads the way in the Eurozone and it was already understood that things were grim in France and other countries in the region.
The German experience indicated that the Eurozone was heading for recession, which has implications for the world economy, which is now slowing.
Stock market investors took fright, with at one point 10% falls in some of the major indices. However, as soon as the markets dropped central bankers round the world started making soothing noises to the effect that interest rates would remain lower for longer, and this immediately caused a rebound. This was most pronounced in the US, demonstrating the relative strength of this economy.
Here is the FTSE100 share index over the previous three months;
Moving away from the equity markets, fixed interest securities made progress due to their “safe haven” status. UK commercial property made excellent gains as there is now a shortage of offices to rent in the city, as many offices have been converted into flats. The upshot of this is of course, that valuations are rising strongly.
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
I enclose tables showing the performance of the portfolios over various periods of time to the end of September;
Short-term Performance
| Parmenion Portfolio/Index | One monthPerformance to 31 October 2014 | One year performance to 31 October 2014 |
| Income Portfolio | +0.8% | +6.6% |
| Average Mixed Investment fund (20-60% shares) | -0.4% | +1.9% |
| Balanced Portfolio | +1.0% | +6.1% |
| Average Mixed Investment fund (40-85% shares) | -0.9% | +1.2% |
| Tactical Portfolio | +1.2% | +6.6% |
| Average Flexible Investment Fund | -0.9% | +1.1% |
| MSCI UK | -1.0% | +0.5% |
| MSCI World (£) | +2.2% | +9.9% |
| IBOX Gilt | +1.3% | +6.6% |
Long-term Performance
| Parmenion Portfolio/Index | Three year performance 30 September 2014 | Five year performance to 30 September 2014 |
| Income Portfolio | +32.1% | +53.2% |
| Average Mixed Investment fund (20-60% shares) | +19.7% | +31.8% |
| Balanced Portfolio | +30.9% | +51.8% |
| Average Mixed Investment fund (40-85% shares) | +25.3% | +40.7% |
| Tactical Portfolio | +33.6% | +52.7% |
| Average Flexible Investment Fund | +24.3% | +40.3% |
| MSCI UK | +31.8% | +54.7% |
| MSCI World (£) | +52.9% | +79.1% |
| IBOX Gilt | +11.8% | +32.3% |
(Source; Parmenion Capital Partners LLP)
PORTFOLIO REVIEW
All Portfolios
All portfolios produced a positive return in October against a backdrop of volatile markets. Markets initially fell and then rebounded, but by the end of the month were still in the red.
No changes were made to any of the portfolios during the month.
Income Portfolio
The Income portfolio gained +0.8% in October out-performing its benchmark (the average mixed investment (20-60% shares) fund) which lost -0.4%.
All investments performed well this month in spite of the volatility, as investors rotated into higher yielding defensive equities of the type held in this portfolio. The portfolio has high exposure to UK commercial property which made strong gains this month.
Balanced Portfolio
The Balanced portfolio gained +1.0% in October out-performing its benchmark (the average mixed investment (40-80% shares) fund) which fell by -0.9%.
All investments performed well this month in spite of the volatility, as investors rotated into higher yielding defensive equities. This portfolio has considerable exposure to this area of the market. The portfolio also has high exposure to UK commercial property which made strong gains this month.
Tactical Portfolio
The Tactical portfolio gained 1.2% in October, outperforming the benchmark (the average flexible fund) which fell by -0.9%.
The fund’s relatively defensive positioning (for a speculative investment) supported returns due to the inclusion of some property and high yielding defensive equities. A number of the fund managers we use have a quality bias and this proved to be supportive in difficult market conditions.
OUTLOOK
After a volatile month calm has been restored and markets have returned to normal. I do however believe that we are at a turning point; either some large unforeseen event (maybe a geopolitical event) will seriously upset the applecart and cause a major upset in the markets, or markets will stagnate somewhat in what has been predicted to be “the new normal”. This looks like a world with little or no growth that implies little prospect of strong returns from equities going forward.
This presents a quandary for investors as equities are the only decent source of income at the moment. My perception is that cheap money is supportive of markets and when interest rates do rise, the increases will be modest and gradual.
The upshot is that we have been gently de-risking the portfolios (especially the income portfolio) over the last year and the job will be finished in November with a final batch of fund switches going through around now. This may result in a modest fall in income available to investors, but that is the price to pay for capital protection. You can see the effect of this de-risking process in our one year performance figures, which look exceptional compared with the benchmarks.
With the funds positioned defensively we are well placed to take advantage of any opportunities which present themselves.
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.
