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Video transcript
Simon Taylor: Hello, good day and welcome. My name is Simon Taylor, Head of Strategic Partnerships here at Investec Wealth & Investment, part of the Rathbones Group. It's my pleasure to welcome you to this quarter's webinar on our Managed Portfolio Service. As ever, I'm joined by Andrea Yung and Ronelle Hutchinson, Investment Directors.
This has been another eventful quarter. Both from a market perspective and also from a macroeconomic perspective. We've seen election outcomes in Indonesia, Turkey, Spain, and then more recently in the U.K. and France. The global economy has shown signs of moderate growth, most notably in the U.S. And China, despite concerns over inflation and geopolitical tensions.
We've seen major stock markets showing reasonable returns, with the U.S. and U.K, leading amongst that group. We've seen some notable corporate, announcements over the quarter, most notably NVIDIA. So, to look at the quarter and the macroeconomic environment, I'm pleased to hand over to Ronelle Hutchinson.
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Ronelle Hutchinson: Thanks, Simon. Equities have continued their rally in the second quarter of the year. The S&P500 is up 4%. The FTSE100 is up 3.4% over the quarter, and Europe is up 0.9%. Japanese equities, however, has struggled. Delivering negative returns weighed down by currency depreciation. Bonds have also disappointed, delivering negative returns pretty much across the board due to the fact that the much anticipated interest rate cuts by the Fed and the BOE have been delayed due to sticky services inflation. Over the quarter, we experienced a divergence in growth in developed markets. Economic data in recent months from the U.S. has begun to disappoint. What we're showing in this chart is the city economic surprise index for the U.S., the U.K. and Europe. The black line is the U.S. and as you can see, this chart is in negative territory, indicating a slowdown in the U.S. in the months ahead, while the lighter charts, the blue and the grey are for the U.K. and Europe. As you can see, this is in positive territory, confirming a recovery in these regions.
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While inflation has moderated from the highs that we experienced in 2022, there have been bumps in the road in recent months. What we show in the charts on the left is the U.S. inflation breakdown. This disinflation trend has stalled, specifically for headline inflation in the U.S., and this is the black line in the chart. This is the inflation index that is dominated by food and energy prices, and in recent months, this has risen, despite expectations of this moderating. On the left-hand side, we have U.K. inflation data. It's been pretty much a similar story, but for different reasons. Under the hood, U.K. core services inflation specifically here has disappointed and remained sticky, buoyed by higher wages. The good news is that headline inflation in the U.K., which is the dark black line, has moved decisively lower.
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It's currently at 2%, which is the target level of the BOE. Nevertheless, the market remains optimistic about the outlook for interest rate cuts in the U.S. and the U.K. and what we show here is the market implied policy rates for the three major central banks, the U.S. and the U.K. there being the black and the grey line, and as you can see, the market is still discounting lower interest rates for the U.S. and the U.K. by the end of the year. In fact, the market is expecting the BOE to cut interest rates as early as August, and the Fed is anticipated to cut interest rates at the September meeting.
But regardless of the timing of interest rate cuts, the fundamentals for the U.K. consumer have improved. What we show here is the monthly ASDA income tracker. It's a comprehensive measure of the discretionary spend that is available to the U.K. household, and in this chart, as you can see, it is booming. It is up 15% year on year in May, and this is thanks to lower energy bills and higher wages.
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Currently this is £239 per week, and it is now back pretty much to the highs that we experienced during the pandemic. This combined with a U.K. economy that is growing again after stagnating, bodes really well for U.K. equities. What we show in this chart is the quarter and quarter GDP growth, in the U.K. in recent months. As you can see, that has moved decidedly positive. Exiting the mild recession the U.K. experienced in 2023, we think the outlook for the U.K. Economy has improved. We think that earnings should recover, and this should support U.K. equities. As a result, we are up weighting U.K. equities within portfolios.
While fixed income assets have disappointed this year, we believe that the high real yields that are on offer still make this an attractive asset class. As we show in this particular chart, we show the yield on fixed income assets in the U.S. and the U.K. relative to current inflation in these particular regions.
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And as you can see, they are attractive yields on offer. In addition, in the unlikely event that we experience a U.S. recession or a geopolitical shock, fixed income assets can still provide stability to the portfolio. Particularly where we see the fact that in the U.S. we have stretched valuations at the index level.
Simon Taylor: Thank you, Ronelle. I'd just like to summarise your points from that session. We're clearly seeing a divergence of growth in developed markets at the moment. The U.S. is slowing, having said that, the U.K. and Europe are improving. With that, we see a strong opportunity for equities, but active management is important.
With the removal of political uncertainty in the U.K., we do think the prospects for U.K. equities are improving as well. Service inflation is continuing to hold back central banks from reducing interest rates, and with that, bonds have performed not as we would have hoped in the quarter. But we do think the prospects for bonds improves as interest rates reduce.
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So with all of that, I'd like to hand over to Andrea Yung to talk about how the portfolios have performed over the quarter.
Andrea Yung: So looking at income range, we've got three models across different risk levels. Cautious income, moderately cautious income and balanced income. We've ensured the portfolios are diversified across asset class, geography and equity style.
And importantly, these models will follow the same strategic asset allocation that we have for our current range. And although we remain committed to a natural income, our portfolios will still be invested in growth funds, which may pay little to no dividends. And this is because we want to ensure sufficient diversification and be able to take advantage of different opportunities that are present in the market.
Now, as we strive for a higher yield, there are a couple of key differences of our income range versus our standard two plan models. So firstly, looking from an asset allocation perspective, we have a lower allocation to alternatives, which naturally generates a lower yield. And instead, we've got a higher allocation to fixed income and equities.
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But the chart on the right, when you delve deeper, looking at regional valuations, you can see that this elevated valuation is being largely driven by the US, where the forward PU ratio is well above historic averages, but regions like Japan are showing value where valuations are much lower versus historic.
And while Europe appears to be fairly valued, we believe that markets may not be fully factoring in the strong recovery in earnings that we are anticipating. We are mindful of concentration risks in the US at the moment, as you can see from the chart, the top 10 stocks in the S&P 500 at the moment make up 33 percent of the index.
So quite concentrated, more concentrated than it has been in a while. The market seems to have lofty earnings expectations for these stocks. And there is room for disappointment. Also, we believe that risks remain elevated. There are higher interest rates, geopolitical risks, election risks coming up as well.
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The more resilient US economy has forced the market to dial back its interest rate cut expectations this year. And as you can see from the chart, the blue bar, which is the market expectations for interest rate cuts in February, was pricing in more than three 25 basis point cuts at the end of February.
That has since been reduced, pointing to the fact that interest rates in the US might actually remain higher for longer. As you can see, on the right side, interest rate expectations for the BOE and Europe has moved positive, however, the recent service inflation print for the UK has forced investors once again to push further out the timing of these interest rate cuts.
Equity markets have recovered strongly since the lows of 2022 to the point where the market as a whole, as represented by the MSCI world forward PE ratio, is looking expensive. The charts on the left is showing the forward PE ratio of the MSCI relative to the long-term average. And as you can see, that is elevated.
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In the chart, we show the City Economic Surprise Index for the US and any level above zero shows a positive economic surprise. And as you can see since January, this index has rebounded strongly, meaning that the US has consistently surprised on the upside since the beginning of the year. While inflation has declined materially since the highs of 2022, the pace of decline has moderated in recent months, specifically core CPI, which is the central bank's main measure of inflation.
Both in the US and the UK, services inflation is proving sticky, driven by very tight labour markets that is leading to growth that is proving relatively healthy and robust. This, combined with higher commodity prices means that upward pressure on inflation will remain in the short term. Good news on the economic front has been bad news for investor expectations of rate cuts in the months ahead.
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Now with inflation proving to be a little bit more stubborn than had been anticipated, geopolitical risks not helping matters, and with interest rates flip-flopping around, I'm pleased to hand over to Ronelle Hutchinson first for a catch-up on what's been going on in world markets and what's driving our tactical asset allocation decisions.
Ronelle Hutchinson: Thank you Simon. We have seen a strong rally in risk assets for the start of the year. The MSCI All Country World Index is up over 9 percent, driven by robust returns from developed markets. Both the S&P 500 and the MSCI Japan are up more than 11 percent, followed by the FTSE 100, which is 4 percent higher. Bonds, on the other hand, delivered disappointing returns.
On average, bonds returned negative returns over the quarter, while commodity prices moved meaningfully higher over the quarter. One of the major surprises for this year has been the extent to which both the US economy and the global economy has been resilient in the face of higher interest rates.
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Simon Taylor: Hello, good day and welcome. My name is Simon Taylor, Head of Strategic Partnerships at Investec Wealth and Investment. It's my pleasure to bring you this quarter's webinar on the MPS portfolios, and to give you an update on our thinking on the macroeconomic environment and what's driving portfolio returns.
We'll also be looking at some of the key areas advisors have been asking us to talk about this quarter. They include a continued spotlight on some of the low-risk portfolios given where cash rates are, talking about concentration risk and how this has been a hot topic over the quarter, And then we'll also address some of the other key questions that you've asked in news on the MPS portfolios.
I'm pleased to say that we are now live on Nucleus platform. We've also had some demand from advisers to make sure our portfolios are available on Quilter's onshore bond platform, and that's now been made available too. And I hope to be bringing you news around a new platform that we'll be adding the MPS portfolios to at our next quarterly return.
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And we believe that it's in 2024 that the 2023 interest rate hikes will begin to have an impact on corporate profitability as higher interest costs weigh on earnings throughout this year. Generally, from an equity perspective, we see better opportunities outside of the US. If you look at Japan and Europe, these areas did rally in 2023, but relative to their long term history, their valuations still remain attractive, and as a result, we favour these regions as areas of opportunity within the portfolio.
And with that, I will hand over to Simon.
Simon Taylor: Thank you, Ronelle. And now over to Andrea to look at what's been going on within the portfolios themselves.
Andrea Yung: Thanks Simon. Just looking across our models, we've reduced our exposure to alternatives in favour of fixed income. We continue to see better value in fixed income from a risk adjusted perspective.
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The BOE interestingly enough, led the hiking cycle in late December 2021 and may just lead the rate cycle lower. As we move into 2024, from evaluation perspective, US equities appear relatively expensive, and as a result, we remain underweight in US equities across our portfolios. The main driver of this is valuations as you can see in the chart which is showing the equity risk premium over a longer time horizon.
The equity risk premium is calculated taking the current yield on earnings and subtracting that from the current 10 year yield and 10 year bond yield. And as you can see, currently that equity risk premium is close to 1 percent, well below the 4 percent equity risk premium that prevailed throughout history. And as a result, we believe that equities is less attractive relative to bonds and US equity specifically. And as a result, we are favouring fixed income within the portfolios. Another reason why we are risk averse is because investor expectations regarding the profits or the outlook for corporate profitability in the US still appear a little too optimistic.
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2023 was a year defined by interest rate volatility, but despite the wild gyrations of bond yields during the course of the year (taking into account the banking crisis in the first quarter and inflation risks, particularly in the third quarter), the US 10 year yield pretty much ended at the level at which it started.
Moving to the next chart, market predictions on inflation proved correct. Headline inflation declined materially throughout the course of the year. And although core inflation remains well above central bank target levels, particularly in the UK, households should benefit from higher real disposable income throughout the year, given the lower year on year prices.
It is likely that in 2023 that the worst of the interest rate hikes are now behind us. The path of the interest rate cuts in 2024 is likely to fuel speculation, but this will hinge largely on the extent to which global economies will prove to be resilient, however. The UK and Europe are looking particularly vulnerable.
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Ronelle Hutchinson: Thank you, Simon. The calendar year returns for 2023 contradicted the fears of stagflation and recession risk that prevailed throughout the year. Global equities rallied strongly in the fourth quarter as investors grew more confident of interest rate cuts. The S&P 500 ended the year up close to 20 percent in pounds and the FTSE 100 ended up 8 percent. UK bonds performed positively as the pound strengthened 6 percent relative to the dollar.
As we revisit and review the predictions at the start of 2023, we can see that was pretty much a lot of hits and miss. There were three key areas of surprises in the year. Energy prices ended the year materially lower versus the higher for longer expectations at the start of the year. Secondly, China disappointed. The recovery from the Covid reopening really struggled throughout the course of the year. The global economy surprised on the upside, with global growth outperforming.
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Simon Taylor: Hello, good afternoon and welcome. My name is Simon Taylor and welcome to this month's quarterly update on our Managed Portfolio Service. This has been another eventful quarter from a macroeconomic perspective. We have seen inflation reducing pleasingly, we have seen expectations of interest rates falling, and in the last quarter of the year, we did see risk markets improving their returns.
I'm pleased to be joined this afternoon by Ronelle Hutchinson, Senior Investment Director at Investec Wealth & Investment and also Andrea Yung the Portfolio Manager for our Managed Portfolio Service. I'll be turning to them shortly to give you an update on the macroeconomic environment and also on the portfolio and how we've been adjusting it through that environment.
We'll also be doing a spotlight at the end of the session with questions from advisers, particularly focused on the lower risk portfolios. So firstly, to look at the macroeconomic environment. I'm pleased to hand over to Ronelle Hutchinson.
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Looking at performance, over the quarter, we have outperformed across all strategies relative to the respective IA Mixed Asset benchmarks. Global Equities posted negative returns as concerns of ‘higher for longer’ interest rates fed through into markets. Our Alternatives exposure has supported portfolios with JPM Global Macro Opportunities and NB Uncorrelated Strategies benefitting from the sell-off. Our UK funds have also rebounded thanks to the energy and basic materials sector which were supported by sterling weakness and a recovery in oil prices.
We now have full 1-year performance, and we are delighted to show we have achieved strong returns since we launched. Hopefully, this highlights the benefits of active management and the capability of our research team at selecting the best funds in class.
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We have also added Schroder US Smaller Companies. This fund offers an extra layer of differentiation through market cap exposure. The fund still holds defensive characteristics with the fund manager implementing a strong risk-management process.
We have also sold out of Abrdn Europe Equity Income across our models following concerns around the fund management team and the recent departures.
Our portfolios remain active, with over 70% invested in active funds across each of our models. We believe this is important, especially as this point in the market cycle, where we are seeing a divergence of returns across different companies and sectors.
We still remain cognisant of costs, and we will use passive funds to gain low-cost exposure to certain areas of the market. Over the course of the quarter, we have also been able to gain access to cheaper share classes across a number of platforms and we continue to work with fund managers and platforms to get the cheapest share classes available.
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Over the quarter we have dialled down equity risk across our models by reducing our concentration to US growth holdings and diversifying our exposure to create a more blended style, as we move further through the market cycle.
Geographically we have reduced our exposure to the US and slightly increased our exposure to the UK and Japan. We hold a degree of caution around US valuations, we feel now is an opportune time to lock in gains and diversify our exposure towards more value-focused funds.
We believe this shift will help us to capture those quality value names that have strong fundamentals and are better positioned to weather economic headwinds.
Looking at the fund changes that we have made across the models, we have reduced our position in the L&G US Index and sold out of Baillie Gifford American. We had added to Beutel Goodman US Value. Beutel Goodman US Value is a value-focused fund with a quality overlay. This means the fund is not so geared towards the cyclicity of markets and should help to provide resilience during market weakness.
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And we've positioned ourselves to take advantage of the potential interest rate cuts as we move further through the rate cycle. We've maintained our weight into equities, keeping a slight underweight position across our models, and we remain defensive given the current economic uncertainty. So using our moderately cautious portfolio as an example.
As you can see, our portfolios maintain a global approach, which is really benefited performance. And this is a similar theme that plays out across all of our strategies. As you may recall, at the start of the third quarter, we increased our positioning to quality value names, companies with strong fundamentals that should hold up well against economic headwinds, and we remain confident with this positioning.
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Senior Investment Director
Ronelle Hutchinson
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I am responsible for the portfolio management of Rathbones' MPS on Platforms service. Using a structured and disciplined investment framework, our primary focus is delivering outcomes that align with the objectives and risks associated with each MPS strategy.
Investment Director
Andrea Yung
I am a Senior Investment Director at Rathbones.
I have over 20 years of industry experience. Most recently as a portfolio manager for Investec Wealth & Investment in their South African office managing a range of multi-manager funds for our private clients. I am responsible for overseeing Rathbones' Managed Portfolio Service on platforms. My focus is to ensure that we deliver consistent investment performance & a proactive service to our advisory clients.
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Ronelle Hutchinson
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From a regional perspective, we've got a higher allocation to the U.K., which typically has exposure to better yielding companies. And we've got a lower exposure to US and global funds where yields are not so high. So despite these differences, we're still working within the same SAA guidelines, with the same investment philosophy and the support of a highly experienced research team.
So across our models, we've maintained our asset allocation weightings over the quarter. Using moderately cautious model as an example, we've continued to hold a slight underweight position to equities while maintaining an overweight to alternatives. We have, however, made a few key changes within our equity allocation over the quarter.
So firstly, we've increased our exposure to the U.K. We've seen for a while that U.K. Markets have looked relatively cheap. However, we've been hesitant to add exposure here as the U.K. Has continued to face particular headwinds of negative sentiment and economic uncertainty. More recently, we're now seeing those economic concerns ease.
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We've got more political stability and we're starting to see a positive turn in sentiment. It's a combination of those factors, which leads us to believe that now is the time to take advantage of these opportunities. We've also slightly reduced our position to large cap US companies. And this is on the back of very strong performance and increased concentration risk within the U.S. index. So we've made a reduction in the U.S. to our L&G U.S. Index Fund and the L&G Global Equity Index Fund, both passive funds which hold a high level of exposure to these U.S. mega cap stocks. In the U.K., we've increased our exposure through the Vanguard FTSE100 Index. This is to gain exposure to U.K. large cap companies in a cost effective way.
Within our higher risk portfolios, we've also increased our exposure to Man GLG undervalued assets. A value focused fund with over 50 percent allocated to mid and small cap companies. Higher interest rates have been a huge headwind to mid and small caps over recent years. And we believe that there's strong potential embedded within these companies as interest rates fall.
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It's important to note the concentration risks that persist in these global and U.S. index funds. Although these stocks have been huge contributors to the market rally. We are starting to see a broadening out of market returns as inflation eases. Investors are looking to other areas of the market outside the Magnificent Seven, which appear better value.
