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Investment Committee Meeting Minutes - July 2016

  • By Richard Ellis
  • 02 Aug, 2016

Observant readers of our investment minutes will know that our roundup of activity in various asset classes is, by its nature, historic. 

For example, in July we would typically review the performance of assets during the month of June. Following the economic shakeup as a result of the U.K.'s EU referendum result at the end of June, we felt that the June economic data may be of little interest to readers. In addition, as we have written to you twice since the Brexit result with updates on the immediate impact and then on the subsequent effect on a number of property funds, we thought we should keep these minutes brief.

Since the credit crunch and the introduction of Quantitative Easing from the world’s central banks, we have become familiar with an adage that, from a portfolio perspective, bad news can be good news. The Brexit result is a case in point.

First the bad news. The expected downturn in the UK economy has been well documented. All three of the world's leading rating agencies have downgraded economic growth for the UK. Last week, the Managing Director of the International Monetary Fund Christine Lagarde said they had to downgrade the global growth forecast as a result of the decision. The immediate response of the market to the vote was that investors took the view that interest rates in the UK will need to stay lower for longer in order to stimulate the economy and that therefore holding currencies other than sterling is likely to get a better return. The weakness of the pound relative to other currencies has continued since.

The good news for investors in the UK for the time being is twofold. On one hand, the assets that you hold in your portfolios that are denominated in currencies other than sterling have increased in value when converted back to the pound. In addition, the announcements from Mark Carney the Governor of the Bank of England related to the economic stimulus that they will be looking to introduce to support the economy has resulted in a recovery in confidence by investors in many UK shares.

At the time of writing most portfolios have increased in value and it is noteworthy that certain safe haven investments such as gilts and gold have performed particularly well.

It is worth remembering that investment portfolios tend to perform the strongest during periods of strong economic growth and that while the short term portfolio values have been resilient, we may need to be prepared for slightly slower investment returns if the UK economy should slow down for a prolonged period. It is also worth remembering that in such an environment, interest rates and inflation should also stay low (although we will be importing inflation due to our weaker pound over the forthcoming year) and the interest rates on cash deposit accounts may also disappoint. The main aim of investing for the medium to long term is for your portfolio to keep its buying power in real terms and, depending on the risk you are willing to take, to grow in real terms. In that regard, nothing has changed.

Date of next meeting:   24th August 2016

Fraser Heath News

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It has been a strong start to the year for investment portfolios, mostly driven by signs of continued strength in the US Economy and the promise of more to come under the Trump presidency. Markets always move ahead of the economy so to make money, investors will position portfolios to benefit from what they think is around the corner. But what if the promise does not materialise? One fund manager described this recent wave of enthusiasm as the “Trump Bump” and that this may well be followed by the “Trump Dump” if the new President is unable to deliver on his campaign promises due to lack of support from political colleagues. In this respect, it seems that the failed repeal of Obamacare has given investors pause for thought over the last week or so.

While some asset classes are looking expensive, on an individual basis, there remains optimism amongst fund managers. Those who particularly seek to invest in undervalued, unloved but robust companies can see plenty of scope for increased valuations in their investment pool.

Eight years have now passed since the FTSE 100 hit its Credit Crunch low point. In investor memory, particularly among younger investors, we are getting to the point when the slide that started in summer 2007 down to its nadir risks being forgotten. We don’t know what the future holds but the past tells us that investing needs time on your hands to ride out the tough times. We’re confident that investing remains the best long term strategy for your money but make sure that you understand the strategy you are taking and that your portfolio is right for your attitude to investment risk and your time frame.

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