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Investment Committee Meeting Minutes - October 2016

  • By Richard Ellis
  • 04 Nov, 2016

Perhaps our biggest concern right now is for clients who have pensions, are approaching retirement and have not reviewed their pension fund choice.

The most common strategy for pension funds has been to automatically switch your money into long dated gilts as you near the policy retirement date as they tend to mirror the price of buying an annuity. If you have been in this strategy you will have benefitted but if you are not expecting to buy an annuity when you reach retirement and expect to make use of the pension freedom rules, there has never been a greater risk that the value of your pension might unexpectedly fall dramatically just when you were ready to spend it.


  • The shape of Britain’s exit from the EU dominated market discussions in September.
  • Volatility in UK equity markets continued throughout the month driven by wider macroeconomic themes.
  • Crude oil and energy stocks rose into month end on news that OPEC members had agreed to cut oil production in a co-ordinated move to shore up pricing.
  • September’s Purchasing Manager’s Index indicated growing confidence in British business with rises in services output and new business. Prime Minister May also approved the £18bn proposal for Hinkley Point power station, ending the uncertainty over the future of Europe’s largest energy project.
  • The Bank of England began its corporate bond buying program, one element of the wider stimulus package to be rolled out over the next 18 months.
  • The headline rate of inflation held firm at 0.6% as rising food and travel costs were offset by falling hotel prices.
  • In corporate news, September brought better news for Thomas Cook which released a positive trading update. Legal & General also provided a bullish update which showed the group’s retirement division remains on track to double new business sales in 2016. In contrast, Capita issued a profit warning and downgraded full year earnings, citing a slow-down in specific trading businesses, one off costs and delayed client decision making since the EU referendum.


  • Speculation about US interest rate rises fuelled investor uneasiness at the beginning of the month. Towards month end, market nervousness about the upcoming corporate earnings season and uncertainty surrounding the outcome of the Presidential race added to the market’s volatile moves.
  • Despite the equity markets see-sawing between weekly gains and losses, the S&P 500 managed to end the month flat.
  • The Fed kept interest rates unchanged at 0.5% but hinted at the possibility of a later rate increase. General market expectations see a likely increase after November’s presidential election at the Fed’s December meeting.
  • With the Fed deferring its next interest rate increase, the more economically sensitive sectors such as financials, industrials and consumer discretionary disappointed.   This was also in part due to repeated profit taking during the month as momentum from the post Brexit vote rally faded.
  • While most equity sectors were unable to hold onto August’s gains, energy stocks increased. Sentiment towards the energy sector improved on the news that OPEC had reached an agreement to curb its oil output.   Further support to oil prices came from robust Chinese trade data and improving core economic indicators.
  • The utility sector also performed well, however other perceived “safer” bond like sectors, including telecoms underperformed as did healthcare.


  • European equity markets were flat in September, following two months of consecutive gains.
  • The ECB kept its stimulus programme unchanged but reiterated the QE will run until March 2017 or beyond if necessary, to spur growth in the Eurozone.
  • Headline inflation rose to 0.4% from 0.2% in August, its fastest level since late 2014, while core inflation (excluding food and energy) remained constant at 0.8%.
  • While the ECB’s economic growth outlook was slightly revised downwards in September, citing dampening factors such as subdued foreign demand and balance sheet adjustment, the ECB expected the economy to maintain its positive growth and steady pace of expansion.
  • Recent macro-economic data has shown that the European recovery is still on track. The latest data available shows that bank lending to companies in the Eurozone rose 1.9%, the fastest pace since October 201. In addition, an index of business and consumer confidence unexpectedly improved to the highest level since January in a sign the region is weathering external risks, including Britain’s decision to leave the EU.
  • On a sector level, technology was the leading outperformer, while after a rally over the summer, financials led the detractors, as issues surrounding Deutsche Bank significantly weighed on investors’ sentiment.


  • Asian equity markets ended September with positive momentum. There was a notable divergence in performance as North Asian equity markets tended to outperform their southern peers, in sterling terms, with Hong Kong and Taiwan making the largest gains.
  • South East Asian markets lagged the broader region. Thailand’s equity market gave back some of its recent gains as the benefits from its fiscal stimulus earlier in the year were seen fading.
  • Fears about the health of China’s economy continued to recede, with economic data in line with or ahead of expectations. Consumption data was robust with passenger car sales up 27% year-on-year.
  • Global emerging equity markets edged higher in September, benefitting from higher commodity prices.
  • In terms of regional performance, Europe, Middle East and Africa regions led with returns bolstered by strong performance from South Africa and Russia. Latin America was the worst performing area with uncertainties over the forthcoming US election knocking confidence towards Mexico.
  • Equity performance elsewhere in emerging Europe was varied with gains in Czech Republic being offset by losses in Greece and Poland. The Turkish equity market struggled to gain ground following the country’s credit rating being downgraded to non-investment grade by Moody’s rating agency.  


  • The Japanese equity market ended the month marginally lower in local currency terms as investor sentiment was dampened due to uncertainty surrounding the Bank of Japan’s policy review.
  • The BOJ announced that asset purchases will remain at 80 trillion yen per year, but will have short term flexibility to allow the bank to focus bond purchases at the shorter end of the yield curve. This strategy is expected to help push up longer term rates, alleviating pressure on financial institutions which have seen earnings come under pressure from lower rates.
  • The Bank also decided not to deepen negative interest rates, at least at the current time. This monetary easing combined with the potential for US interest rates to rise in the short term have reduced the risk of further yen appreciation and led to some currency sensitive sectors to outperform.  


  • September was generally a weaker month for bond markets.
  • Concerns over the ultimate terms of the UK’s trading position following departure from the EU appeared to weigh on sterling corporate bond markets, which gave back some of their recent strong returns. Nonetheless, for the three months to the end of September, returns in sterling bond markets remain positive.
  • According to data from Merrill Lynch, sterling investment grade corporate bonds returned -1.4%, while Gilts returned -2.4% and Bunds 0.2%

What do we think?

A recurring theme in recent meetings with fund management groups has been the head scratching and bewilderment at the price of gilts. The chart below plots the performance of an index of long-dated gilts (loans to the UK Government due for repayment in 15 years’ time or later, typically perceived as low risk), and the other is the FTSE 100 (the index of the top 100 companies’ share prices listed on the UK stock market). The chart shows that volatility and the return of gilts has been greater than the stock market over the past year.

The cause of this can be attributed to what Theresa May in her conference speech described as the bad side effects of low interest rates and quantitative easing – that people with assets have got richer while people without them have suffered. This reflects the fact that your investments should have fared well but your cash savings less so.

The law of gravity doesn’t apply to investments but we must all know that what goes up in value can come down. We are increasingly attracted to managers who can either take an active position in gilts (buy in dips and sell at peaks) and who look at alternative ways of keeping volatility in the range you are expecting.

Perhaps our biggest concern right now is for clients who have pensions, are approaching retirement and have not reviewed their pension fund choice. The most common strategy for pension funds has been to automatically switch your money into long dated gilts as you near the policy retirement date as they tend to mirror the price of buying an annuity. If you have been in this strategy you will have benefitted but if you are not expecting to buy an annuity when you reach retirement and expect to make use of the pension freedom rules, there has never been a greater risk that the value of your pension might unexpectedly fall dramatically just when you were ready to spend it.

Date of next meeting:  17th   November 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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