The potential sector rotation may have an impact on these concentrated passive funds. We therefore believe it's important to have exposure to actively managed funds. So turning to performance, at the start of the year, we held a degree of caution for equity markets, giving the economic uncertainty and persistent inflation.
And as a result, our portfolios were underweight in equities. Now what's transpired over the year is actually very strong performance in equity markets, mainly driven by a select number of mega cap U.S.. companies. So even though we've had less risk embedded into our portfolios, our performance still held up well over the first half of the year.
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Our U.S. equity allocation, as one may expect, has been the largest contributor to returns across these portfolios. And this is followed closely by our active positions in Asia and emerging markets. Now what's disappointed so far this year? It's been our exposure to both fixed income and property. These assets are sensitive to interest rates, and with higher interest rates holding, the returns have been somewhat limited.
However, we believe interest rates have peaked, and as rate cuts prevail, that's when we'll see the positive price movement in these types of assets. Our one-year performance again tells a similar story to our six-month figures. Equity markets have rallied, and despite our underway position, our portfolios have continued to participate well on the upside.
Now the key attributors to performance have really been our geographical positioning and also strong fund selection. And finally, looking at our performance since inception, our performance has been strong and we've outperformed the benchmark. That again has been supported by our regional allocation and strong fund selection.
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We've got a large and experienced research team behind us, carrying out the continuous due diligence on these funds, and this has been reflected in our performance. And with that, I'll pass back to Simon.
Simon Taylor: Thank you, Andrea. Thank you for that presentation. I think some of the key takeaways I took from that are: we do see value in the U.K. and we're taking advantage of opportunities there.
Despite the strong performance of passive funds, we are being mindful of the concentration risk and sector rotation. For that very reason, our portfolios are actively managed. Despite our lower equity exposure over the quarter, with risk management being key to our investment process, our portfolios have kept pace with the peer group.
So, some very strong points from your presentation there. Now turning to questions that we've received from investors over the quarter. Let me start with the income portfolios. Andrea, can I ask, what is the actual income after charges and expenses on the portfolios that you've just launched?
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Andrea Yung: So the actual income distribution we expect is to be around 0. 2 to 0. 3 percent lower than the figures on screen. That's because a couple of the funds in the model may be invested in accumulation share classes. This is down to availability on platform. So we aim to have all funds in income units, so that they pay out the natural income rather than it being reinvested. So we're currently working with platforms to get these income units made available. Now in terms of income after charges, there is an element here that's platform dependent and that's going to be outside of our control. That's down to whether the platform fees are deducted from the same pot that the natural income is paid into, and this varies from platform to platform.
Simon Taylor: Brilliant, and can I ask Andrea, how is the income actually paid?
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Andrea Yung: So on most platforms, advisors have the option on how the natural income is paid out. So they can usually pick from, a set frequency such as monthly or quarterly, and they have select payment days of when to do this. So the natural income from the models will build up and then be paid out on those select days.
Simon Taylor: Andrea, how stable do we think the income that you're projecting is on the portfolios?
Andrea Yung: So, we do expect a degree of stability for the income being paid out. So, our key focus really is to generate a yield and try and source the best areas to get that yield, but of course a lot of it will be dependent on external factors such as interest rates what the bank of England decided to do and the Fed for example , so there will be changes as we go through market cycles.
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Simon Taylor: Excellent. Okay, and we're expecting with the recent FCA Systematic Review on Retirement Income Advice, the demand for income funds to be increasing quite a lot as advisors start to match clients requirements with their underlying investment propositions. So hopefully advisors will find the income portfolios of use.
Just a few more questions relating to the 2plan managed portfolio service, and we talked about launching sustainable MPS portfolios again, some more regulation due to drop at the end of July with SDR. Can you provide an update, Andrea, on where we're at with providing the sustainable portfolios for 2Plan?
Andrea Yung: So, we're currently looking towards the first quarter of next year to be able to provide a unique sustainable range for 2Plan advisors. So, following the latest SDR regulations, from the FCA, we're working exclusively with Greenbank. So thanks to the combination with Rathbones, we now have the ability to work with Greenbank, who are one of the most experienced teams in the sustainable investment field.
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They've been operating in that space for well over 20 years. So they're, going to be integral, in producing a unique proposition for us.
Simon Taylor: So Andrea, can I just ask you to attest that all portfolios have continued to operate within their risk return corridors over the quarter?
Andrea Yung: Yes, that's right. So, all of our models have stayed within our strategic asset allocation parameters, and we monitor those, continuously to make sure that any drifted weights don't exceed those parameters.
Simon Taylor: Now we're changing the subject a little bit. The Task Force for Climate Fund Disclosure Set requirements for us to publish very specific reports with regards to managed portfolios by the end of the end of July.
I think we've done that, but over to you, Andrea, for a bit more detail around that. What we've done and why we've done it.
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Andrea Yung: Indeed. So, the TCFD stands for the Task Force of Climate Related Financial Disclosures. Essentially this aims to enhance reporting of climate related financial information, and it helps investors and advisors to understand how us as organizations think about and assess, climate related risks and opportunities.
So we've produced a summary document of the potential impact of climate change, looking at both the risks and opportunities on the assets held within each of our models. These can be found on our website.
Simon Taylor: So Andrea, we've had a number of questions from advisors who have clients who really want to get into the nitty gritty of what they're invested in. If I'm one of those advisors and I have a client who wants to understand exactly, what I'm invested in, where can I get access to that information?
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Andrea Yung: Yep. So, we've got the resources to be able to do that deep dive into each of our portfolios and we can generate those reports on request. If advisors can reach out to their BDDs and want to request that information, we can provide that deep dive analysis on the underlying holdings. Also our equity style, positioning and the risks embedded within the portfolio.
Simon Taylor: Fabulous. Thank you very much. So to all of those advisors who tuned in, thank you again for taking your time today to listen to our quarterly webinar.
As always, if you have got any questions, please do send them into us via your business development director. We look forward to seeing you at the next quarter for an update on our managed portfolio service. Thank you and goodbye.
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We do utilise passive funds where we can gain exposure to certain areas of the market for a lower cost. However, as Ronelle mentioned, we aren't cognizant of the concentration risks within passive funds. Nearly a third of the US index is made up of just seven stocks, and due to the dominance of the US market within global equities, many of those who are investing passively on a global scale are still putting a large amount of their capital into In a very small portion of the market. So this not only increases the concentration risk of the portfolio, but it also leads to missed opportunities that aren't so prevalent in these passive funds.
So this chart to the left shows the concentration of the magnificent seven stocks across the S&P 500, the global index and our MPS models. And what this highlights is that we still have exposure to these holdings. But with much less concentration risk.
And the chart to the right shows our equity style. We've got a blended approach within equities with exposure to both value and growth funds. And it's this diversification which helps us to provide stable returns over the long term and more resilience during market downturns.
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Similar to Jupiter, this fund is value-focused, and it also provides us with exposure to small and mid-cap UK names, and it complements our wider UK allocation. And finally, within emerging market equities, we've increased our diversification by switching into the Lazard Emerging Markets Fund. The fund's value focus complements our existing allocation in emerging market growth, and additionally, its lower ongoing charge has helped to reduce overall costs.
So for those interested in the full details of our model changes, we've also created a quarterly document citing our trades and the rationale behind them. I think it's key to highlight that the majority of our portfolios will be allocated to active funds with our split between active versus passive shown here.
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So drilling down into our models, we've made a few key changes within these asset classes. So firstly, within fixed income, we've reduced our exposure to high-yield debt. Credit spreads are tight relative to historic levels, meaning we're not really being compensated for taking on that additional risk in lower-quality credit.
Instead, we're seeing better value in the emerging market debt space. Despite the short-term inflationary pressures year to date, the broader downward trend of inflation is a positive for EM debt. The countries are also at the forefront of monetary easing, and we've seen Latin American countries already starting to cut rates.
We've added the Morgan Stanley Emerging Market Debt Fund to gain exposure here, and the fund also provides a very attractive yield of over 9%. Secondly, we've adjusted our UK equity holdings. We've switched out of Jupiter UK Special Situations, and this is ahead of the up and coming departure of key team members, and we've reinvested into the Man GLG Undervalued Assets.
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And with that interest rates aren't coming down as quickly as we would want. And we're very mindful of concentration risk. Clearly, the US is proving to be a large part of portfolios. And with that, the exposure to the US, the exposure to the technology sector and the exposure to the Magnificent 7 potentially provides risks that we need to mitigate.
So with that, I'm going to hand over to Andrea now to talk about what we're doing within the MPS portfolios to address some of these points.
Andrea Yung: Thanks, Simon. So across our models, we've maintained our asset allocation weightings over the quarter. We continue to hold a slight underweight position in equities, while maintaining an overweight position in fixed income. As Ronelle mentioned, although we've seen interest rate cut expectations pushed out, we're still benefiting from the higher yields on offer.
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So as a result, we believe that maintaining resilient and more diversified portfolios in the current environment just seems prudent. Bonds have struggled in the first quarter of the year. However, at these higher absolute yields, they still remain attractive, and they are paying investors to be patient.
In addition, if you look at this chart, which shows that those investors who invested in fixed income early in anticipation of interest rate cuts actually ended up maximizing future returns over the next 12 months. In addition, we believe that bonds are once again playing their traditional role in the portfolio by providing the stability that is needed, especially in an environment where risks are elevated.
Simon Taylor: Thank you, Ronelle, for that update on the macroeconomic environment. The three things I took from that were that we continue to see bonds as being good value and a diversifier within portfolios. Clearly, portfolio resilience is very important at the moment, as inflation is proving a little bit more stubborn than anticipated.
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Ronelle Hutchinson: Yeah, I can answer to opportunities because I think beneath the surface of even the US index, the global index, there is dispersion across stocks, which means that they are undervalued assets. If you look at the small-cap sector, if you look at the value sector, if we see a broadening of this economic recovery across the globe, particularly the manufacturing sector, this is going to mean that those assets will begin to unlock value.
Simon Taylor: Andrea, therefore, you're picking up the risk part of that question.
Andrea Yung: So I think the main risk that we are seeing in the market currently is that rebound in inflation. The market is still pricing in rate cuts this year, and if we see that pick-up in inflation and rate cuts are off the cards, I think this is going to be a huge headwind, not just for the economy, but all folks.
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Ronelle Hutchinson: I think that's a really good question, Simon. The benefits of the combination is enhanced resources to manage portfolios, and it's a greater depth of expertise and a stronger investment team that will support the investment proposition. In addition, the business as a whole will be larger, which means our ability to enhance costs at the underlying fund level will be improved, which should lead to a better cost and investment proposition for our clients.
Simon Taylor: We have a similar question here and I'll let you decide between yourselves which you would like to answer, whether it's the opportunities or the risks. But we've got questions here asking what do we see as the biggest risks for portfolio returns? And what do we see as the biggest opportunities for portfolio returns?
Ronelle, Andrea, I'll let you decide amongst yourselves who would like to answer which.
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Andrea Yung: So I think for us, when we are constructing our portfolios and reviewing them, we do the deep dive into the portfolios and see where those asset allocations are, where those portfolios are positioned. So we've got external tools to help us do that deep dive analysis. And what our aim is, is to make sure that we are well diversified, we have a blended approach.
And we also carry out scenario testing within our portfolios as well, which means that we can stress test these portfolios to understand how they will perform under certain market conditions. And I think that's key is really having that understanding of what we're, what we're being exposed to.
Simon Taylor: So, Ronelle, we have a question here as well, and I think this is one that I've heard a few advisors ask of late as I've been up and around the UK. We've combined with Rathbones. We're now the largest discretionary fund manager in the UK , with offices all over the UK. How do we think this is going to benefit our underlying investors?
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And I think the other thing to take into consideration as well is that factor of inflation and the opportunity costs while sitting in cash. And I think that is a risk that is often a lot of the time ignored.
Simon Taylor: We've also had a lot of advisors picking up on this point around concentration risk. And I think this is because there are a lot of asset managers out there at the moment talking about concentration risk at the moment, talking about the extent to which the US is an ever-growing part of the MSCI world index talking about within that, the extent to which technology as a sector is, is ever increasing. And obviously the magnificent seven within that. We hold passive investments, you mentioned, within the MPS portfolio. So I'd just like to ask your thoughts around how we manage that concentration risk within portfolios and look at the underlying stock constituents. That's clearly a question that a lot of advisors are asking us at the moment.
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Okay, ladies, we've had a number of questions in from advisors over the quarter. So I'd like to pose these to you. Just a reminder to any advisors out there who would like to ask questions, please do use the bottom of the screen for those questions.
The first question relates to the lower risk portfolios, which we've seen some strong growth in, in terms of asset flows over the quarter. I think a lot of advisors are now picking up that the returns on these portfolios are beginning to exceed that of cash returns. So, Andrea, quick question for you. Do we expect this to continue? And what would your reason be behind that?
Andrea Yung: Yeah, so I think over the long term, the benefit of having that investment exposure relative to cash really does pay off. I think there's been a lot of evidence as well that supports that, especially given where we are in the interest rate cycle. Interest on cash is going to come down and people sitting in cash are going to want to then start to invest to get that return. And at that point, I think they will have already missed out on a lot of the market uplift.
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We've got a large research team behind us carrying out the continuous due diligence of these funds and this can be reflected in our performance. So with that, I'll pass back to Simon.
Simon Taylor: Andrea, thank you for the update there on the portfolio returns. Again, I think a very strong quarter for you.
So, congratulations on delivering some great results over the quarter. I think the three things that I took away from your presentation is we continue to see risk out there in the market. And given that, you know, we're very much concentrating on the diversification within portfolios. You highlighted that that point around concentration risk.
I think it was very interesting to see the degree to which we are looking at that at the portfolio level, and I noted there as well that you said that we talk about the opportunity for value in emerging market debt. Thank you very much for your for your update there.
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So the chart here highlights how our portfolios are protected on the downside. The shaded area shows a drawdown of our moderately cautious model plotted against the relevant risk sector. And as you can see, our models have provided much stronger protection in periods of market weakness. And this helps us support performance over the long term.
So just turning into performance. It's been another strong quarter for markets. Equities were the key driver of returns. And the US continued to show signs of resilience. Our US funds, both value and growth focus, performed very well over the quarter. Our positioning in Japan also boosted returns, as we saw increasing optimism supported by mild inflation and wage growth.
Our performance figures since inception have also been positive across our range, outperforming the benchmark. Our portfolios continue to participate well on the upside, despite having that underweight position in equities. And what supported our performance has been our regional equity allocation and strong fund allocation.
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Simon Taylor: Thank you, Andrea. Thank you, Ronelle. That's a wrap as far as the questions are concerned. Thank you for your attendance today. We hope that you found the webinar useful. If you have got any questions, please do make use of the email address, and that is available to you throughout the quarter, as well as for the end of, the webinar.
Thank you for your attendance, and thank you for your support.
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Ronelle Hutchinson: We are definitely concerned by the exodus of capital from the local market. And as a result, we are encouraged by the recent initiatives in the budget to incentivise investors to invest locally. But in reality, this is not going to be enough. We need higher growth. We need higher investment. We need prospects for higher returns. And it's these fundamental factors that are going to attract investors back into the UK.
Andrea Yung: I agree. I think theoretically it's positive for UK companies. There's that incentive there for investors. And I think we will see some increased inflows. I mean, will there be a resurgence? I'm a bit more sceptical on the impact that having the additional £5,000 per year will have when you take into consideration the amount of people that do actually max out their full ISAs, and the fact that there'll be an element of restructuring within the normal ISA. And that's going to be more global focused, taking into consideration the British ISA.
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Also for the stock market, and the other thing is the geopolitical tensions that we've seen arise as well. So in the Middle East, China and Taiwan, and I think this is going to have a huge impact on like the energy sector and also the semiconductor industry. For me, I think the biggest risks are always those black swan events, the completely unpredictable events, which we don't see coming.
So for us, the key is to remain diversified, really understand what's under the bonnet of our portfolios and how they can react and set market conditions. And I think it's that focus that helps us with our drawdown protection.
Simon Taylor: Thank you both. And then a final question, and this one sort of throws back to the recent budget and the Chancellor announcing the launch of the British ISA. Do we think this will stimulate a resurgence in the UK stock market?
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Simon Taylor: And I think I'm right in saying there's a rule of thumb that applies with duration in terms of when you do see a 1 percent reduction in interest rates. Can you just remind advisers of that rule of thumb?
Andrea Yung: Yes, so as an example, if a bond has a duration of six years and interest rates fall by one percent, that bond price will increase by approximately six percent. So you've got that inverse relationship and the sensitivity to interest rates and increases as the duration increases.
Simon Taylor: Thank you. And can I just ask a further question here? Because I'm sure advisers might be concerned that they've perhaps missed the boat with regards to expectation of interest rate reduction and bond prices. Is it important - is it the actual rate reduction itself, or is it the perception of interest rate reduction that impacts portfolio returns.
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Notably with the lower risk portfolios with that fixed income exposure and also property exposure, which rallied on the back of that. And I think as we forward, a key question is, will central banks cut rates because they can, if we do see lower inflation, or because they have to due to a weaker economy.
And if it's a latter, we may see a bumpier ride for markets. And that's when I think active style management is crucial and that focus on risk management, especially for those more defensive models
Simon Taylor: And Ronelle, I think duration is important within the portfolios in terms of, the duration position that we're holding. Can you just tell advisers, how we are positioned as far as duration is concerned in our portfolios?
Ronelle Hutchinson: We are currently running a duration of six years. And this is well above obviously a cash fund, which would typically run the duration of 90 to 180 days, but it's much lower than a pure passive bond index, which will have a duration of longer than eight and a half years.
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Ronelle Hutchinson: Investors are still reeling from the disappointing returns in 2022, given the fact that they were heavily invested in fixed income. But with the highest heels in fixed income assets in decades, particularly in the short end of the bond curve, it's important that investors reassess their expectations and reposition to take full advantage of these very attractive yields.
Simon Taylor: Andrea I think in your presentation, you showed that the portfolio returns in the lower risk portfolios have been particularly attractive in the last quarter of 2023. Has that been driven by expectations of lower interest rate return lower interest rates?
Andrea Yung: Yes. The rally towards the end of the year was supported by the expectation of interest rate cuts.
