After an eventful few months in the UK, August was relatively quiet from a market point of view, with a large portion of Europe on holiday. For those left at their desks, the outlook for US interest rates and to a lesser extent a recovering (and then slightly fading) oil price seemed to drive most activity.
Quiet months are often good ones from a portfolio perspective, and so it proved this month too. The latest performance analytics pdf is available here and August commentary is available below.Responding to some weaker economic indicators, Bank of England Governor Mark Carney cut UK interest rates to their lowest ever level of 0.25% during August as well as implementing additional stimulus measures and a pledge to take further action if necessary.
Better than expected jobs data provided a boost for US stocks in August and raised expectations for a rate rise sooner than expected. Hawkish sentiment from the Fed, including comments from Chair Janet Yellen that the “case for (a rate) increase… has strengthened in recent months” fuelled these expectations, although she did not give direct guidance as to timing.
In Japan, Shinzo Abe’s cabinet agreed a package of economic stimulus measures worth over 28 trillion yen, designed to support accommodative monetary policy to boost the country’s economy. This received only a lukewarm reaction from investors, who responded more to a weakening of the yen against the dollar in the face of increasing likelihood of a US interest rate increase.
In the Eurozone, Italy suffered from a devastating earthquake during the month, further depressing sentiment already dampened by news that the Italian economy stagnated during the second quarter. German economic growth also disappointed during the second quarter, slowing from 0.7% in 1Q 2016 to 0.4% in 2Q 2016. Confidence amongst German businesses also registered a sharp decline. On the flip side, Greece’s economy bounced back from a 0.1% contraction during the first quarter to achieve growth of 0.3% during the second.
The pound fell slightly against most other currencies in August, down 1.4% against the US dollar, 1% against the Euro, 0.4% against the yen and 1.3% against the Brazilian real. It did, however, strengthen against the South African rand, up 4.7%, as worries re-emerged of a political strike against South Africa’s respected finance minister by government officials heavily associated with South Africa’s troubling system of patronage.
Asset class performance during August was solid overall. EM equities were the star performer, assisted by strengthening EM currencies. Volatile commodities performed well too as the oil price recovered somewhat.
Global bond yields retraced some of their recent falls, rising somewhat as expectations of a rate rise by the Fed picked up speed which caused global interest rate sensitive asset classes such as government bonds and global property to struggle.
Performance was strong over the month as both equities and credit performed well. Core Active slightly outperformed Absolute Oriented as solid performance from corporate bonds and UK fixed income in Core Active did better than only mildly positive performance overall from absolute return funds.
Relative performance was again strong over the month, with the 10 balanced funds we regularly track up on average 1.5% over the month with the highest performing up 2.3% and the weakest up 0.5%.
Overall, Core Active 6 outperformed 8 of these 10 competitors.
Different Currencies Views
We’ve pointed out in previous commentaries that clients in the UK have benefitted from a combination of portfolios diversified across different currencies in the face of the post Brexit fall in sterling. Global allocations and pound falls have combined to produce exceptional portfolio returns when measured in pounds and pence (the currency of most future expenditure for UK clients) but as an exercise, how have the portfolios held up in different currencies? Or put differently, some of your and PortfolioMetrix’s clients’ future expenditures will actually be in overseas currencies (holidays, imported goods) – has a diversified portfolio safeguarded against those expenses?
Below is the last three months for PMX Core Active No-Tilt 5, encompassing a period including both pre and post the Brexit vote. I’ve also added the performance of sterling in dollars for comparison.
The effect of Brexit is pretty clear in the above, both the run up in sterling’s value just before the results and the crash afterwards. What is pleasing, though, is that even in a Core No-Tilt 5 portfolio (which includes almost 40% of the portfolio in bonds hedged to sterling and in £ cash), the portfolio has recovered its value in dollars over a pretty short time period. What is equally obvious is that, at least using certain different viewpoints, cash isn’t always the least risky investment.