UK: Suitable for retail and professional clients
In this month's edition:
The equity market rally continued over the month, with some stock markets reporting their best August since 1984. With risk assets gaining ground (what’s referred to as a ‘risk-on’ environment), sovereign bond yields moved higher (meaning their prices dropped). Meanwhile gold, traditionally a safe haven during times of market upset, had a volatile ride; the gold price initially surged above $2,000 per ounce before finishing the month down -0.4%.
In the UK, the FTSE All Share Index had a strong start to the month, but the release of gross domestic product (GDP) growth data on 12 August seemingly signalled a turning point. The Office for National Statistics confirmed that GDP contracted by 20.4% in the second quarter, making it the deepest recession the UK has ever seen – and the worst of the G7 countries. Despite GDP growth data being marginally better than economists’ expectations, the UK equity market drifted lower for the remainder of the month to return 2.4%, having at one stage been up more than 6%.
Mega-cap technology stocks continued to be the driving force behind the US equity rally as many of these companies have benefited from the changes in living and working conditions brought about by the coronavirus. Technology giant Apple performed well, becoming the first US company to be valued at $2trn, while better-than-expected corporate earnings also helped to buoy US markets.
US and Chinese relations soured mid-month as President Trump announced restrictions on Chinese companies TikTok and WeChat, and a meeting to review progress on the Phase 1 trade deal was delayed. By the end of the month though, the US had reaffirmed its commitment to the deal and noted progress was being made towards the agreed goals. By the end of the period, the MSCI USA Index delivered a total return of 5.3%, eventually shrugging off the back-and-forth in trade tensions. Democrats and Republicans in the US Congress remained in a stand-off over a proposed fiscal stimulus package, the country’s second since the virus hit.
The Democrats’ already watered down $2.2trn proposal has garnered little support from Republicans, who favour a bill nearer the $1trn mark, raising the possibility of another government shutdown if the disagreement is not resolved.
Growing coronavirus cases in continental Europe, notably in France and Spain, weighed on European equities. Several countries reported negative monthly inflation rates for August, including Germany and Italy. Nevertheless, the MSCI Europe ex-UK Index ended the period generating a total return of 2.2%.
The MSCI China Index was not far behind the US, ending the month with a 3.6% total return. Chinese equities moved higher in response to a fresh wave of monetary stimulus as the Chinese central bank, the People’s Bank of China, injected 700 billion yuan of one-year funding through its medium-term lending facility.
At the US Federal Reserve’s (Fed’s) annual symposium at Jackson Hole, Fed chairman Jerome Powell announced a policy shift from a 2% inflation targe to a 2% average inflation target. This subtle difference means the Fed will tolerate inflation moderately above 2% for some time to make up for periods of lower inflation.
This change implies easy monetary policy, potentially for years to come, which initially drove longer-dated US Treasury yields sharply higher to compensate for higher expected inflation, but this move partly unwound in subsequent days.
Given the general market appetite for riskier assets it was unsurprising that US high-yield bonds fared better than Treasuries, with the ICE BofA US High Yield, GBP Hedged Index delivering a 1.0% total return during August, whereas the ICE BofA US Treasury, GBP Hedged Index fell by 1.19%.*
In the UK, the ICE BofA UK Gilt All Stocks Index also ended the period in negative territory, delivering a total return of -3.1%. In currency markets, euro strength has been a market theme since April, but the single market currency stalled a little in August.
Meanwhile, US dollar weakness continued through the month as the higher yield the dollar used to enjoy over other major currencies has disappeared since the Fed cut its policy rate due to the coronavirus. As the other major currencies struggled, sterling was well supported despite stalled Brexit negotiations.
(All performance figures in sterling terms and rounded to one decimal point, unless otherwise stated)
*Currency hedging of foreign investments removes the risk of currency fluctuations affecting the returns on your investment. Under normal circumstances, in the Creation Portfolios we currency hedge our foreign bond holdings.
August was a generally positive month for the Creation Portfolios, thanks to the continued rise in equity markets, which led to the higher risk portfolios delivering slightly stronger performance.
During the month there were few changes to the equity portion of the portfolios, as although the overall equity allocation increased in the period, this was a factor of the continued rally in equity markets.
The effects of manager selection were negative overall as the continued outperformance from growth sectors meant that any manager with anything even remotely value-orientated struggled. Key detractors in the month included the Wellington Durable Enterprises Fund, the Quilter Investors Global Dynamic Equity Fund and the BNY Mellon US Income Fund. In contrast, managers with any growth-related holdings did very well during the period, including the Quilter Investors Equity 1 Fund, managed by Merian Global Investors, the JPM Emerging Markets Growth Fund and the Sands Global Leaders Fund.
From a fixed income perspective, our tactical asset allocation generated a positive return. Bonds in general were negative for the portfolios given the rise in yields over the month. However, credit spreads (the difference in yield between government bond and corporate bonds) did compress during the month, which helped offset some of the losses incurred by the sensitivity of the holdings to interest rate changes (duration).
Within our fixed income holdings we slightly increased the interest rate sensitivity in the portfolios (duration) through a small purchase of government bonds. This was beneficial to the portfolios as yields moved lower (and prices moved higher) towards the end of August.
The alternatives allocations were also helpful over the month, contributing slightly to returns especially within the long/short space in the form of the Merian UK Specialist Fund. We made one change to the alternatives holdings, where we have replaced the PIMCO Dynamic Bond Fund with the Allianz Macro Fixed Income Fund. The return profile of the Allianz fund is much more suited to the alternatives bucket and we would expect strong performance in the case of a market sell-off. Similarly, the recent rally in credit meant that the PIMCO strategy had recently performed well and so we took advantage of the opportunity to crystallise the profits and reinvest the proceeds elsewhere.
Quilter Investors has appointed Premier Miton as manager of the Quilter Investors Corporate Bond and Quilter Investors Diversified Bond funds.
With so many investment choices available, demonstrating appropriate due diligence can present significant challenges. Within the WealthSelect Managed Portfolio Service we appoint asset management companies to run funds within guidelines that are set and monitored by us.