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Our performance throughout 2023 has been positive across our full range. And we're pleased with how we've navigated through both the uncertainty and the rally that 2023 presented. We've outperformed the benchmark across all models, and looking at our lower risk portfolios in particular, these have performed well on both an absolute and risk adjusted return basis.
Finally, reviewing our performance since inception. Again, we've outperformed the benchmark across all portfolios, and we've performed very well against our competitors. And I hope this just highlights the benefits of active management combined with strong research capability that Investec have. And with that, I'll pass back over to Simon.
Simon Taylor: Thank you Andrea. Now, we've had a number of questions from advisers, particularly focused on the lower risk portfolio. So we mentioned at the beginning that we would do a spotlight on those lower risk portfolios. And I've got a few questions here. So Ronelle, the first question for you here is, "We haven't seen strong flows into the lower risk portfolios, particularly the sort of defensive portfolios. Why do you think that is?"
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We've also enhanced our cash position by adding the Fidelity Cash Fund into our lower risk models, which hold slightly higher cash positions. And for those that are interested in the full details of our model changes, we've also created a quarterly document citing all changes and the rationale behind them.
The changes that we've made to the portfolio this quarter has also had a positive impact on the cost of our models, as shown here. This is due to the reduction in our hedge fund type strategies, which are commonly more expensive. These cost savings are present across our whole range and will pass on directly to clients.
We believe that this reduction in cost will help to support performance over the long term. So looking at recent performance, overall Q4 was a strong quarter for equity and bond markets. Despite our portfolios being positioned slightly more defensively, we still held up well. And although our returns, which you can see in the dark blue bar was slightly lower than the benchmark, we still participated strongly on the upside.
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In terms of fund changes, we've focused on increasing our exposure to higher quality credit, increasing duration, and enhancing the liquidity profile within the fixed income space. We've implemented this by reducing our high yield bond exposure through the sale of the L&G Active Global High Yield Bond fund and also reducing the hedge fund type investments through the sale of the NB Uncorrelated Strategies, which despite its attraction of being uncorrelated to equities and bonds, we feel that it no longer holds a superior return relative to fixed income.
So instead we've increased our gilt exposure through the L&G All Stocks Gilt Index. And this has helped to increase the duration of the portfolio. We've also added our corporate bond exposure through TwentyFour Corporate Bond Fund, which thanks to the fund manager's in-house expertise, offers exposure to highly liquid investment grade bonds.
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We have seen inflation reduce as expected. We're hoping to see on the back of that reductions in interest rates. And as Ronelle and Andrea mentioned, that should benefit portfolios, particularly the sort of fixed income holdings within those portfolios. I think it's fair to say that advisers who do have clients invested in lower risk portfolios should be thinking about how those portfolios are positioned for this new environment that we're expecting.
And hopefully the information we've given today will help for that. We are producing a guide to help advisers and your business development directors will be sharing that with you over the coming weeks and months. All it leaves for me to do now is to thank you for your time and we look forward to seeing you at the next quarterly webinar.
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Simon Taylor: And then finally, Andrea, you mentioned credit risk and, exposure to different parts of the credit curve. In terms of how you look at that within portfolios and how you evaluate the managers that are invested, perhaps you can give some comment on that as well?
Andrea Yung: So I think it's definitely critical to look at and this I think is where it's really important to have that active style. Because when you're looking at credit market, I mean if we do see default rates start to increase and bonds do start to default, I think it's really important for fund managers to have that good understanding of those underlying risks that are within the bond.
Simon Taylor: So thank you, Ronelle. Thank you, Andrea, for your time this afternoon. Thank you for joining us. I think I would summarise today's webinar by saying the macro economic environment is looking better as we go into 2024.
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Andrea Yung: I think there's a few aspects to keep in mind. Firstly, I think it's important to be positioned globally. It's hard to predict how and when these central banks will respond and having that global opportunity set will allow for active managers to be able to respond and be able to take advantage of the opportunities when they arise.
I think duration positioning is also key. So as we mentioned, we have increased our duration in the portfolios. But we're still mindful that yields may rise a bit higher in the short term. So it's keeping that kind of duration in the forefront. And I think, finally, just the main point to mention is portfolios have that active focus towards credit risk. So default rates are currently low at the moment. Credit spreads are tight, so investors aren't really being compensated fully for taking on that higher risk credit. So if this changes and we see those spreads widen, I think it's vital to have a good understanding of risks within the fund, especially if we do see that weaker economy coming through.
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Andrea Yung: I think there's a competition there. There's still a degree of uncertainty out there in markets. We did see that rally towards the end of last year. But what we've seen since the start of 2024 is that markets have come back a bit. And this is on the back of concerns again around inflation.
There's some worry around geopolitical issues and whether this will have an impact on supply inflation. And the fact that interest rate cuts may not be as aggressive as we previously thought towards the end of last year. So I definitely don't think investors have missed a boat. And I think what it's highlighted is that potential cost of being sat in cash.
Simon Taylor: And Andrea, you mentioned many clients and many clients of advisers that were invested in low risk portfolios had a difficult year in 2022 and saw poor returns and in fact negative returns on those lower risk portfolios. So there are clients out there who are invested in lower risk portfolios. And if you were an adviser, how would you suggest that they should be positioning those clients to gain from interest rate reductions when they do come?
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Today's quarterly update is accompanied by a very useful guide for advisers to use with clients on the value of staying invested. And this covers why investment returns have been difficult to come by of late, why time in the market does matters when it comes to long term investing, why it's important to stay invested, and where we see value and opportunities. If you'd like a copy of this guide, please do contact your local Business Development Manager or indeed, drop me a line.
The third quarter has been a challenging backdrop for global equities. Interest rates have remained high, bond yields have remained elevated and global growth has struggled as a result. To talk more about this, I'm delighted to invite Ronelle Hutchinson, Senior Investment Director, to the microphone.
Thanks Simon. So, looking to the global macro environment, if we just look at the performance of asset class returns in the third quarter, as SImon pointed out, you know, the strong start to risk assets in the first half of 2023 faltered in the third quarter as global equities delivered negative returns.
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Now, before I start, I'd like to draw your attention to some exciting corporate news. Our combination with Rathbones, the leading provider of individual wealth management and asset management services to individual clients, charities, trustees and professional partners completed on the 21st of September. Our combined business now manages in excess of £100 billion of assets on behalf of clients and partners. And together we now have over 675 investment managers working out of 23 offices throughout the UK and Channel Islands.
In the coming months and weeks ahead, we will bring you more information on how this amazing combination is benefiting you and your clients. In the meantime, rest assured that your clients and your business are partnering with the largest discretionary fund manager in the UK and one which can truly boast a local presence. If you'd like to hear more about this, please do reach out to your local Business Development Manager, or drop me a line after this video.
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Hello, good day and welcome. My name is Simon Taylor, Head of Strategic Partnerships at Investec Wealth and Investment. And it's my pleasure to be your host and to welcome you to this quarter's market update and review of the Manage Portfolio Service.
I'm joined today by Ronelle Hutchinson, Senior Investment Director from our Investment and Research Office, and Andrea Yung, the Investment Director focused on our Managed Portfolio Service. Good day to you both.
For the next 30 minutes, we will consider investment markets, looking back over a very eventful quarter, which saw interest rates and inflation remaining high and markets continuing to be volatile. We will also look ahead to 2024 and beyond, considering what the investment outlook means for the MPS Portfolios, your clients and your firms.
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So we do feel that these higher rate are likely to take its toll and we're really seeing it already in the Global Purchasing Manager Index, which has now deteriorated and is showing, signs of slowing in the economic momentum and no more is this evident than in the next slide, which shows the UK Purchasing Manager's Index for both the manufacturing and service sectors. And as you can see, while the service sector has been quite robust for the large part of 2022 and the early part of 2023, the reality is that the cost-of-living crisis is now denting the post-Covid resilience that we've seen in the service sector. And as a result, the weakness of the UK economy is now evident and recession risks remain. So it's still definitely a risk there.
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If you look across to currencies, the pound is stronger on a year-to-date basis, up 1.5%, despite the weakness that we experienced in the third quarter. Just looking at what really drove risk assets over the quarter, as Simon shows here, once again you had volatility in the interest rate environment, largely as a result of the strong labour market data, as well as higher oil prices, that kept central banks hawkish over the period.
And as a result, investors across the board had to reprice the interest rate outlook for the remainder of the year, forcing them to reprice interest rates higher. And this dented sentiment across the board.
Just moving to the next slide, what we can see is that despite the economic resilience we've seen this year, the continued much higher for interest rates is likely to take its toll on the global economy. And as you can see, the recent update from the IMF has pointed to downgrades for economic growth. For 2024, they've downgraded it by 0.1% to 2.9% and that's well below the long-term historical average.
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If you look at the S&P 500, it delivered negative returns in dollars, but in pounds, managed to be up 0.8% as the pound weakened against the dollar. Looking at UK equities, they were up 2.4%, delivering out-performance relative to US equities. And generally global bonds struggled as the rise in yields negatively impacted the bond market. A notable outperformer was commodities, with the gain in oil prices as a result of production cuts in Saudi Arabia and Russia.
When you look at the year-to-date performance of asset class returns, it's been a positive screen across the board. As you can see, global equities have surprised on the upside, largely as a result of the resilience we've seen in the global economy.
If you look at the S&P 500, it is up 11%, driven by that strong rebound in the technology sector as a result of ChatGPT and generative AI. Moving to Europe, it was up 7% and the UK has delivered a positive return of 5%. Generally, when you look at bonds over the period, they have struggled. But there have been areas of positivity, specifically in the UK bond market. But really marginal gains.
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Thank you Ronelle for that update on the global macro picture. And I think the sort of main points that I took away from that were that, with this sort of weaker economic picture on growth and falling inflation, we think we're close to the peak on interest rates and there's clearly, at current yields, with the risk return skewed in favour of fixed income, that's clearly a positive for those holding fixed income assets. And that's one of the things that we continue to look at quite strongly.
And I think you also mentioned there that when interest rates do moderate, equity portfolios should rise as the equity discount rate improves. So some positive news on that point. Now, let's look at the MPS Portfolios themselves in a little bit more detail. I think this has been a busy quarter for the MPS Portfolio management team, as they look to reposition portfolios for the future. So to talk through the managed portfolios that we have, and the changes that we've made over the quarter, I'm delighted to invite Andrea Yung to the microphone.
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And as you can see, they are showing the most attractive yields over the last 15 years. And then if you move to the chart on your right, this is a very interesting chart. It's showing the impact of a 1% rise or fall in interest rates and the impact that this will have on fixed income assets. And as you can see, there is a positive skew across all maturities. A rise or fall in interest rates is actually showing that there's a positive skew, and there’s more upside to be gained from fixed interest, irrespective of where interest rates move from here.
Obviously, the longer dated, like the 30 year US Treasury will be negatively impacted. But what we're seeing is an asymmetric return profile for fixed income. And as a result, we've moved more positive on the asset class, from an asset allocation perspective. And with that, I'm going to hand back to Simon.
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While in the short term, we don't know what the outlook for equities is going to be longer term, we know that from these elevated levels of valuation in US equities markets, combined with tighter financial conditions and already a downward trend in corporate profitability in the US, definitely we see that over the long term, the outlook for US equities is less positive. And hence, we are underweight at this particular stage.
But there is some good news. As I alluded to earlier on, fixed income assets, are becoming more and more attractive. And if you look at the next slide, what you can see on the chart on your left is the range in the grey bar there, the blue shaded range, is showing the range of yields across maturities over the last 15 years, and as you can see that blue line at the very top shows the current yields of fixed income assets across maturities.
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If we just move to the next slide, the reality now is that the sharp rise in interest rates has actually been quite positive for savers and current investors at the moment, because you're getting very attractive yields on cash at the moment. And this is well beyond the subpar returns we've seen over the last decade. So cash and fixed income assets are now offering very attractive alternatives to equities, and so investors are now losing that incentive to own equities - not just in the US, but the UK as well as the rest of the world - because of this rise in interest rates and the attractiveness of fixed income.
Just turning to the next slide, it then leads us to reflect our current assets allocation view, which is to remain underweight equities and US equities, specifically. If you look at the chart on your left, which is showing the valuation levels of US equities at the moment currently sitting at 18 times PE. Well above the long-term average of the 15 times average.
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If we just move to the next slide, the combination of a weaker economy and falling inflation has given the Bank of England reason to pause interest rates, which they have just done at the latest Central Bank meeting. They have opted to pause the hiking cycle at these current levels. And if you look at the chart on the right, which is showing pricing in these changes in interest rate expectations, if you look at the orange line at the very top, that was the July expectation of interest rates. Post the BOE pause in September, you've seen interest rate expectations decline by the second orange line at the bottom there. And clearly what it means is that bad news on the economic front is turning out to be good news for the interest rate outlook in the months ahead.
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So here you can see how the asset allocations have changed for each strategy in our core range over the quarter. Firstly, the reason why we've reduced our alternative exposure and increased fixed income, is due to the value that we're finding in that fixed income asset space, especially in the government bond space.
Real yields over the quarter have risen. And as we're seeing as we're seeing, that peak US interest rates being pushed out further and that shallower decline being priced in. We're seeing this as an opportunity to benefit from the higher yields that bonds are offering.
Now we continue to believe that there will be a slowdown in global growth, as Ronelle mentioned, and therefore the latest increase in yield we feel just provides us with that opportune time to also slightly increase our duration within fixed income to a more neutral stance.
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Andrea is the Investment Director who's focused on our MPS range. And as a quick reminder, we have six portfolios across the risk return spectrum. Those portfolios are continually being rebalanced to ensure that they stay within their risk return pathways. And that rebalancing process in itself has the advantage of making sure that we're continually cashing in on gains and capitalising on valuation opportunities with underperforming assets. Andrea, I see that we have made some changes to the portfolio this quarter, which have had a positive impact on total expense ratios and TAAS (tactical asset allocation) changes. Perhaps you could talk the audience through these? Andrea over to you.
Thank you Simon. So I'll cover the main changes that we've made to the models since our last update, why I think we're well positioned given the current outlook, and then I'll reflect on recent performance.
So, firstly, here's a current breakdown of our asset allocation across all models. The main key points to highlight, and what I'll go into in a bit more detail on the following slides, is that we've slightly dialled down our alternative exposure and added to fixed income. And we've also diversified our equity exposure by reducing that UK home bias and increasing overseas exposure.
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So in the US, what you'll find is that we've dialled back our growth tilt and added exposure to more value focused names, just helping us to provide a more diversified exposure within the US, rather than adding concentration to those large cap growth stocks, which are on high valuations.
The Beutel Goodman Value Fund is a good example of this. We feel that the fund managers have still demonstrated strong performance relative to the US market, despite not owning any of the large cap names, which is just evidence of their stock picking capability. And although our outlook on the market still remains cautious, we believe it pays to have this type of active management during this point in the cycle, as when we do see increased volatility, the fund manager will be able to be more flexible and responses and responsive to market inefficiencies and risk pricings compared to those passive funds.
We've also adjusted our Japanese exposure by selling Bailey Gifford Japan, which is more growth focused to M&G Japan, which has a more blended approach with a bit of a slight value tilt. And we believe this fund is a compelling core value proposition for allocating to Japan and is best in class.
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So just having a look at the model changes in a bit more detail, here are the changes that we've made. So firstly, looking at fixed interest, we've increased our waiting in sovereign debt through the L&G All Stock Guilt Index, and we feel the risk adjusted return characteristics are looking favourable. As yields have increased, the return that you can get on the guilt is more attractive, and you've still got that potential for capital uplift as we approach the end of the hiking cycle.
We've also increased opposition in the Royal London Sterling Credit Bond Fund by selling our position in the Fidelity Sustainable Money Builder. These funds both fall under the same UK investment grade sector and are quite similar in terms of structure and exposure. We've made this decision as we just feel that Royal London team have that edge at selecting bonds, especially in the less liquid area that offer a higher return. And we just believe that Royal London are market leaders within the space.
Now within equities, we've reduced a number of our UK holdings in order to gain exposure overseas, maintaining only our most favoured names.
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So the UK market is dominated by sectors such as oil and gas, mining and banks, and these are typically capital intensive and cyclical. So these types of sectors benefit from an interest rate rising environment when commodity prices are rising. However, looking ahead, the UK could begin to lag once interest rates expectations soften and the global market just opens up exposure to sectors that aren't available in the UK to global leaders with areas such as technology, manufacturing and healthcare. And I think this chart highlights it well.
In equities, no country has a monopoly on industry leaders. So thanks to the size of its capital market, the US has many, particularly in technology and Europe and the UK compete in pharmaceuticals, staples and industrials. Emerging markets are increasingly producing future leaders as well. These areas are less thoroughly analysed, less efficient, and therefore offer a greater opportunity for upper generation. And by keeping our investable universe as wide as possible, we just give ourselves the best opportunity to generate superior returns and also to diversify that risk.
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So, using the balance model as an example, this chart here shows how our asset allocation has changed over the quarter and how we're currently positioned. What this highlights is how we've increased our overseas equity exposure and adopted a more global approach. And our UK equity exposure, as a percentage of the overall portfolio, has reduced from 25.8% down to 12%, while our overseas exposure has increased from 31.8% to 45.5%.
So looking at how this overseas allocation has changed, what you can see, is that we've increased our exposure across the regions, Europe, US, the Far East and emerging markets and general global Funds. And the reason why we've done this just stems from broadening our opportunity set, which we expect will lead to stronger returns over the long term.
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Looking within equities, we've been hurt by the lack of exposure overseas, most notably in the US and the magnificent seven, which have been a key driver of global equity returns year to date. Although we try to minimise sell backs when we look at value versus growth, our portfolios have historically had a bit of a growth tilt during the low interest rate environment, and these companies will usually create returns above the cost of capital. And this has served us well in recent years. However, as we've seen one of the most aggressive tightening cycles in history over the last 12 months, this has put downward pressure on the valuations of these types of companies.
So this slide just details the timings of our tactical asset allocation decisions, as directed by our research team throughout 2021 and 2022, which we've reflected in our models. As evidenced, we have reduced risk through a reduction in equities during tough periods, and a lot of this reduction has been through the growth style equity funds. However, in hindsight, we could, and we should have been a bit more aggressive in this approach.
