OVERVIEW
Investors moved into a risk averse mood this month with sentiment in parts of Asia rattled by political upheaval in Hong Kong. In addition to this there is a lengthening list of woes affecting the markets to a greater or lesser degree;
- Weakness in the Eurozone
- Russian action in the Ukraine
- The impact of ISIS in the middle east
- The Ebola epidemic
- Thoughts that interest rates would rise in the UK and US in the near future
There is also general wariness over the future trend for global growth which is hurting equities, while encouraging buying of highly rated government bonds.
The two regions giving the greatest concern are Europe, which is heading for another recession and China, which is slowing due to the bursting of its property bubble.
In contrast, US equities were firm as the economy booms, fuelled by low oil & gas prices as America becomes a major oil producer.
Fixed income investments enjoyed gains as investors sought the safety of government bonds.
Commercial property continued its upward march with progress throughout the country. Rents are starting to rise in selected areas.
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 following tables show the performance of our model portfolios over various periods of time to the end of September;
Short-term Performance
| Parmenion Portfolio/Index | One monthPerformance to 31 September 2014 | One year performance to 31 September 2014 |
| Income Portfolio | -1.1% | +8.5% |
| Average Mixed Investment fund (20-60% shares) | -0.9% | +5.1% |
| Balanced Portfolio | -1.3% | +8.4% |
| Average Mixed Investment fund (40-85% shares) | -1.1% | +5.6% |
| Tactical Portfolio | -1.2% | +9.6% |
| Average Flexible Investment Fund | -1.1% | +5.6% |
| MSCI UK | -2.8% | +6.0% |
| MSCI World (£) | +4.0% | +13.0% |
| IBOX Gilt | -0.6% | +5.9% |
Long-term Performance
| Parmenion Portfolio/Index | Three year performance 31 September 2014 | Five year performance to 31 September 2014 |
| Income Portfolio | +38.6% | +52.7% |
| Average Mixed Investment fund (20-60% shares) | +24.6% | +31.7% |
| Balanced Portfolio | +37.4% | +50.5% |
| Average Mixed Investment fund (40-85% shares) | +33.6% | +40.0% |
| Tactical Portfolio | +41.7% | +49.3% |
| Average Flexible Investment Fund | +32.8% | +39.1% |
| MSCI UK | +44.0% | +53.6% |
| MSCI World (£) | +59.9% | +66.3% |
| IBOX Gilt | +11.6% | +30.1% |
(Source; Parmenion Capital Partners LLP)
PORTFOLIO REVIEW
All Portfolios
All portfolios returned modest losses as world markets fell back. The value of overseas investments held up well as Sterling weakened on the foreign exchange markets.
Income Portfolio
The Income portfolio lost -1.1% in September, under-performing its benchmark (the average mixed investment (20-60% shares) fund) which lost -0.9%.
Our exposure to the Asian markets detracted from returns whereas our heavy exposure to Commercial Property boosted returns.
This month we sold down our exposure to UK equities, taking some profits and bought a fixed income fund. We also sold the Unicorn UK Income fund as sadly the manager died, replacing it with the Marlborough Multicap Income fund, which has been very successful since launch three years ago.
Balanced Portfolio
The Balanced portfolio lost -1.3% in September, under-performing its benchmark (the average mixed investment (40-80% shares) fund) which lost -1.1%.
Our exposure to the Asian markets detracted from returns whereas our heavy exposure to Commercial Property boosted returns.
This month we sold the Unicorn UK Income fund as sadly the manager died, replacing it with the Marlborough Multicap Income fund, which has been very successful since launch three years ago. We also sold Newton Global Higher Income fund, taking a little money out of the markets and bought more UK Commercial property in view of the positive outlook for the next 18 months.
Tactical Portfolio
The Tactical portfolio lost -1.2% in September, marginally under-performing its benchmark (the average flexible fund) which fell by -1.1%.
Our focus on the US market helped offset losses in Asia. Our modest exposure to commercial property also contributed to returns.
This month we sold the Pictet Premium Brands fund which had been affected by political action in China, with the authorities there frowning on conspicuous consumption. We replaced the fund with the Marlborough Multicap Income fund, which has been very successful since launch three years ago. We also bought more UK Commercial property in view of the positive outlook for the next 18 months.
OUTLOOK
As investors, we are in many respects living through some pretty gentle times – and those who would counter that view by pointing to the bleak news emanating from areas such as Iraq and Ukraine must at least concede that markets would have reacted a good deal more negatively to such events had this been a more volatile period in the mould of 2008, say, or even 2011.
Even Mother Nature appears to be in a more benign mood so far this year – as you can see from the graph below, data from the US-based National Oceanic and Atmospheric Administration shows the low level of tornadoes that have occurred in the US over the first six months of this year, compared with much of the last decade.
Source: National Weather Service Storm Prediction Centre, 13th July 2014
For its part, Munich Re observed in a recent research note that, in the first half of 2014, 2,700 people had died “as a result of natural catastrophes” – well down on the same period’s 10-year average of 53,000 – although the insurer did add: “Towards the end of the year, the natural climate phenomenon El Niño may impact regions differently in terms of the number and intensity of weather extremes.”
The evidence from nature is that things always change and can be very variable. The world of investment is no different. Low levels of volatility currently being seen in share, bond and currency markets may be coming to an end. There seems to be too much trouble in the world at the moment and this is starting to be felt in the markets.
We have progressively reduced risk in our portfolios over the last year and my vibe is that this will prove to be the correct decision.
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.