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Now just looking year to date, we've seen mixed performance across our strategies, with defensive cautious and income lagging their respective ARC indices, while cautious plus balance and growth have either kept in line or outperformed.
Now, the reason why our lower risk strategies have failed to keep pace with ARC is just due to our positioning on property and alternatives, which have struggled in the current economic environment. However, our outlook still remains cautious for global equities, and if we do experience periods of market weakness, it's these types of strategies which should help support portfolios.
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So thanks to energy and the basic material sector, which was supported by sterling weakness and a recovery in oil price, we've also seen domestic sectors improving on the back of positive consumer sentiment for the quarter. Also, fixed income showed signs of resilience within the corporate bond market.
And our exposure to the Royal London Sterling Credit performed quite well. We've also seen a recovery in alternatives, most notably the JP Morgan Global Macro Opportunities Fund. This bounced back due to its hedge against the US tech sector and European equities, which were negative over the quarter.
It has been property which has detracted from performance. And that's because of the global exposure in the Schroeder Global Cities Fund, which has generated negative returns. And that's been weighed down mainly by the US real estate section. So where we have seen slight underperformance relative to ARC has been in our defensive strategy, and this is mainly due to the high rating in property relative to that equity position.
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So this slide here just helps to visualise the cost reduction for each strategy, which hopefully is some positive news for your clients. And we understand the importance of total costs for clients, and we remain committed to reducing costs where we can without impacting returns.
So the next slide here just shows the active versus passive split for each of our strategies. The passive weighting has increased mainly as a result of that fixed income guilt exposure that I mentioned. However, we still remain very much active, especially at this point in the market. If we do see market stress, our active funds can take advantage of these missed pricing opportunities. So just having a look at how our strategies have actually performed, this slide, shows how we performed over the quarter.
And we have seen some slightly positive returns across our models. The dark blue line represents our strategies, and this is plotted against the comparable ARC indices for each of the models. And as you can see during this time, we've outperformed across most strategies, with the exception of defensive. And what's driven our performance this quarter has been the UK names.
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We've also increased our weighting to Hermes Emerging Markets Equity Fund. And while we're aware of the impacts that the stronger dollar has had and the risks surrounding China, we see emerging markets as a longer-term beneficiary of an eventual weaker dollar and recovery.
So just having a look at our fees, over the quarter, we've reduced both our underlying OCF and transactional fees, and this is mainly down to a few reasons. Firstly, gaining access to cheaper share classes has helped and we're continually working on this so we can get the best value for money.
Secondly, we've increased our exposure to passives in the UK sovereign space, as we feel a passive gilt product provides the same exposure and similar performance for a much lower cost relative to other active gilt funds. And a reduction in alternatives has helped to reduce transactional charges, which are inherently higher than the other asset classes due to their hedge type structures in place.
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I also mentioned in terms of investing in current markets, a very useful guide that's been produced by John Wynn Evans from our Investment Research Office about helping customers to stay committed and invested in current markets.
A very worthwhile read. Very supportive of long-term investing.
And again, something, that you might find useful and your clients might find useful. So please do reach out to us.
That's all for us for now.
Thank you for your time, thank you for your support and we look forward to seeing you again at the next quarter.
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But one of the things that has stood up quite remarkably well over the quarter is the amount of money going in to managed portfolio strategies. At the at the beginning of last year, it was something like 12% of total assets on platforms. So around about £80 billion. It's now over 16%, over £100 billion.
The latest report from Cerulli Associates, the respected independent research firm, predicts the number of financial advisors outsourcing investment decisions to discretionary fund managers will continue to increase as the regulator increases its focus on consumer protection.
So for the any of those of you at the moment who haven't yet adopted the managed portfolio strategies, there’s plenty of material coming to you from our good selves in the near future.
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Excellent, thank you. Well, there's no more questions from the audience. If any advisor out there watching do have further questions for us, please do, write them down and post them into us, and we'll be happy to provide answers to that.
I think just before we finish off just a a few other things from the quarter.
One of the latest platform studies has come in from Platform Forum, which continues to show that platform assets, into the managed portfolio service are growing. Very interesting that over the last 12 months, assets into platforms generally across the industry have actually declined from something like £680 billion under management to, something like £640 billion under management. So quite a significant fall. Largely, I suspect, due to asset prices and maybe, clients taking more out of portfolios on platforms than putting into portfolios on platforms.
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Where we do have the benefit in terms of active managers, managers that are looking at companies with idiosyncratic risk factors, and drivers whose returns can often decouple from the economic environment. So being active in this environment makes sense where we will normally see quite a dispersion in returns and that really is the playing ground for active management.
Thank you Ronelle. And one final question here, I think, relating to where the most assets are going into the 2plan managed portfolios at the moment. I think that's moderately cautious.
But Andrea, probably you're better placed to answer that one. So we're seeing a lot of the traction and demand within the moderately cautious portfolio, which has done very well for us. And also within that cautious portfolio as well. That's where we're seeing a lot of the inflows coming in.
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Yes, so when I refer to when we refer to the 'magnificent seven', these are the companies the likes of Amazon, Apple, NVIDIA and Meta. These are growth stocks within the US, which have done very well year to date. So our exposure to these has been through the L&G US index, as these actually make up such a large position of the benchmark.
Brilliant. OK, so we have had exposure to those through the portfolios. Excellent. Lovely. Excellent. Wonderful.
And Ronelle, I think there's a question for you here as well – "We clearly are predominantly still active within those portfolios. Obviously, markets are quite challenging at the moment in terms of the economic backdrop. Perhaps you could just give some comments and thoughts in terms of the importance of active management?"
Thanks Simon. I think the current volatile environment suits definitely an active manager. Generally, what you find in broad systematic environments of geopolitical risk, rising economic uncertainty and deteriorating economic growth, headline indices across the board decline.
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We've got a couple of slides here that we put into the pack just to help advisers with persuading clients of the merits of continuing to be invested in the market.
But as I mentioned right at the very beginning, we've got a very handy guide, which we have just published for you. And I would advocate that you reach out to your local Business Development Manager and get a copy of that, for any conversations that you need to have with clients around continuing to remain invested in in these challenging times.
With that, I think we move to Q&A.
I think the first one I can see here is "You alluded to the magnificent seven". So for those advisors and investors out there that don't know who the magnificent seven are, or what the magnificent seven are, I thought it was a film, a Western film in fact! Perhaps you can just enlighten us as to who the magnificent seven are?
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Now, taking a longer-term view and looking at performance since inception, I'm pleased to say that we've still outperformed across all portfolios. We believe we can drive returns further over the long time over the long term, by adopting a more global approach and broadening that opportunity set.
We also remain competent in our ability to protect portfolios on the downside and during market weakness. And with the support of our research capability, we're able to select the best ones in class. So with that, I will pass back to Simon.
Excellent. Thank you Andrea. Thank you for that very comprehensive overview of what looks to be a very busy quarter for the MPS team. The three takeaways I took away from that were that we've clearly reduced alternatives in favour of fixed income over the quarter, we've adapted more of a global approach for equities, and I think, importantly for advisers and their clients, we have reduced the cost of portfolios throughout the quarter as well. So it's great to see that we are well positioned for the for the future.
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Download the slides from the video
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Investment Director
Andrea Yung
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Senior Investment Director
Ronelle Hutchinson
I am responsible for the portfolio management of Rathbones' MPS on Platforms service. Using a structured and disciplined investment framework, our primary focus is delivering outcomes that align with the objectives and risks associated with each MPS strategy.
Investment Director
Andrea Yung
I am a Senior Investment Director at Rathbones.
I have over 20 years of industry experience. Most recently as a portfolio manager in Investec Wealth & Investment's South African office managing a range of multi-manager funds for our private clients. I am responsible for overseeing Rathbones' Managed Portfolio Service on platforms. My focus is to ensure that we deliver consistent investment performance & a proactive service to our advisory clients.
Senior Investment Director
Ronelle Hutchinson
Download the slides from the video
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Andrea Yung: So looking within the equity exposure, what we've tried to do is move away from the concentration to these large cap mega stocks, and then also look towards those sectors and assets which are offering greater value, those which are more sensitive to interest rates, where higher rates and that environment has been more of a headwind. So we're looking at the likes of property and infrastructure, and also smaller cap stocks, where we've seen valuations looking a lot more attractive. And where we expect to see greater returns going forward.
Simon Taylor: So Ronelle and Andrea, thank you very much for your comments today. And to those of you watching, I hope that you found today's webinar helpful and insightful and it's helped you think about your own client solutions for the remainder of the year. If you'd like to have any more details about the points covered today, please do reach out to your local business development manager.
And to remind you, your CPD certificates are now available from the platform to download. Thank you for your attention today and your continued support.
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Simon Taylor: Now I mentioned in my opening address that China's stimulus measures, including its interest rate cuts and its housing reforms, had lifted market sentiment and resulted in some very positive equity returns over the quarter. So we have a question here from one advisor asking if our outlook on China has changed given the recent government stimulus.
Ronelle Hutchinson: While our outlook for China is more positive, given the Chinese response, we remain cautious. History tells us that balance sheet recessions take time to unwind. If you look at the post GFC world, it required a massive quantitative easing to restore household balance sheets et cetera. Thus, we are closely monitoring the extent to which this Chinese stimulus is likely to resuscitate investor and consumer confidence. So no changes to the portfolio at the moment, but closely monitoring the situation.
Simon Taylor: One final question here, and this relates to some of the comments you made on concentration risk and I guess passive exposure to markets. What has this meant for our exposure to US and European markets in particular?
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Andrea Yung: So although we've seen a shift in sentiments towards the UK in recent weeks, we can see that a lot of this negative sentiment from the autumn budget has already been priced in.
And if we take a longer term view and look past that political noise, we know that valuations remain attractive. And we also know that the largest companies in the UK derive their revenues globally. It's not just domestic. So with that in mind, we've not made any changes ahead of the UK budget. Instead we're taking that longer term view.
So looking at our equity composition, around 30 percent of this is allocated towards UK equities, while 70 percent is allocated overseas. So we do have that global exposure. Within fixed income, we do have exposure to UK gilts through the L&G All Stock Gilt Index. And we've got around 9 percent allocated to gilts in our median risk portfolios.
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Simon Taylor: And I guess the sort of corollary to that which has come to us in the next question would be what would a Harris win mean for US markets and markets generally? And I guess linked to both of these is how are we positioned one way or the other?
Ronelle Hutchinson: If Harris wins, it is likely that this will weigh on equities as markets digest the impact of higher corporate taxes.
On the other hand, the bond market might respond positively as a smaller fiscal deficit will be better received in the fixed income market.
Simon Taylor: And clearly advisors and clients have got the UK in mind as well with upcoming potential changes in the autumn budget. So one of the questions here is have we made any changes ahead of the autumn budget? And what exposure do we have to UK and UK gilts and how might that be impacted by whatever is said in the budget?
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Simon Taylor: And we have another question here and this is, in fact, we've got another couple of questions here, which are clearly very much focused on the US markets and the upcoming presidential election. So the first of these is what would a Trump win mean for US markets, and markets more broadly?
Ronelle Hutchinson: In the short term, equity markets are likely to respond positively to a Trump victory or a Trump win in this campaign, largely because lower corporate taxes is likely to boost corporate profitability going forward.
So equities will definitely respond positively to that. When we look at specific sectors, Trump's proposals of deregulation focusing specifically on the energy and the financial sectors should also benefit the sectors as a wave of deregulation or the potential of a wave of deregulation benefits the sectors.
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With the ongoing conflict in the Middle East and uncertainty surrounding the upcoming presidential election, what protection do we hold in the portfolios and what does this provide us with?
Andrea Yung: So risk management is a key focus for us when managing models, and we aim to provide protection in various ways.
So our alternative funds offer low and uncorrelated returns to equity markets. So if we do see uncertainty feed through into risk appetite for equity assets, we have a degree of protection there. We also ensure that we've got sufficient diversification, so when reviewing our models, we're not just looking at regional allocation and asset allocation.
But we also have a deeper understanding of what types of companies and sectors that we're investing in. And then these portfolios undergo scenario stress testing before we make any changes. And that just helps us to understand the underlying positions and the potential impact in different types of scenarios.
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What's led this quarter has been certain areas within our equity exposure, most notably in Europe, where we've seen economic data released, signalling a slowdown in the economy. Looking at performance year to date, returns have been driven by equity markets, and despite us taking less equity risk at the start of the year, our portfolios still participated in the market rally while taking a lower level of equity risk.
And finally, looking at our performance since inception, performance remains strong relative to the benchmark. And this has been supported by our regional allocation and fund selection. We continue to take a long-term approach to investing, with a focus on downside protection. And with that, I'll pass back to Simon.
Simon Taylor: So we have a number of questions now from advisors around the UK. And firstly, thank you to those of you who submitted questions. And for those of you who would like to submit questions, please do feel free to contact us. So I'm just going to turn to the first of these and over to you, Andrea, with this one.
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Turning to performance, as we look over the quarter, it's been those assets which are sensitive to interest rates that have generated the strongest returns for our portfolios. As we look at the chart, we can see that it's been our lower risk portfolios which have performed better, due to the higher exposure to fixed income and property. Our property fund has generated the strongest returns over the quarter. This is the Schroder Global Cities Real Estate Fund, which is up over 8 percent over the last three months.
We also saw positive performance in our fixed income exposure. The change in interest rate expectations supported performance of government bonds, most notably US treasuries.
We also saw strong performance in our off benchmark position in emerging market debt, supported by a strong dividend yield. Within equities, our Asia and emerging market funds, which have exposure to China, performed very well towards the end of the quarter, and this is on the back of Chinese government stimulus, which has helped to support sentiment.
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And as we discussed in our previous update, We believe it's important to highlight the concentration risks that persist in passive funds, especially the US. Now, we do believe passive funds have a place in portfolios. They offer low-cost exposure to certain areas of the market. However, the risk stems from being overly exposed to these investments.
Looking at the S&P 500, the seven largest stocks make up over 30 percent of the index. And this risk is also exacerbated given the high correlation between these companies. Although they've been large contributors to equity performance, we are seeing a broadening out of returns. In the third quarter, value stocks as well as small caps have outperformed these mega caps. And August highlighted to us the potential volatility that can occur. So we believe it remains important to take an active approach in diversifying exposure and not be solely invested in these market cap weighted index funds.
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And although we've seen in the autumn budget, there's been weighing concerns of consumer sentiment over recent weeks, if we look at the wider picture, the macroeconomic environment is a lot more favourable than what we've seen in previous years. In terms of fund changes, we've increased our position to the UK through the Vanguard FTSE 100 Index and the Royal London Sustainable Leaders. The Royal London Fund is actively managed and positioned towards large cap quality growth names, and this complements our current value exposure and our mid and small cap.
Within the US, we've also added small cap exposure in our higher risk models, through the Schroder US Smaller Companies. And what we like about this fund is how the team have a strong valuation discipline and take a more conservative approach relative to other small cap payers. And we prefer this rather than taking undue risk through exposure to speculative growth companies. This fund offers us a compelling way to invest in US small caps without being exposed to that additional factor risk.
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Andrea Yung: Thanks, Simon. So firstly, looking at asset allocation, at the start of the year, we held a degree of caution towards equity markets, with an underweight position to equities. As the year progressed, we've seen inflation begin to moderate with signs of a global economic recovery. In early August, we saw a sharp fall in equity markets, and we took this as an opportunity to increase equities and neutralise opposition by carrying out an ad hoc rebalance.
In this rebalance, we made the decision to add to our UK equity exposure. In recent years, macroeconomic concerns and negative sentiment have been a headwind for the region. The UK sector composition and lack of technology exposure has caused it to lag other developed markets. However, with tech valuations looking stretched, we begin to see a broadening out of returns and the UK stands to benefit from investors looking to diversify.
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We think that this will continue to be supportive for equities. As a result, we have continued to add to equities over the quarter, focusing specifically on UK equities. And with that, I'd like to hand back to Simon.
Simon Taylor: Ronelle, thank you for that very comprehensive overview of market events over the quarter.
I'd now like to turn to Andrea Yung, Investment Director here at Investec Wealth and Investment, to comment on some of the changes we've made in our investment portfolios over the quarter and to reflect on how the portfolios are performing in the economic backdrop outlined by Ronelle earlier.
Andrea, over to you.
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The key question going into this autumn's budget is how will the Labour government address the 22 billion shortfall in the budget? For now, we know that Rachel Reeves has ruled out increases in income tax, national insurance, VAT, and more recently, tax on pension contributions.
Thus, speculation is rife that there's likely to be changes in Capital Gains Tax, either a reduction in the threshold levels, or worse, realigning Capital Gains Tax to align with the prevailing income tax rates. Either way, it needs to be a finely balanced budget, one that continues to boost consumer and investor confidence that has lagged under the uncertainty of this budget in recent days.
Overall, history tells us that election years tend to be favourable for equities. And in this current environment, we are likely to have continued fiscal stimulus coming from the US. In addition, we have China with its own fiscal measures combined with a falling interest rate environment around the globe.
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From a policy perspective, one of the major differences between the candidates is taxes, with Kamala Harris advocating for raising corporate taxes from 21 percent to 28 percent, while Trump, on the other hand, is proposing a cut in corporate taxes to 15 percent, preferring to propose tariffs on the key trading partners for the US - namely China. In addition, Trump is quite supportive of a wave of deregulation, which is likely to favour the financials and the energy sector if he gets elected.
Irrespective of the election outcome, what we can be certain of is that large fiscal deficits are here to stay. Both parties have expansionary fiscal policies in their campaign and it is estimated that Trump's fiscal plans are likely to cost the US taxpayer some seven and a half trillion dollars, which is almost double that of Harris's campaign plans. Either way, we think higher bond yields are here to stay as investors demand higher compensation for these increased fiscal risks. Longer-dated yields are likely to benefit savers as well as the overall total return for portfolios.
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Over the quarter, the UK and the US finally followed the ECB with interest rate cuts and with more than half of central banks around the world cutting interest rates, we are currently in the midst of a synchronised easing in interest rates around the globe, which is going to be in positive for the outlook for economic growth in the months ahead.
As a result, we have added to equities over the quarter, shifting our risk stance from underweight to neutral. From a growth perspective bottom up, we see positive developments in the UK. In this chart, we show the manufacturing activity. And as you can see, the UK is in expansionary mode ahead of its developed market peers. And this, together with increasing household disposable income and attractive valuations, make us more optimistic on the outlook for UK equities.
Uncertainty around the US election, which is just days away, remain high. We've experienced several campaign shocks along this particular campaign trail with President Biden dropping out of the race. Looking at the polls, it remains too close to call, and it is likely that a few tightly contested swing states are going to be key to this presidential outcome.
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Ronelle Hutchinson: Thanks Simon. The third quarter was marked by a spike in risk aversion in August, which led to a mixed picture for risk assets. The S&P 500, for the first time in a while, delivered negative returns, down 0.2 percent, as the pound strengthened 6 percent buoyed by a favourable election outcome. The UK equities moved higher up over 2 percent, also supported by investor optimism post the elections, while Chinese equities rallied 15 percent as policymakers unleashed a raft of stimulus measures designed to support economic growth in China. And finally, UK bonds delivered a positive return for the quarter, up 2.7 percent as investors welcomed a raft of interest rate cuts from the key central banks.
The global disinflation trend remains on track. And just this week we had positive inflation data. Out in the UK with headline inflation falling to 1. 7%, which is below the BOE's 2 percent target. Inflation is likely to be further supported in the months ahead, with a loosening in labour market conditions in both the US and the UK, as well as a material decline in oil prices year on year, despite tensions in the Middle East.
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The European Central Bank and Bank of England followed suit, driving strong bond performances. US Treasuries returned 4.7 percent and European sovereign bonds saw gains of 4 percent over the quarter. In Asia, China's stimulus measures, including interest rate cuts and housing reforms, lifted market sentiment, resulting in Asia ex-Japan equities rising by 10.6 percent. This highlights China's focus on stabilising its economy. Commodities were mixed. Gold hit new highs, reflecting investor caution, while Brent crude prices fell 17%, driven by concerns over global demand. This impacted energy stocks but benefited sectors like utilities and real estate, which thrive in a lower-rate environment.
So with these major market shifts, let's dive deeper into global market returns over the quarter, and what this has meant for your portfolios and investment strategies. For a more in-depth look at the market events which have shaped the quarter, I'm pleased to now hand over to Ronellee Hutchinson, Senior Investment Director here at Investec Wealth and Investment.
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Simon Taylor: Hello, good day and welcome. My name is Simon Taylor, Head of Strategic Partnerships here at Investec Wealth and Investment. Thank you for joining us today for this quarter's Managed Portfolio Service update.
Over the last quarter, we've witnessed key shifts in global markets, shaped by central bank actions, regional interventions and commodity trends. These developments have had a significant impact on both equity and fixed-income markets. Central banks particularly the US Federal Reserve, led the charge in cutting interest rates with a 50 basis point reduction in September. And this marked the start of an easing cycle aimed at managing cooling inflation and slower economic growth.
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Simon Taylor: Now an important question here relating to, the migration to the Rathbones brand. To start with, I just want to make a few points from a business development support perspective. We have increased the amount of resource available to advisers in the managed portfolio service space. You'll see an increased and improved, microsite from us and you'll also note that we've put more business development directors on around the UK to support advisers. So please do make use, of the increased resource.
From an investment managers perspective. A question here has been how has the migration to Rathbone has impacted decision making? Has it improved or restricted flexibility?
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Simon Taylor: Looking ahead to 2025. Where do we see the key investment risks and opportunities for our MPs portfolios?
Andrea Yung: So a key factor for equity investors next year will be the health of the US economy. We may see increased volatility in markets, and we have to consider that there is greater uncertainty in a Trump presidency and the potential impact of trade tariffs across the world. Inflationary pressures and interest rate expectations will also continue to impact markets. And although we've seen expectations of cuts being pushed back relative to the start of 2024, reductions are still priced into markets. So markets could react negatively if higher inflation persists. So the key is to remain diversified. We have elements of the portfolio which we believe will be resilient in periods of market weakness. Our exposure to gilts should support portfolios and our defensive funds within our alternative allocation should also help. Within regions we are diversified. We don't have a full US weighting in the mega cap funds, for example. We're taking a broader view and we're looking at quality companies.
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Andrea Yung: It's definitely been an active decision. Ultimately our focus is providing long term risk adjusted returns for clients. Our cost caps are in place just to assure advisers that we won't surpass a certain pricing point. However, we already sit comfortably below these levels. So it hasn't forced us into making these types of decisions. Ultimately, we know that costs will impact returns. So we're sure that any fees associated with a fund is worth the price, and we won't just go active or passive for the sake of it.
Simon Taylor: How have the recent interest rate changes in global markets impacted world currencies and in the MPs portfolios?
Ronelle Hutchinson: With a stronger US economy, sticky inflation and Trump stimulus, the market has had to pare back the number of interest rate cuts expected in the US. This has further fuelled a strong dollar in the last three months alone. The dollar has strengthened over 6% relative to the pound and the euro. From an MPS perspective we have been maintaining diversified exposure specifically to US assets, exposing portfolios to the strength of the dollar, which has helped mitigate this currency risk.
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Andrea Yung: So, there are two main factors at play here. Firstly, looking at our fixed income exposure. We have a preference of UK sovereign debt. And we've chosen to allocate to a passive fund in this space as we believe it's an optimal way to gain exposure to this area of the market. And we feel that this fund outweighs that of other active gilt funds. So, this has increased our exposure to passives and naturally brought down the OCF slightly. So that is one reason. And the other is that throughout the year, we've been able to negotiate cheaper share classes with fund managers and make these available across our platforms. This is one of the key benefits of the combination and the negotiating power that we have given our size.
We do hope that we'll be able to attract further fund discounts, which will be passed directly onto clients.
Simon Taylor: It's been noted that there's been a shift between the active and passive allocations in our MPS portfolios. The question here is, is this driven by cost pressures or an intentional active asset allocation decision?
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This is also driving up US valuations. These top ten stocks trade at a 30 times price to earnings ratio, while the rest of the market combined trades at an 18 times. To mitigate concentration and valuation risk in our portfolios. We continue to maintain diversification, focusing on gaining exposure to the quality areas of the US market that have cheaper valuations yet still relatively good earnings prospects.
Simon Taylor: The cost of MPs portfolios has significantly reduced compared to 2024. What has driven this change, and is it likely to persist?
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Simon Taylor: Thank you, Andrea, for the update on the portfolios and their performance there. I think the three main messages I've taken from your presentation were, we're definitely seeing value in the UK sovereign debt markets. The recent increase in yields provides us with a better buying opportunity and you're taking advantage of that. Our portfolios are positioned to favour US growth relative to emerging markets and diversification is key to supporting long term, stable returns. And with that, we’ll now start to move on to some of the questions, that we've received via our business development directors, from our audience.
Many clients have the MPs, assets in pensions, and they've been heavily exposed to passive investing. Where do we see the key risks in this approach?
Ronelle Hutchinson: There are two key known risks. Concentration and valuation risk in the US. The US market is significantly concentrated, with the top ten stocks making up 38% of the S&P 500.
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The main benefit of drawing on the natural income of a portfolio, rather than selling down assets to generate income, is the ability to remain invested and not be forced to sell during periods of market downturns.
An income portfolio will generally have lower volatility & drawdown relative to a total return approach over time. The focus on income serves as a buffer to market volatility and this caters for clients that are likely to have a lower risk tolerance due to their income requirement.
All information on this is available on the 2Plan microsite.
So, with that, I will pass back to Simon.
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Finally looking at our performance since inception, our portfolio returns remains strong relative to the benchmark. We continue to take a long-term approach to investing, with a focus on downside protection which helps to smooth out our returns and support long-term performance.
To highlight the point on drawdown protection, through our defensive positioning, we have managed to protect on the downside. Our use of alternative assets helped to add resilience to the portfolio and provide investors with a smoother return profile.
For those who might not be aware, earlier this year, we launched an income range for 2plan advisers. we have 3 models across different risk levels. We have cautious Income, moderately cautious income, and balanced income.
These models will follow the same strategic asset allocation that we have for our current range. The difference is that they will generate a higher income for those clients that need it.
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Our portfolios remain mainly actively managed and although we do utilise passive investments where we believe we can get access certain areas of the market for a low cost we are heavily weighted towards active funds. If we turn to performance, looking at 2024 we’ve have performed very well and have outperformed the IA Mixed Investment sector, across the majority of our range.
We’ve seen markets have been driven by equity markets and despite us taking less equity risk at the start of the year, our portfolios have still participated well in the market rally. What’s driven returns has been our US exposure as one would expect. We have also benefitted from increasing our allocation to US smaller caps earlier this year.
Although Fixed income generally as an asset class has been disappointing for investors this year, our fund selection and allocation to short duration bond funds and emerging market debt, has helped to support returns in this area.
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Over the quarter, we’ve added exposure to UK sovereign debt and reduced our corporate credit exposure. With gilt yields trending higher, we’ve seen this as a perfect opportunity to add to this allocation. We’ve also made the decision to sell out of JPM Global Macro Opportunities, this fund has provided strong diversification benefits, particularly through its net short position in US equities. As our outlook for the US economy has improved, we feel it is prudent to scale back this negatively correlated exposure. In addition, we have concerns surrounding the team structure and recent departures.
Although the magnificent seven stocks have been the largest contributors to equity markets, especially over the last year. we are seeing Trump’s administration may favour those companies outside of this group and those companies which have a larger portion of their earnings derived domestically. We therefore want to look outside of the S&P 500 and those index funds which are so heavily weighted to these 7 stocks, and we want to ensure that we have sufficient diversification within our portfolio.
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We are taking a neutral position in developed equity risk within our models, whilst being underweight emerging markets.
If we take a further look into our regional equity exposure. We continue to hold a degree of caution for emerging markets, most notably due to the economic concerns within China. The Trump administration with their threat of tariffs and a potentially stronger dollar are going to be a headwind for region. Sentiment in China also looks weak, we have therefore reduced our allocation in our lower risk models.
In the US, however, growth continues to look positive, although we have seen inflation pick up and rate cuts being pushed out, economic data remains positive, and a trump victory supports lower taxes and deregulation which helps US companies that are domestically focused. We are aware, that in certain areas of the US market, valuations remain high, and our preference has been towards the JP Morgan US Equity fund – which focuses on high quality companies at reasonable valuations.
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With that, I’ll now hand over to Andrea for her update on the managed portfolio service portfolios and their performance.
Andrea Yung: Looking at our current positioning, we continue to see value in fixed income, specifically in higher quality bonds, given credit spreads are so tight. Yields are now at highest levels that we have seen over the past 15 years and that coupled with where we are in the interest rate cycle, we are seeing opportunity here not only from being able to achieve a higher income but also that potential of capital appreciation. A large portion of our fixed income exposure is in UK sovereign debt, with gilt yields trending higher, towards the end of 2024 and beginning of this year, we saw this as an opportunity to add to our gilt weighting. Also, given where current yields are, this should also help be a form of protection if we see a recession.
Our alternatives allocation is slightly above the strategic asset allocation, due to a recent addition of a short-dated, low volatility bond funds and this should also protect us on the downside in weaker markets.
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We are neutral on UK equities and Europe. However, as additional interest rate cuts feed into the economy which could potentially boost investor confidence, we are looking for opportunities as this feeds into the economy to upweight into these regions if this materialises. We are underweight emerging markets. China’s stimulus to date has been insufficient to meaningfully support the economy and with the risks of tariffs this may be an additional headwind to emerging markets.
Thank you, Ronelle, for that review of 2024 and for the outlook for world markets in 2025.
The three main messages I have taken from your presentation were:
We remain neutral on equities going into half one.
We are now overweight US but in the quality area where valuations are cheaper, and relatively still strong earnings can be seen.
With the increased yields available on fixed income assets, we expect to see these playing a larger role in MPS portfolios going forward.
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Stronger for longer growth in the US versus the rest of the world should support a stronger US dollar and this is likely to be a headwind to the prospects in the rest of the world, specifically looking at trade with higher imported cost of goods and the impact of tighter financial conditions as capital flows to the US.
From an asset allocation and portfolio positioning going into 2025 we are neutral on global equities currently. Global growth has slowed in the last six months making us cautious going into the first half of 2025, within equities we do see better relative value in the US. However, we remain concerned about valuations and as a result we are focused on diversification and biased to the quality areas of the market where valuations are cheaper and earnings growth relatively solid.
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It is likely that this theme of US exceptionalism that we have seen for the last two years is likely to continue. So, what do I mean by this? This is where US earnings growth has been stronger than the rest of the world. We expect this to continue in 2025 underpinned by policy support with Trump likely to cut taxes and implement a wave of deregulation. On the positive side, the market does expect a recovery in earnings from Europe and the UK as lower interest rates begin to feed into the economy, but this is not without risk.
So, what are the risks? US valuations specifically are expensive with the US currently pricing in a 22 times PE ratio and this is higher than the long-term average of 15 times. Any policy or market event that could de-rail corporate earnings would cause this PE rating to de-rate, negatively impacting total returns. Europe and emerging markets look fairly valued while the UK looks outright cheap but remain at risk of disappointing on growth and earnings given the uncertain policy backdrop.
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Within equities, US equities was the star performer delivering 27% in pounds underpinned by strong performance from the magnificent seven. The UK delivered 9.5% for the year, outperforming Europe which returned 2.8%.
This chart shows how throughout 2024 market expectations for interest rates in 2025 had shifted meaningfully throughout the year. In September 2024, market expectations for interest rates for the end of 2025 had fallen to 2.75%. But by the end of December, these expectations had repriced meaningfully with the market expecting interest rates by the end of 2025 to fall to 3.9%. As you can see this has been a meaningful re-pricing in interest rates throughout the course of the year and this has been as a result of stronger US economic data, sticky inflation, and a Trump election win.
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Finally, we have an important update with regards to the rebranding of the MPS strategies. One of the key changes we’ll cover today is the move of those MPS strategies from Investec Wealth and Investment (UK) to Rathbones. This is an important development that directly impacts your clients and takes effect immediately.
Please continue to take the opportunity to pose questions via your business development directors.
I am now pleased to hand over to Ronelle Hutchison, senior investment director at Rathbones, to begin todays webinar.
Ronelle Hutchinson: Thank you Simon, 2024 was a year marked with lots of twists and turns, economically and politically but despite this volatility risk assets performed well with the MSCI All Country World up 20% in pounds. Fixed income assets however, disappointed with the UK gilt index returning -3% for the year.
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Simon Taylor: Welcome to our quarterly Managed Portfolio Service (MPS) webinar. In this session, we’ll review the key investment highlights from 2024, assess the performance of our MPS strategies, and discuss how we’re navigating important global and domestic changes.
Well, we'll cover, global market highlights. Looking at in particular, the strong performance in US equities, the impact of a stronger US dollar on global trade and emerging markets and we'll look at the challenges in European markets and also developments in China and emerging economies.
In the political space, we’ll look at the key political changes, in particular following last week’s return of Donald Trump to the White House, what this could mean for global markets. We’ll go back to Labour’s budget and its potential impact on the domestic economy and investments.
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Ronelle Hutchinson: So the benefits of the migration to Rathbones have outweighed the costs to date. First and foremost, we have greater access to a depth of resources in our research team, which has allowed us a greater opportunity set, which means we have a bigger buy list from which to build portfolios, thus providing greater flexibility. In addition, we have greater access to the specialist expertise of Greenbank, which gives us a wider perspective of both downside risks and opportunities when investing in assets. Thirdly, and most importantly, this increased scale has provided greater access to discounted share classes, and this has translated into tangible reduction in OCF’s for client portfolios.
Simon Taylor: Now some questions relating to our income portfolios. These have been live for several months now. What has been their total return and how much of this is attributed to income?
Andrea Yung: So if we look at the performance since July, the model has returned over 2.3% and that's a total return. Now if we look at the income that's it's at around 1.5, so you can see a good portion of the return is made up of income.
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Simon Taylor: And finally, a question relating to those clients seeking income from MPS portfolios, it appears that some platforms are more effective than others in distributing this.
Andrea Yung: Yes. so, I think this is a very important point. We'll see that different platforms offer different capabilities and it's important for the adviser to understand what capabilities a platform has and whether this is right for the client. So, for example, we have some platforms that pay out cash into a separate cash account and that sits outside of the model, then gets paid out to the client while other platforms pay cash back into the model.
Now in this situation, there's a risk here that income could get swept up in a rebalance before it's paid out, so it's just important to be aware of these differences. Most platforms give the adviser a range of options, and we can't always see that at our end. But we're happy to help provide advisers with the information that we've got so that they can choose the right platform for the client.
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Simon Taylor: And with that, I'd just like to thank everybody for taking part in today's session. As always, if you've got any questions that you would like to pose to us, please do write to us. Or please reach out to one of your business development directors. Thank you for joining us.
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Download the slides from the video
pdf • 2.63MB
Andrea Yung: Yep. So, we've got the resources to be able to do that deep dive into each of our portfolios and we can generate those reports on request. If advisors can reach out to their BDDs and want to request that information, we can provide that deep dive analysis on the underlying holdings. Also our equity style, positioning and the risks embedded within the portfolio.
Simon Taylor: Fabulous. Thank you very much. So to all of those advisors who tuned in, thank you again for taking your time today to listen to our quarterly webinar.
As always, if you have got any questions, please do send them into us via your business development director. We look forward to seeing you at the next quarter for an update on our managed portfolio service. Thank you and goodbye.
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Andrea Yung: Indeed. So, the TCFD stands for the Task Force of Climate Related Financial Disclosures. Essentially this aims to enhance reporting of climate related financial information, and it helps investors and advisors to understand how us as organizations think about and assess, climate related risks and opportunities.
So we've produced a summary document of the potential impact of climate change, looking at both the risks and opportunities on the assets held within each of our models. These can be found on our website.
Simon Taylor: So Andrea, we've had a number of questions from advisors who have clients who really want to get into the nitty gritty of what they're invested in. If I'm one of those advisors and I have a client who wants to understand exactly, what I'm invested in, where can I get access to that information?
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They've been operating in that space for well over 20 years. So they're, going to be integral, in producing a unique proposition for us.
Simon Taylor: So Andrea, can I just ask you to attest that all portfolios have continued to operate within their risk return corridors over the quarter?
Andrea Yung: Yes, that's right. So, all of our models have stayed within our strategic asset allocation parameters, and we monitor those, continuously to make sure that any drifted weights don't exceed those parameters.
Simon Taylor: Now we're changing the subject a little bit. The Task Force for Climate Fund Disclosure Set requirements for us to publish very specific reports with regards to managed portfolios by the end of the end of July.
I think we've done that, but over to you, Andrea, for a bit more detail around that. What we've done and why we've done it.
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Simon Taylor: Excellent. Okay, and we're expecting with the recent FCA Systematic Review on Retirement Income Advice, the demand for income funds to be increasing quite a lot as advisors start to match clients requirements with their underlying investment propositions. So hopefully advisors will find the income portfolios of use.
Just a few more questions relating to the 2plan managed portfolio service, and we talked about launching sustainable MPS portfolios again, some more regulation due to drop at the end of July with SDR. Can you provide an update, Andrea, on where we're at with providing the sustainable portfolios for 2Plan?
Andrea Yung: So, we're currently looking towards the first quarter of next year to be able to provide a unique sustainable range for 2Plan advisors. So, following the latest SDR regulations, from the FCA, we're working exclusively with Greenbank. So thanks to the combination with Rathbones, we now have the ability to work with Greenbank, who are one of the most experienced teams in the sustainable investment field.
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Andrea Yung: So on most platforms, advisors have the option on how the natural income is paid out. So they can usually pick from, a set frequency such as monthly or quarterly, and they have select payment days of when to do this. So the natural income from the models will build up and then be paid out on those select days.
Simon Taylor: Andrea, how stable do we think the income that you're projecting is on the portfolios?
Andrea Yung: So, we do expect a degree of stability for the income being paid out. So, our key focus really is to generate a yield and try and source the best areas to get that yield, but of course a lot of it will be dependent on external factors such as interest rates what the bank of England decided to do and the Fed for example , so there will be changes as we go through market cycles.
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Andrea Yung: So the actual income distribution we expect is to be around 0. 2 to 0. 3 percent lower than the figures on screen. That's because a couple of the funds in the model may be invested in accumulation share classes. This is down to availability on platform. So we aim to have all funds in income units, so that they pay out the natural income rather than it being reinvested. So we're currently working with platforms to get these income units made available. Now in terms of income after charges, there is an element here that's platform dependent and that's going to be outside of our control. That's down to whether the platform fees are deducted from the same pot that the natural income is paid into, and this varies from platform to platform.
Simon Taylor: Brilliant, and can I ask Andrea, how is the income actually paid?
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We've got a large and experienced research team behind us, carrying out the continuous due diligence on these funds, and this has been reflected in our performance. And with that, I'll pass back to Simon.
Simon Taylor: Thank you, Andrea. Thank you for that presentation. I think some of the key takeaways I took from that are: we do see value in the U.K. and we're taking advantage of opportunities there.
Despite the strong performance of passive funds, we are being mindful of the concentration risk and sector rotation. For that very reason, our portfolios are actively managed. Despite our lower equity exposure over the quarter, with risk management being key to our investment process, our portfolios have kept pace with the peer group.
So, some very strong points from your presentation there. Now turning to questions that we've received from investors over the quarter. Let me start with the income portfolios. Andrea, can I ask, what is the actual income after charges and expenses on the portfolios that you've just launched?
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Our U.S. equity allocation, as one may expect, has been the largest contributor to returns across these portfolios. And this is followed closely by our active positions in Asia and emerging markets. Now what's disappointed so far this year? It's been our exposure to both fixed income and property. These assets are sensitive to interest rates, and with higher interest rates holding, the returns have been somewhat limited.
However, we believe interest rates have peaked, and as rate cuts prevail, that's when we'll see the positive price movement in these types of assets. Our one-year performance again tells a similar story to our six-month figures. Equity markets have rallied, and despite our underway position, our portfolios have continued to participate well on the upside.
Now the key attributors to performance have really been our geographical positioning and also strong fund selection. And finally, looking at our performance since inception, our performance has been strong and we've outperformed the benchmark. That again has been supported by our regional allocation and strong fund selection.
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It's important to note the concentration risks that persist in these global and U.S. index funds. Although these stocks have been huge contributors to the market rally. We are starting to see a broadening out of market returns as inflation eases. Investors are looking to other areas of the market outside the Magnificent Seven, which appear better value.
The potential sector rotation may have an impact on these concentrated passive funds. We therefore believe it's important to have exposure to actively managed funds. So turning to performance, at the start of the year, we held a degree of caution for equity markets, giving the economic uncertainty and persistent inflation.
And as a result, our portfolios were underweight in equities. Now what's transpired over the year is actually very strong performance in equity markets, mainly driven by a select number of mega cap U.S.. companies. So even though we've had less risk embedded into our portfolios, our performance still held up well over the first half of the year.
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We've got more political stability and we're starting to see a positive turn in sentiment. It's a combination of those factors, which leads us to believe that now is the time to take advantage of these opportunities. We've also slightly reduced our position to large cap US companies. And this is on the back of very strong performance and increased concentration risk within the U.S. index. So we've made a reduction in the U.S. to our L&G U.S. Index Fund and the L&G Global Equity Index Fund, both passive funds which hold a high level of exposure to these U.S. mega cap stocks. In the U.K., we've increased our exposure through the Vanguard FTSE100 Index. This is to gain exposure to U.K. large cap companies in a cost effective way.
Within our higher risk portfolios, we've also increased our exposure to Man GLG undervalued assets. A value focused fund with over 50 percent allocated to mid and small cap companies. Higher interest rates have been a huge headwind to mid and small caps over recent years. And we believe that there's strong potential embedded within these companies as interest rates fall.
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From a regional perspective, we've got a higher allocation to the U.K., which typically has exposure to better yielding companies. And we've got a lower exposure to US and global funds where yields are not so high. So despite these differences, we're still working within the same SAA guidelines, with the same investment philosophy and the support of a highly experienced research team.
So across our models, we've maintained our asset allocation weightings over the quarter. Using moderately cautious model as an example, we've continued to hold a slight underweight position to equities while maintaining an overweight to alternatives. We have, however, made a few key changes within our equity allocation over the quarter.
So firstly, we've increased our exposure to the U.K. We've seen for a while that U.K. Markets have looked relatively cheap. However, we've been hesitant to add exposure here as the U.K. Has continued to face particular headwinds of negative sentiment and economic uncertainty. More recently, we're now seeing those economic concerns ease.
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So with all of that, I'd like to hand over to Andrea Yung to talk about how the portfolios have performed over the quarter.
Andrea Yung: So looking at income range, we've got three models across different risk levels. Cautious income, moderately cautious income and balanced income. We've ensured the portfolios are diversified across asset class, geography and equity style.
And importantly, these models will follow the same strategic asset allocation that we have for our current range. And although we remain committed to a natural income, our portfolios will still be invested in growth funds, which may pay little to no dividends. And this is because we want to ensure sufficient diversification and be able to take advantage of different opportunities that are present in the market.
Now, as we strive for a higher yield, there are a couple of key differences of our income range versus our standard two plan models. So firstly, looking from an asset allocation perspective, we have a lower allocation to alternatives, which naturally generates a lower yield. And instead, we've got a higher allocation to fixed income and equities.
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And as you can see, they are attractive yields on offer. In addition, in the unlikely event that we experience a U.S. recession or a geopolitical shock, fixed income assets can still provide stability to the portfolio. Particularly where we see the fact that in the U.S. we have stretched valuations at the index level.
Simon Taylor: Thank you, Ronelle. I'd just like to summarise your points from that session. We're clearly seeing a divergence of growth in developed markets at the moment. The U.S. is slowing, having said that, the U.K. and Europe are improving. With that, we see a strong opportunity for equities, but active management is important.
With the removal of political uncertainty in the U.K., we do think the prospects for U.K. equities are improving as well. Service inflation is continuing to hold back central banks from reducing interest rates, and with that, bonds have performed not as we would have hoped in the quarter. But we do think the prospects for bonds improves as interest rates reduce.
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Currently this is £239 per week, and it is now back pretty much to the highs that we experienced during the pandemic. This combined with a U.K. economy that is growing again after stagnating, bodes really well for U.K. equities. What we show in this chart is the quarter and quarter GDP growth, in the U.K. in recent months. As you can see, that has moved decidedly positive. Exiting the mild recession the U.K. experienced in 2023, we think the outlook for the U.K. Economy has improved. We think that earnings should recover, and this should support U.K. equities. As a result, we are up weighting U.K. equities within portfolios.
While fixed income assets have disappointed this year, we believe that the high real yields that are on offer still make this an attractive asset class. As we show in this particular chart, we show the yield on fixed income assets in the U.S. and the U.K. relative to current inflation in these particular regions.
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It's currently at 2%, which is the target level of the BOE. Nevertheless, the market remains optimistic about the outlook for interest rate cuts in the U.S. and the U.K. and what we show here is the market implied policy rates for the three major central banks, the U.S. and the U.K. there being the black and the grey line, and as you can see, the market is still discounting lower interest rates for the U.S. and the U.K. by the end of the year. In fact, the market is expecting the BOE to cut interest rates as early as August, and the Fed is anticipated to cut interest rates at the September meeting.
But regardless of the timing of interest rate cuts, the fundamentals for the U.K. consumer have improved. What we show here is the monthly ASDA income tracker. It's a comprehensive measure of the discretionary spend that is available to the U.K. household, and in this chart, as you can see, it is booming. It is up 15% year on year in May, and this is thanks to lower energy bills and higher wages.
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While inflation has moderated from the highs that we experienced in 2022, there have been bumps in the road in recent months. What we show in the charts on the left is the U.S. inflation breakdown. This disinflation trend has stalled, specifically for headline inflation in the U.S., and this is the black line in the chart. This is the inflation index that is dominated by food and energy prices, and in recent months, this has risen, despite expectations of this moderating. On the left-hand side, we have U.K. inflation data. It's been pretty much a similar story, but for different reasons. Under the hood, U.K. core services inflation specifically here has disappointed and remained sticky, buoyed by higher wages. The good news is that headline inflation in the U.K., which is the dark black line, has moved decisively lower.
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Ronelle Hutchinson: Thanks, Simon. Equities have continued their rally in the second quarter of the year. The S&P500 is up 4%. The FTSE100 is up 3.4% over the quarter, and Europe is up 0.9%. Japanese equities, however, has struggled. Delivering negative returns weighed down by currency depreciation. Bonds have also disappointed, delivering negative returns pretty much across the board due to the fact that the much anticipated interest rate cuts by the Fed and the BOE have been delayed due to sticky services inflation. Over the quarter, we experienced a divergence in growth in developed markets. Economic data in recent months from the U.S. has begun to disappoint. What we're showing in this chart is the city economic surprise index for the U.S., the U.K. and Europe. The black line is the U.S. and as you can see, this chart is in negative territory, indicating a slowdown in the U.S. in the months ahead, while the lighter charts, the blue and the grey are for the U.K. and Europe. As you can see, this is in positive territory, confirming a recovery in these regions.
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Simon Taylor: Hello, good day and welcome. My name is Simon Taylor, Head of Strategic Partnerships here at Investec Wealth & Investment, part of the Rathbones Group. It's my pleasure to welcome you to this quarter's webinar on our Managed Portfolio Service. As ever, I'm joined by Andrea Yung and Ronelle Hutchinson, Investment Directors.
This has been another eventful quarter. Both from a market perspective and also from a macroeconomic perspective. We've seen election outcomes in Indonesia, Turkey, Spain, and then more recently in the U.K. and France. The global economy has shown signs of moderate growth, most notably in the U.S. And China, despite concerns over inflation and geopolitical tensions.
We've seen major stock markets showing reasonable returns, with the U.S. and U.K, leading amongst that group. We've seen some notable corporate, announcements over the quarter, most notably NVIDIA. So, to look at the quarter and the macroeconomic environment, I'm pleased to hand over to Ronelle Hutchinson.
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Download the slides from the video
pdf • 2.63MB
Andrea Yung: Yep. So, we've got the resources to be able to do that deep dive into each of our portfolios and we can generate those reports on request. If advisors can reach out to their BDDs and want to request that information, we can provide that deep dive analysis on the underlying holdings. Also our equity style, positioning and the risks embedded within the portfolio.
Simon Taylor: Fabulous. Thank you very much. So to all of those advisors who tuned in, thank you again for taking your time today to listen to our quarterly webinar.
As always, if you have got any questions, please do send them into us via your business development director. We look forward to seeing you at the next quarter for an update on our managed portfolio service. Thank you and goodbye.
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Andrea Yung: Indeed. So, the TCFD stands for the Task Force of Climate Related Financial Disclosures. Essentially this aims to enhance reporting of climate related financial information, and it helps investors and advisors to understand how us as organizations think about and assess, climate related risks and opportunities.
So we've produced a summary document of the potential impact of climate change, looking at both the risks and opportunities on the assets held within each of our models. These can be found on our website.
Simon Taylor: So Andrea, we've had a number of questions from advisors who have clients who really want to get into the nitty gritty of what they're invested in. If I'm one of those advisors and I have a client who wants to understand exactly, what I'm invested in, where can I get access to that information?
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They've been operating in that space for well over 20 years. So they're, going to be integral, in producing a unique proposition for us.
Simon Taylor: So Andrea, can I just ask you to attest that all portfolios have continued to operate within their risk return corridors over the quarter?
Andrea Yung: Yes, that's right. So, all of our models have stayed within our strategic asset allocation parameters, and we monitor those, continuously to make sure that any drifted weights don't exceed those parameters.
Simon Taylor: Now we're changing the subject a little bit. The Task Force for Climate Fund Disclosure Set requirements for us to publish very specific reports with regards to managed portfolios by the end of the end of July.
I think we've done that, but over to you, Andrea, for a bit more detail around that. What we've done and why we've done it.
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Simon Taylor: Excellent. Okay, and we're expecting with the recent FCA Systematic Review on Retirement Income Advice, the demand for income funds to be increasing quite a lot as advisors start to match clients requirements with their underlying investment propositions. So hopefully advisors will find the income portfolios of use.
Just a few more questions relating to the 2plan managed portfolio service, and we talked about launching sustainable MPS portfolios again, some more regulation due to drop at the end of July with SDR. Can you provide an update, Andrea, on where we're at with providing the sustainable portfolios for 2Plan?
Andrea Yung: So, we're currently looking towards the first quarter of next year to be able to provide a unique sustainable range for 2Plan advisors. So, following the latest SDR regulations, from the FCA, we're working exclusively with Greenbank. So thanks to the combination with Rathbones, we now have the ability to work with Greenbank, who are one of the most experienced teams in the sustainable investment field.
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Andrea Yung: So on most platforms, advisors have the option on how the natural income is paid out. So they can usually pick from, a set frequency such as monthly or quarterly, and they have select payment days of when to do this. So the natural income from the models will build up and then be paid out on those select days.
Simon Taylor: Andrea, how stable do we think the income that you're projecting is on the portfolios?
Andrea Yung: So, we do expect a degree of stability for the income being paid out. So, our key focus really is to generate a yield and try and source the best areas to get that yield, but of course a lot of it will be dependent on external factors such as interest rates what the bank of England decided to do and the Fed for example , so there will be changes as we go through market cycles.
Page 14 of
Andrea Yung: So the actual income distribution we expect is to be around 0. 2 to 0. 3 percent lower than the figures on screen. That's because a couple of the funds in the model may be invested in accumulation share classes. This is down to availability on platform. So we aim to have all funds in income units, so that they pay out the natural income rather than it being reinvested. So we're currently working with platforms to get these income units made available. Now in terms of income after charges, there is an element here that's platform dependent and that's going to be outside of our control. That's down to whether the platform fees are deducted from the same pot that the natural income is paid into, and this varies from platform to platform.
Simon Taylor: Brilliant, and can I ask Andrea, how is the income actually paid?
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We've got a large and experienced research team behind us, carrying out the continuous due diligence on these funds, and this has been reflected in our performance. And with that, I'll pass back to Simon.
Simon Taylor: Thank you, Andrea. Thank you for that presentation. I think some of the key takeaways I took from that are: we do see value in the U.K. and we're taking advantage of opportunities there.
Despite the strong performance of passive funds, we are being mindful of the concentration risk and sector rotation. For that very reason, our portfolios are actively managed. Despite our lower equity exposure over the quarter, with risk management being key to our investment process, our portfolios have kept pace with the peer group.
So, some very strong points from your presentation there. Now turning to questions that we've received from investors over the quarter. Let me start with the income portfolios. Andrea, can I ask, what is the actual income after charges and expenses on the portfolios that you've just launched?
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Our U.S. equity allocation, as one may expect, has been the largest contributor to returns across these portfolios. And this is followed closely by our active positions in Asia and emerging markets. Now what's disappointed so far this year? It's been our exposure to both fixed income and property. These assets are sensitive to interest rates, and with higher interest rates holding, the returns have been somewhat limited.
However, we believe interest rates have peaked, and as rate cuts prevail, that's when we'll see the positive price movement in these types of assets. Our one-year performance again tells a similar story to our six-month figures. Equity markets have rallied, and despite our underway position, our portfolios have continued to participate well on the upside.
Now the key attributors to performance have really been our geographical positioning and also strong fund selection. And finally, looking at our performance since inception, our performance has been strong and we've outperformed the benchmark. That again has been supported by our regional allocation and strong fund selection.
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It's important to note the concentration risks that persist in these global and U.S. index funds. Although these stocks have been huge contributors to the market rally. We are starting to see a broadening out of market returns as inflation eases. Investors are looking to other areas of the market outside the Magnificent Seven, which appear better value.
The potential sector rotation may have an impact on these concentrated passive funds. We therefore believe it's important to have exposure to actively managed funds. So turning to performance, at the start of the year, we held a degree of caution for equity markets, giving the economic uncertainty and persistent inflation.
And as a result, our portfolios were underweight in equities. Now what's transpired over the year is actually very strong performance in equity markets, mainly driven by a select number of mega cap U.S.. companies. So even though we've had less risk embedded into our portfolios, our performance still held up well over the first half of the year.
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We've got more political stability and we're starting to see a positive turn in sentiment. It's a combination of those factors, which leads us to believe that now is the time to take advantage of these opportunities. We've also slightly reduced our position to large cap US companies. And this is on the back of very strong performance and increased concentration risk within the U.S. index. So we've made a reduction in the U.S. to our L&G U.S. Index Fund and the L&G Global Equity Index Fund, both passive funds which hold a high level of exposure to these U.S. mega cap stocks. In the U.K., we've increased our exposure through the Vanguard FTSE100 Index. This is to gain exposure to U.K. large cap companies in a cost effective way.
Within our higher risk portfolios, we've also increased our exposure to Man GLG undervalued assets. A value focused fund with over 50 percent allocated to mid and small cap companies. Higher interest rates have been a huge headwind to mid and small caps over recent years. And we believe that there's strong potential embedded within these companies as interest rates fall.
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From a regional perspective, we've got a higher allocation to the U.K., which typically has exposure to better yielding companies. And we've got a lower exposure to US and global funds where yields are not so high. So despite these differences, we're still working within the same SAA guidelines, with the same investment philosophy and the support of a highly experienced research team.
So across our models, we've maintained our asset allocation weightings over the quarter. Using moderately cautious model as an example, we've continued to hold a slight underweight position to equities while maintaining an overweight to alternatives. We have, however, made a few key changes within our equity allocation over the quarter.
So firstly, we've increased our exposure to the U.K. We've seen for a while that U.K. Markets have looked relatively cheap. However, we've been hesitant to add exposure here as the U.K. Has continued to face particular headwinds of negative sentiment and economic uncertainty. More recently, we're now seeing those economic concerns ease.
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So with all of that, I'd like to hand over to Andrea Yung to talk about how the portfolios have performed over the quarter.
Andrea Yung: So looking at income range, we've got three models across different risk levels. Cautious income, moderately cautious income and balanced income. We've ensured the portfolios are diversified across asset class, geography and equity style.
And importantly, these models will follow the same strategic asset allocation that we have for our current range. And although we remain committed to a natural income, our portfolios will still be invested in growth funds, which may pay little to no dividends. And this is because we want to ensure sufficient diversification and be able to take advantage of different opportunities that are present in the market.
Now, as we strive for a higher yield, there are a couple of key differences of our income range versus our standard two plan models. So firstly, looking from an asset allocation perspective, we have a lower allocation to alternatives, which naturally generates a lower yield. And instead, we've got a higher allocation to fixed income and equities.
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And as you can see, they are attractive yields on offer. In addition, in the unlikely event that we experience a U.S. recession or a geopolitical shock, fixed income assets can still provide stability to the portfolio. Particularly where we see the fact that in the U.S. we have stretched valuations at the index level.
Simon Taylor: Thank you, Ronelle. I'd just like to summarise your points from that session. We're clearly seeing a divergence of growth in developed markets at the moment. The U.S. is slowing, having said that, the U.K. and Europe are improving. With that, we see a strong opportunity for equities, but active management is important.
With the removal of political uncertainty in the U.K., we do think the prospects for U.K. equities are improving as well. Service inflation is continuing to hold back central banks from reducing interest rates, and with that, bonds have performed not as we would have hoped in the quarter. But we do think the prospects for bonds improves as interest rates reduce.
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Currently this is £239 per week, and it is now back pretty much to the highs that we experienced during the pandemic. This combined with a U.K. economy that is growing again after stagnating, bodes really well for U.K. equities. What we show in this chart is the quarter and quarter GDP growth, in the U.K. in recent months. As you can see, that has moved decidedly positive. Exiting the mild recession the U.K. experienced in 2023, we think the outlook for the U.K. Economy has improved. We think that earnings should recover, and this should support U.K. equities. As a result, we are up weighting U.K. equities within portfolios.
While fixed income assets have disappointed this year, we believe that the high real yields that are on offer still make this an attractive asset class. As we show in this particular chart, we show the yield on fixed income assets in the U.S. and the U.K. relative to current inflation in these particular regions.
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It's currently at 2%, which is the target level of the BOE. Nevertheless, the market remains optimistic about the outlook for interest rate cuts in the U.S. and the U.K. and what we show here is the market implied policy rates for the three major central banks, the U.S. and the U.K. there being the black and the grey line, and as you can see, the market is still discounting lower interest rates for the U.S. and the U.K. by the end of the year. In fact, the market is expecting the BOE to cut interest rates as early as August, and the Fed is anticipated to cut interest rates at the September meeting.
But regardless of the timing of interest rate cuts, the fundamentals for the U.K. consumer have improved. What we show here is the monthly ASDA income tracker. It's a comprehensive measure of the discretionary spend that is available to the U.K. household, and in this chart, as you can see, it is booming. It is up 15% year on year in May, and this is thanks to lower energy bills and higher wages.
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While inflation has moderated from the highs that we experienced in 2022, there have been bumps in the road in recent months. What we show in the charts on the left is the U.S. inflation breakdown. This disinflation trend has stalled, specifically for headline inflation in the U.S., and this is the black line in the chart. This is the inflation index that is dominated by food and energy prices, and in recent months, this has risen, despite expectations of this moderating. On the left-hand side, we have U.K. inflation data. It's been pretty much a similar story, but for different reasons. Under the hood, U.K. core services inflation specifically here has disappointed and remained sticky, buoyed by higher wages. The good news is that headline inflation in the U.K., which is the dark black line, has moved decisively lower.
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Ronelle Hutchinson: Thanks, Simon. Equities have continued their rally in the second quarter of the year. The S&P500 is up 4%. The FTSE100 is up 3.4% over the quarter, and Europe is up 0.9%. Japanese equities, however, has struggled. Delivering negative returns weighed down by currency depreciation. Bonds have also disappointed, delivering negative returns pretty much across the board due to the fact that the much anticipated interest rate cuts by the Fed and the BOE have been delayed due to sticky services inflation. Over the quarter, we experienced a divergence in growth in developed markets. Economic data in recent months from the U.S. has begun to disappoint. What we're showing in this chart is the city economic surprise index for the U.S., the U.K. and Europe. The black line is the U.S. and as you can see, this chart is in negative territory, indicating a slowdown in the U.S. in the months ahead, while the lighter charts, the blue and the grey are for the U.K. and Europe. As you can see, this is in positive territory, confirming a recovery in these regions.
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Simon Taylor: Hello, good day and welcome. My name is Simon Taylor, Head of Strategic Partnerships here at Investec Wealth & Investment, part of the Rathbones Group. It's my pleasure to welcome you to this quarter's webinar on our Managed Portfolio Service. As ever, I'm joined by Andrea Yung and Ronelle Hutchinson, Investment Directors.
This has been another eventful quarter. Both from a market perspective and also from a macroeconomic perspective. We've seen election outcomes in Indonesia, Turkey, Spain, and then more recently in the U.K. and France. The global economy has shown signs of moderate growth, most notably in the U.S. And China, despite concerns over inflation and geopolitical tensions.
We've seen major stock markets showing reasonable returns, with the U.S. and U.K, leading amongst that group. We've seen some notable corporate, announcements over the quarter, most notably NVIDIA. So, to look at the quarter and the macroeconomic environment, I'm pleased to hand over to Ronelle Hutchinson.
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Simon Taylor: Looking ahead to 2025. Where do we see the key investment risks and opportunities for our MPs portfolios?
Andrea Yung: So a key factor for equity investors next year will be the health of the US economy. We may see increased volatility in markets, and we have to consider that there is greater uncertainty in a Trump presidency and the potential impact of trade tariffs across the world. Inflationary pressures and interest rate expectations will also continue to impact markets. And although we've seen expectations of cuts being pushed back relative to the start of 2024, reductions are still priced into markets. So markets could react negatively if higher inflation persists. So the key is to remain diversified. We have elements of the portfolio which we believe will be resilient in periods of market weakness. Our exposure to gilts should support portfolios and our defensive funds within our alternative allocation should also help. Within regions we are diversified. We don't have a full US weighting in the mega cap funds, for example. We're taking a broader view and we're looking at quality companies.
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Simon Taylor: Now an important question here relating to, the migration to the Rathbones brand. To start with, I just want to make a few points from a business development support perspective. We have increased the amount of resource available to advisers in the managed portfolio service space. You'll see an increased and improved, microsite from us and you'll also note that we've put more business development directors on around the UK to support advisers. So please do make use, of the increased resource.
From an investment managers perspective. A question here has been how has the migration to Rathbone has impacted decision making? Has it improved or restricted flexibility?
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Ronelle Hutchinson: So the benefits of the migration to Rathbones have outweighed the costs to date. First and foremost, we have greater access to a depth of resources in our research team, which has allowed us a greater opportunity set, which means we have a bigger buy list from which to build portfolios, thus providing greater flexibility. In addition, we have greater access to the specialist expertise of Greenbank, which gives us a wider perspective of both downside risks and opportunities when investing in assets. Thirdly, and most importantly, this increased scale has provided greater access to discounted share classes, and this has translated into tangible reduction in OCF’s for client portfolios.
Simon Taylor: Now some questions relating to our income portfolios. These have been live for several months now. What has been their total return and how much of this is attributed to income?
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Andrea Yung: So if we look at the performance since July, the model has returned over 2.3% and that's a total return. Now if we look at the income that's it's at around 1.5, so you can see a good portion of the return is made up of income.
Simon Taylor: And finally, a question relating to those clients seeking income from MPS portfolios, it appears that some platforms are more effective than others in distributing this.
Andrea Yung: Yes. so, I think this is a very important point. We'll see that different platforms offer different capabilities and it's important for the adviser to understand what capabilities a platform has and whether this is right for the client. So, for example, we have some platforms that pay out cash into a separate cash account and that sits outside of the model, then gets paid out to the client while other platforms pay cash back into the model.
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Simon Taylor: That’s all the questions we’ve had from our audience, thank you ladies for your participation in todays webinar. Thank you for the questions you’ve asked, for investing in the portfolios and if you’re interested in learning more about them, please reach out to your business development director or indeed if you have any questions you’d like to ask the team next quarter, please do reach out to us.
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Andrea Yung: When you’re investing in overseas markets, unless your exposure is fully currency hedged, you’re always going to have that potential risk in portfolios. That is something that we factor in when we’re looking at asset allocation and regional positioning. That’s been a consideration within the portfolio positioning. Yes, there will be risk there but having that exposure and diversification to different regions and the benefits of that outweighs the currency risk.
Simon Taylor: What’s the best advice you’d give someone feeling unsure about staying invested right now?
Ronelle Hutchinson: The key point would be not to panic, to stay invested and be reminded of the longer-term perspective, markets are volatile by nature, intra year declines are actually quite common, we’ve been through covid, the onset of the Ukraine war but if you invest in good quality assets that have good starting yields this over time can compound and deliver good returns for clients. As always we recommend clients stay invested.
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Simon Taylor: If we do get another market drawdown, is there anything in the portfolios to help mitigate these big potential losses?
Andrea Yung: Within the portfolios we’ve also got exposure to fixed income assets and our alternatives so that sits outside of that equity bucket. So, within our fixed income allocation we’ve got more exposure to higher quality credit and government bonds. Given where yields are they should provide a degree of protection if we do see a recession come to fruition. Also, as we mentioned in the alternatives bucket, we’ve got exposure to low volatility funds which should help provide a degree of defensiveness.
Simon Taylor: Will the change in the value of the pound or any other currency affect portfolio returns?
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Andrea Yung: The risk management element is embedded into the portfolio, so we tend to have a higher degree of exposure to alternative assets and that’s also relative to other MPS providers. So, within that segment of the portfolio, we’ve adjusted our exposure, so our alternative assets are exposed to absolute return strategies, and they have a low volatility. That exposure helps to ride out the volatility we’ve seen in markets so far this year.
Would I be better off moving to cash until things settle down?
Ronelle Hutchinson: The danger of moving into cash at the moment is that you will crystallise these losses and avoid the potential of participating in any recovery in markets. Just to give you an example, last week Tuesday alone markets were up 9%. This upside volatility is equally common, as always, we encourage investors to stay invested. This volatility is not just on the downside it’s also on the upside so allow markets the opportunity to recover and compound good long-term returns.
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Simon Taylor: Will portfolios and markets impact my retirement plans and how should we think about that?
Ronelle Hutchinson: There are two types of investors investing for retirement. There are investors still in the accumulation phase and it’s easier to stay invested and to exploit pound cost averaging in this environment. For clients in the decumulation phase, at this stage their portfolios would be skewed to income generating assets and these are assets that exhibit lower volatility and the natural yield in the portfolio will mitigate drawdown over this period. So, naturally for decumulation the portfolio is more risk averse and more focused on capital preservation.
Simon Taylor: Have you done anything to make the portfolios a bit more cautious, given everything that’s happening?
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Simon Taylor: Would you say portfolios and investments are more actively managed now, or are you mostly leaving it to track the market?
Andrea Yung: With our portfolios they’ll always be mainly actively managed and with the recent changes that we’ve made to the US we’ve moved out of the US index funds into more actively managed, so we have seen that tilt and that has provided us with being better positioned going into 2025.
Simon Taylor: What should I be telling my family and friends who are nervous about investing right now?
Ronelle Hutchinson: We will always encourage investors to maintain a long-term perspective. We know that short-term volatility in markets and intra year declines are quite common, yet markets can still go on to deliver good long-term returns. I think investors need to remember that falling prices allow us to buy cheaper quality assets. The portfolio is not sitting static, we are actively managing the portfolio, identifying opportunities which can deliver future returns and repositioning the portfolio in this environment. So, for investors we encourage them to remain invested over this period.
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Simon Taylor: Should I be worried about how all this political and economic uncertainty might affect investors?
Ronelle Hutchinson: We will always encourage investors to keep a long-term perspective. We know that this short-term volatility in markets do occur, but it also provides opportunities to buy good quality assets at cheaper prices and this will better position the portfolio to deliver long-term returns.
Simon Taylor: Have you made any changes to portfolios because of the recent market ups and downs?
Andrea Yung: So, the main thing that we’ve been doing in portfolios, which we started at the end of last year, we reduced our exposure to US index funds and that exposure to the mega cap stocks which were very expensive on high valuations, and we’ve transitioned to more actively managed funds with a quality focus that are more reasonable valuations. In the fixed income space, we’ve increased our exposure to higher quality credit and government bonds, and we think this should provide more resilience if we do see a recession coming through.
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In terms of current positioning, we have made similar changes to our 2plan income range that we have for our Core range. Looking at our equity positioning, we are holding an underweight position to the US and overweight to Europe and Japan that’s in line with our house view.
These models, with their income focus, have actually already been well positioned for this type of volatile environment and the natural income has served as a buffer to this market volatility.
The full breakdown of our model changes over the last quarter is available on our microsite.
And with that, I will pass back to Simon.
Simon Taylor: Thank you, Ronelle for your review of quarter one and to Andrea for your update on the MPS portfolios and how they have performed over the quarter.
I’d now like to move on to some of the questions that both our advisers and our clients have posed to us:
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However, if we take a slightly longer-term view, looking at performance since inception, our portfolios outperformed the IA benchmarks across the full range. We maintain a long-term approach, prioritizing downside protection, stabilizing returns and supporting that performance over the long-term.
Finally, focusing on our Income range. Which, as a reminder, is designed for those clients who are seeking an income from their investments. These models will follow the same strategic asset allocations that we have for our current range; however, they generate a higher income, so clients aren’t having to sell down as much of their portfolio.
The recent market movements, that we have seen over the last few months, serves as a reminder as to why it’s so important for income seeking clients to be able to receive a natural income from their portfolio, and not be forced to sell down some of their assets after the market has sold off.
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Turning to performance, we know that it has been a volatile period for markets so far this year. As Ronelle mentioned, there have been large disparities in terms of performance across different regions.
Bond markets held up relatively well over the quarter, especially short, dated bonds as investors sought refuge in high-quality assets like government bonds and this is why our lower risk models, which have a greater allocation to bonds have held up better relative to the higher risk models.
However, what is reassuring is we have been able to provide a slightly higher degree of protection on the downside in these higher risk models, relative to the IA benchmark.
If we look at performance over the past year to the end March, although we have seen positive returns, we know that gains in stock markets were driven mainly by a handful of US mega-cap tech stocks in 2024 and that has proven difficult for us and other active managers to be able to participate fully in that upside.
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We believe now, it is important to have an actively managed portfolio. That gives fund managers the ability to adjust positioning in light of these economic and geopolitical changes and also gives us the ability to manage portfolio risk and volatility effectively. What 2025 has proven so far, is that being overly exposed to these passive, market weighted funds, has led to bigger drawdowns and increased volatility. In our portfolios, we still have a degree of passive funds but that is to cost effectively gain access to certain areas of the market and the majority of our funds are in active funds so this ensures our portfolios remain well diversified, we’re are able to take advantage of market inefficiencies and helps to provide that smoother return profile for clients.
An important point to highlight is that we have been able to reduce our costs over the year. So, on the back of the Rathbones combination, we’ve been able to negotiate cheaper share classes with fund managers and we’ve been able to make these available across the different platforms and this is one of the key benefits of the combination, it’s the negotiating power we have given our size.
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So, when looking at out relative positioning against the SAA, we hold a slight underweight in US and we’ve increased our European exposure resulting in a small overweight.
If we drill deeper into our equity positioning, as you may recall, last year we cited our concerns around the growing vulnerabilities of the magnificent-7 stocks and we know these have driven the majority of returns in equity markets. In 2025 so far, we’ve seen that there has been a reverse with a rotation out of these stocks. Our repositioning towards quality and value names has supported performance in the most recent market downturn.
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We have also tilted our portfolio away from growth, towards more quality assets. We started repositioning our portfolios towards the end of last year, specifically in the US, we did this by reducing our allocation to index funds in favour of quality companies on more reasonable valuations and we have continued to do this in recent months. This has led to us being better positioned to navigate through the turbulence that we’ve seen so far this year.
As we anticipate that volatility may continue in markets, we’re keeping an overweight position to alternatives assets, this aims to provide a degree of protection during market weakness. In this space we are focusing on absolute return funds, which exhibit low volatility, have a strong focus on risk management, and have actually provided resilience for us in the face of weaker equity markets.
We’re also maintaining our exposure to UK gilts and government bonds, which we believe will act as an attractive hedge against equity type risk if investors start seeking that flight to safety.
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With that I’d like to hand over to Andrea who will take you through the specific portfolio actions that we have implemented in the MPS portfolios.
Andrea Yung: So, looking at the key changes that we have made over the quarter. Firstly, we have adjusted our regional equity positioning by adopting a more global approach and this is keeping in-line with the latest 2plan SAA. We have specifically improved our outlook for European equities, and we’ve added to the region in our latest rebalance. This has been motivated by the changes we have seen in European fiscal policy and the support for defence spending. This dramatic shift in approach suggests the outlook for European growth over the next few years has improved. These changes alongside relative momentum and valuations, creates a more favourable outlook towards European equities.
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Tariff revenue from China & Europe in dollars will be quite substantial as you can see in the blue bars, close to $250bn for China alone. But relative to the size of these economies, the blue dots, tariffs will be much more moderate. It is likely that smaller countries like Vietnam and Thailand where trade with the US is a bigger percentage of the economy, that will feel the biggest impact.
So, amidst this market volatility, how have we repositioned the portfolios? Firstly, we have moved to mitigate risk in the portfolio, reducing our US exposure marginally as Trump’s trade policy will weigh on growth and earnings. We have added to alternatives to limit portfolio volatility & drawdown risk. Whilst we have increased exposure to European equities to take advantage of the improved outlook driven by increased fiscal spending.
Corrections are now a normal part of investing in equities, as you can see from this chart, intra year declines in markets are quite common but markets can rebound quite strongly as they have done in more recent days where there is some upside volatility. As a result, we encourage investors to keep a long-term perspective.
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Over the quarter, the Trump administration has announced a series of tariffs ranging from 10 – 50% on countries that have large trade deficits with the US. A universal 10% tariffs have been levied on all other countries and a further 25% tariff on steel & auto imports was also announced. While a number of these tariffs are now currently paused, if fully implemented this would effectively bringing the US tariff rate close to 25%, levels we have not seen this century.
Volatility in markets have spiked – with the VIX index shown in this chart rising to levels last seen during Covid as markets have priced in maximum uncertainty and the risk of stagflation.
To date, Trump’s policy remains fluid with tariffs paused for a number of countries that have not retaliated. However, it seems that Chinese tariffs will move ahead. But if we take a step back and ask what will be the likely impact of these tariffs if we assume no change?
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We’ve seen China responding with higher tariffs, escalating trade tensions and we’ve seen the European Central Bank signalling a rate cut which is likely in the coming weeks to support growth.
We’ll also cover the rebranding of our MPS strategies and what that means for you and your clients, as well as share some key messages you can pass on to investors—helping them stay confident and focused in what continues to be a volatile environment.
Thank you for joining us and let’s get started.
Ronelle Hutchinson: Over the quarter, markets have been left reeling from the impact of Trump’s tariff policy. The S&P 500 is down 7% bearing the full brunt of the impact. But outside of the US, equity markets have fared better with Chinese equities up 11% as investors react positively to Deepseek, China’s AI model. European equities have rallied 7% buoyed by a seismic shift in fiscal policy to increase defence spending that is expected to boost growth. UK equities are up 4.5% for the quarter and gold prices have surged to an all-time high as investors have fled to safe haven assets.
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Simon Taylor: Hello, good day and welcome to the first MPS quarterly webinar of 2025. Today, we’ll review how our MPS strategies have performed over the last quarter and explore some of the key market events that shaped them.
Some of the highlights we’ll cover include:
The volatile start to the year, triggered by President Trump’s return and sweeping new tariffs, which pushed global markets lower and sent the S&P 500 into bear market territory.
We’ll look at the flight to safety, with increased demand for bonds and gold amid all this uncertainty.
We’ll look at some of the currency fluctuations, particularly a strengthening US dollar and its impact on emerging markets.
In just the last week markets have rebounded sharply after a 90-day pause on US tariffs was announced, with the S&P 500 surging 9.5% in one of its strongest rallies since the Second World War.
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Simon Taylor: Andrea, many of our 2Plan advisers will be aware of the merger between Investec and Rathbones and I’m delighted to say that it has now fully completed, what kind of enhancements can both advisers and consumers can expect as a result of the merger of these two businesses. How is that going to play through to portfolios?
Andrea Yung: What we’ve tried to do is bring the best of both businesses together for the MPS solution, what we’ve found with MPS is that we have an enhanced research capability now we’ve got a stronger research team. We’ve delved deeper into the risk management framework, focusing not just on asset allocation but also truly understanding how these different asset classes and individual funds perform so we’ve enhanced that side of it. From a more practical level, we’ve been able to negotiate cheaper share classes with fund managers and we’ve been able to pass on those cost reductions to pass directly on to clients.
Simon Taylor: So, we’re starting to use that increased buying power that we’ve got on the back of being a £100bn assets under management business now?
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Simon Taylor: So, in this environment we think it’s right to be active, rather than passive?
Andrea Yung: 100%, you’ve got that difficulty being able to manage concentration risk and also manage volatility in these types of index passive funds.
Simon Taylor: Ronelle, another one for you here. Given the improving outlook for inflation and the potential interest rates that you talked about previously, where do you see the most compelling opportunities for growth in the second half of this year?
Ronelle Hutchinson: We think Europe remains one of the most compelling risk-reward opportunity sets for the second half of the year. The fiscal spending, the lower interest rates, the undemanding valuations, altogether point to a more positive outlook for Europe and hence we’re overweight this region in our equity allocation.
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Simon Taylor: So, we do expect interest rates to come down?
Ronelle Hutchinson: That’s correct, yes.
Simon Taylor: We have a question here that relates to US tech stocks, they have performed really well recently, the adviser here is concerned with concentration risk in portfolios, is this something that you’re worried about?
Andrea Yung: This is something that we have held a degree of caution around for quite some time, just around global index funds and US index funds. This is not only from a concentration risk with individual companies but it’s also looking at that concentration risk in particular the sectors as well, because you’re seeing that these mega cap stocks are actually performing with a degree of correlation with each other, it’s that risk centred around volatility and we’ve seen it at the start of the year, when we’ve seen volatility in markets, even in April and we’ve seen that sharp sell off. We’ve reduced our exposure to US passives at the beginning of the year and what we’ve done is we’ve reinvested into actively managed strategies which we believe will offer stronger volatility and drawdown protection and we’ve seen that play out when we’ve seen the market movements.
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Ronelle Hutchinson: We have to understand what’s already priced into markets with regards to interest rate expectations, when we look at the US, these interest rate cuts are already fully priced into the markets and hence we think risks remain for the positive expectations that markets already have on the US, not just in terms of interest rates but also in terms of earnings. So as a result, we think these risks remain. When we move to the UK, we think lower interest rates are needed, we know there are several headwinds to the UK economy, so we think that UK interest rates are key to stimulating growth, to off-setting the debt burden in the UK and so we think that this is a like a necessary requirement in the UK to stimulate the economy and sustain the earnings profile. As a result, we are neutral on UK equities. The biggest impact for lower interest rates is likely to be Europe because even though markets are expecting lower interest rates, the domestic consumer hasn’t fully taken up the lower interest rates that will already prevail in the market and the demand really hasn’t fully recovered, given the issues that Europe has experienced and so we think lower interest rates are likely to have a better impact in Europe and this combined with the additional fiscal spending that is anticipated is likely to lead to a better outcome for Europe.
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Simon Taylor: Andrea, we’ve got a question here relating to the ARC indices, I believe the ARC indices were launched in May of this year, specific to the MPS environment, how have the 2Plan portfolios performed over them?
Andrea Yung: The new ARC indices for MPS have been designed specifically for these types of MPS solutions, so they should really be catered for more of the framework for MPS. So, what we’ve found with our 2Plan strategies, we have outperformed across that full range since inception. ARC have looked at 750 different MPS solutions, they’ve spoken to 60 different investment providers, so it really does capture that MPS market.
Simon Taylor: So, the 2Plan portfolios have performed very well against the ARC indices then?
Andrea Yung: They have, and that is across the full range.
Simon Taylor: Ronelle, we’ve got a question here relating to interest rate cuts, particularly from the bank of England and the FED, how are we positioning portfolios ahead of those potential cuts?
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Simon Taylor: So, does that mean there are slightly more UK equities in the income portfolio relative to the growth portfolio?
Ronelle Hutchinson: That’s a good point because when you look at the 2plan core range vs, the 2Plan income range, particularly in a year like 2025 where UK equities have performed better, the income strategies have a higher UK equity exposure and we’re seeing this in a better return profile for these strategies in this particular year.
Simon Taylor: We also have a question here relating to regional diversification in the portfolio so Ronelle, how are we ensuring regional diversification for the 2Plan portfolios?
Ronelle Hutchinson: Since the start of this year, we have seen significant differences in the performance of regional equities like, Europe, China, and the UK vs. Europe. Our asset allocation team had judged that from a risk-reward perspective regional equities are better positioned vs. the US. As a result, we’re overweight Europe for example and Japan as well. We’re neutral on UK equities and we’re slightly underweight the US, taking into account the risk return profile and the better price momentum as well as the better valuations we’re seeing in regional equities.
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Ronelle Hutchinson: The important way to look at this is to understand how we design the portfolios differently. For example, in the balanced income portfolio vs. a typical balanced portfolio we’re more focused on looking at income generating assets. So within fixed income and equities we’re more focused on the yield of these assets, and to give you an example, within fixed income we know that corporate credit and higher yield bonds offer better yields. So, within the fixed income we’re looking to skew the portfolio to these types of assets, obviously providing the risk- reward is favourable. Within equities we’re focused on markets that offer better dividend yields. Well, what does this mean? For example, if you look at the UK and Europe, these equity markets typically offer higher dividend yields vs. the US which typically offers a yield of about 1.5%. So, within the design we’re focused on yield generating assets. We’re also focused on the stability of the returns. What do we mean by this? For example, within equities, quality equities tend to exhibit lower volatility vs. value and growth equity styles, so within the equity we’re also going to be focused on quality. So, the key thing to understand is that within an income portfolio we’re clearly focused on yield and the stability of the return profile from the assets in the portfolio.
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That is the key to understanding how we position ourselves relative to other competitors. We do tend to have a higher allocation to alternatives, especially when we see heightened risk in markets. So broadly speaking our portfolios might not participate fully if we see a strong rally in markets but we do tend to offer a smoother return profile and our focus is on risk management. So, if we do see a sharp pullback in markets or a prolonged downturn, we will tend to add a bit more protection.
Simon Taylor: Ronelle, thank you very much for that oversight on the macro environment and Andrea for the overview on portfolios. We’ve had a number of questions from our 2Plan advisers, if you don’t mind, I’d like to throw these out to you and see where we go from there.
So, the first question, we’ve launched some income portfolios recently for 2Plan advisers to use. This gives them a choice as to whether they use the balanced portfolio in cash units to provide income or whether they use the income strategy and take some natural income off that, so what’s your view on the best way they should be thinking about this going forwards?
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So, turning to performance, we’ve experienced a positive performance across our models, and if we reflect over the last 3 months, we have seen significant volatility on the back of US tariff concerns and we saw in April liberation day caused a large sell-off. The strong earnings season really helped to boost mega cap-growth stocks in the last couple of months and we saw global growth outperform volume here. This meant that our tilt away from growth meant that we didn’t fully participate in the recovery. However, we were able to provide greater stability during this volatile period. This can be seen when looking at the market drawdowns.
Looking at our drawdown protection, we can see that when we have experienced more pronounced market drawbacks, such as in April this year, we have been able to provide drawdown protection, and this helps to support long-term performance overall.
So, looking at performance since inception, our portfolios have outperformed their benchmarks across the full range. This is what we aim for, a focus on long-term, downside protection and generating strong risk-adjusted returns.
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If we delve deeper into our Equity analysis, this chart highlights the style split between value and growth assets as well as large cap and small cap companies.
If we look back to December 2024, the models had quite a blended approach to value and growth with a slight growth tilt, throughout the first half of the year, we dialled back that growth exposure, that’s mostly in the US, on concerns around valuations and mega cap stocks and this is really centred around the increasing vulnerability that we’re seeing. We’ve moved more towards value, and this has been through our focus on quality companies. Hopefully, this highlights our models are not constrained by any particular style and will adjust to market conditions as we move through the cycle.
Another notable change has been our reduction in cost over the year.
On the back of the Rathbones combination, we have been able to negotiate cheaper share classes with fund managers and then make these available across our platforms. This reduction in costs has been directly passed on to your clients, which in turn, should help to support long term performance.
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We’ve adjusted our alternatives allocation by reducing property exposure, instead we’ve added to funds which we believe will provide our models with better drawdown protection, and reduced volatility. This is because we do expect to see continued volatility in markets over the second half of the year. Although these funds we know won’t shoot the lights out if markets rally, they will support performance in a downturn.
So, what does that mean for our overall model positioning? Well:
We remain Underweight the US – that’s in line with our concerns around the region, around trade tariffs and slowing growth.
We now have a neutral position in the UK as we have carefully brought the portfolio back in line with the new 2Plan SAA.
We are also overweight in Europe - this has been motivated by the changes we have seen in European fiscal policy and the support for defence spending. This shift in approach suggests the outlook for European growth over the next few years has improved. Despite the headwinds from US tariffs, changes in momentum and attractive valuations, creates a more favourable outlook toward European equities.
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Andrea Yung: So, when we look back at our model changes over the quarter. it is important to first acknowledge the updated Strategic Asset Allocation (SAA) provided by 2plan, which forms the foundation of our models. There have been two key changes here: within equities there has been a reduction in the UK, that’s been in favour of a more global allocation within developed markets, with an increase in the US, Europe and Japan.
Within fixed income, there has been a reduction in UK sovereign debt and an increase in global (hedged) exposure.
To summarise the key changes that we have made over the quarter, we have firstly implemented a more global approach, we’ve continued to reduce our UK exposure and increase our overseas exposure and that’s mainly been in Europe, given our positive outlook in the region. We’ve also continued to reduce credit risk and currency risk within our fixed income allocation, and we’ve done this by reducing investment grade corporate bond exposure and unhedged global bond exposure and we’ve reinvested into hedged exposure.
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Moving into the second half of the year, we remain defensively positioned. We remain marginally underweight US equities, however over the quarter we have used equity weakness to upweight US equities in the 2plan portfolios and align more closely with the new global strategic asset allocation. We continue to be overweight European equities leaning into the improved outlook in the region, owing to fiscal spending and lower interest rates. Also, valuations are undemanding, hence this supports the overweight position. We have maintained our exposure to alternatives but have enhanced protection in the portfolio, focusing on relative value strategies to limit portfolio volatility and the drawdown risk. We remain overweight fixed income, but are shorter in duration relative to the benchmark given higher levels of bond volatility that we’re seeing this year.
I’ll now hand over to my colleague Andrea to provide an update on the portfolio positioning and the performance over the quarter.
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The negative correlation between equity and bond returns which held pretty much through the early 2000’s appears to have firmly reversed with both assets moving somewhat together, in an apparent return to the ‘old normal’ as illustrated in the 80’s and 90’s on this chart. This poses a challenge for portfolio construction as adequate diversification can no longer be achieved simply through a simple mix of equities and longer-date bonds. In fact, when you look at this year’s equity market selloff, longer-dated US Treasuries didn’t provide much buffer. For us, this reiterates the importance of diversifying assets and having exposure to alternatives given the fiscal loosening that’s taking place, inflation risks and geopolitical uncertainty.
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One of the reasons the US economy has been so exceptional is due to the government’s willingness to take on much more debt to stimulate the economy. Trump on the other hand, has spurred Germany and the EU to act to take control of its destiny with enormous funds created for defence and infrastructure spending, which we expect to be more positive for European growth.
Europe in the last couple of years is coming off a low growth base and with falling interest rates and lower inflation. We are beginning to see some early signs of green shoots in the economic data, which coupled with fiscal expansion is structurally positive. Also, European valuations are undemanding, and price momentum remains positive. As a result, we are preferring to be overweight Europe.
Shifting cross asset correlations now pose a challenge for multi-asset portfolios.
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What we show in the chart is the US Federal Reserve economic forecasts which have been updated in June, as you can see growth in GDP has been dialled back since March.
While we do expect the one big, beautiful act that has just been passed to have a positive effect on growth in the short-term, adding about 0.2% to GDP, the substantial increase in debt of over $3.3tn over 10 years is likely weigh on longer term interest rates and crowd out investment. Thus, the weaker economic backdrop combined with expensive US valuations at 22x earnings and a re-acceleration in analysts’ earnings expectations going into 2026, heighten the risk of disappointment in US equities. Hence, we remain slightly underweight.
Moving to the UK, while the local market has cheap valuations and attractive dividend yields, the growth outlook is weak, and with elevated inflation the recent CPI print came in at 3.6% above expectations, and rising taxes amidst fiscal risks keep us retaining a neutral position to local equities.
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More about that later. Now, I’ll hand over to Ronelle to begin with the macro-overview.
Ronelle Hutchinson: Year to date, markets appear to have shrugged off the tariff uncertainty and geopolitical risk, to climb to new highs in June. What’s uniquely different this year is the extent to which international equities have dramatically outperformed the US. Europe +12.5% and the UK is up 9% vs the S&P 500 which is down 3%, all in pounds. Part of this outperformance is due to the weakness of the U.S. dollar, with the dollar ending the first half down approximately 10%. Commodities on the other hand have performed well, with gold up over 13% providing a buffer to the trade tensions, inflationary risk, and geopolitical challenges that we’ve seen this year.
Despite the Trump administration’s willingness to negotiate on tariffs, moderating the Liberation Day effective tariff rate, uncertainty on trade policy remains. This is expected to weigh on the growth outlook for the US given the likely negative impact on prices, costs, margins and supply chains.
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Simon Taylor: Hello, good morning, and welcome to our Q2 Managed Portfolio Service webinar.
Over the past quarter, markets have continued to navigate sticky inflation, shifting rate expectations, and increasing political uncertainty. These factors have all shaped asset class behaviour and informed positioning across our portfolios.
Today, Ronelle will start with a summary of the macroeconomic and market backdrop — covering inflation trends, central bank activity, and investor sentiment. Then Andrea will take us through how this has influenced our portfolio positioning and performance over the quarter.
Looking ahead, we’re also working on a range of enhancements to the MPS proposition — drawing on the combined expertise of our recently merged investment management businesses. These developments are aimed at helping investors better navigate an increasingly volatile world, while further improving both the investment experience and long-term returns.
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