Watch our latest quarterly MPS update

Our latest quarterly update on our Managed Portfolio Service (MPS) provides you with an update on markets and strategy performance over the quarter.

 

Join our experts as they outline what makes the service unique, how we manage the funds invested, cost management and how we're managing market volatility and inflationary impacts.

 

Learn more about our speakers and access a transcript and the slides below.

 

Our latest quarterly update on our Managed Portfolio Service (MPS) provides you with an update on markets and strategy performance over the quarter.

 

Join our experts as they outline what makes the service unique, how we manage the funds invested, cost management and how we're managing market volatility and inflationary impacts.

 

Learn more about our speakers and access a transcript and the slides below.

 

 

 

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    Download the slides in the update PDF 4.17 MB
  • Expand to read a transcript of the video

    Simon Taylor: Hello, good day and welcome. My name is Simon Taylor, Head of Strategic Partnerships here at Investec Wealth and Investment. Pleased to welcome you to this quarter's webinar on our MPS portfolios. As usual, we'll be looking at the macroeconomic environment, what's driving asset class returns, and then we'll be diving into the portfolios themselves to see how we're dealing with markets and translating that into the portfolios themselves.

    This quarter again has been eventful in terms of geopolitical risk, inflation has proved to be a little bit more stubborn than expected, interest rates have not come down as quickly as we had hoped. So to look at this, I'm going to hand over to Ronelle Hutchinson, Senior Investment Director, who will be telling us what's going on in markets and what's driving our tactical asset allocation decisions. Ronelle, over to you.

    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 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. 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. 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 inflation is proving sticky, driven by very tight labour markets that is leading to wage 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. 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 chart 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.

    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. 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 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 maximising future returns over the next 12 months.

    In addition, we believe that Bonds once again play 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. 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, 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 our weighting and fixed income. As Ronelle mentioned, although we've seen rate cut expectations pushed out, we're still benefiting from the higher yields on offer.

    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 well for taking on that additional risk for lower quality credit.

    Where we are seeing better value is in the emerging market debt space. So despite the short-term inflationary pressures here to date, the broader downward trend of inflation for emerging markets is positive. And these countries are also at the forefront of monetary easing. And we've already seen Latin American countries starting to cut rates.

    We've recently added the Morgan Stanley Emerging Market Debt Fund to gain exposure here. And the fund also provides a very attractive yield of over 9 percent.

    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. We've reinvested into Man GLG Undervalued Assets. So similar to Jupiter, this fund is value-focused, and also provides us with exposure to small and mid cap names, and it complements our wider UK allocation.

    Finally, within emerging market equities, we've increased diversification by switching into the Lazard Emerging Markets Fund. The fund's value focus helps support the existing allocation in emerging market growth. And additionally, its lower ongoing charge has helped to reduce costs. So for those who are interested in the full details of our model changes, we've also created a quarterly document citing our trades and the rationale behind them.

    So 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. We do utilise passive funds where we can to gain exposure to certain areas of the market at a lower cost. However, as Ronelle mentioned, we're cognizant of the concentration risks within these 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 are putting a large amount of their capital 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.

    And the chart to the left shows a concentration of the Magnificent 7 stocks in the S&P 500, the Global Index, and our MPS models. And what hopefully 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 companies. And it's this diversification that helps us to provide stable returns over the long term. And more resilience during market downturns.

    So looking at our drawdown, this chart highlights how our portfolios have protected on the downside. The shaded area shows the drawdown of our balanced MPS model plotted against the relevant risk sector. And as you can see, our models provided much more protection in periods of market weakness. And this just helps to support performance over the long term.

    So turning to performance, it's been another strong quarter for markets. Equities were a key driver of returns as the US continued to show signs of resilience. And our US funds, both value and growth-focused, performed very well over the quarter. Our overweight position in Japan also boosted returns as we saw increasing optimism supported by mild inflation and wage growth.

    Looking at our performance over the past year, again, it's been positive across the range, and we've outperformed the peer group average. Our portfolios continue to participate well on the upside, despite having an underweight position in equities, and this is due to strong fund selection, thanks to the support of our experienced research team.

    And here is our performance since inception, which dates back to February 2015. It highlights how we've performed throughout the market cycle. We've managed to continuously participate well on the upside while still offering a degree of protection in periods of market weakness. And with that, I'll pass back to Simon.

    Simon Taylor: Andrea, thank you for the update there on the portfolio returns. Again, 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, we're very much concentrating on the diversification within portfolios, you highlighted 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.

    So thank you very much for your update there.

    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.

    And the first question relates to the lower-risk portfolios, which we've seen some strong growth 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: 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.

    And I think the other thing to take into consideration as well is the factor of inflation and the opportunity cost 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's 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.

    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: 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 are 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?

    Ronelle Hutchinson: I think that's a really good question Simon. The benefits of the combination are enhanced resources to manage portfolios, greater experience, 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? I'll let you decide amongst yourselves, who would like to answer which part.

    Ronelle Hutchinson: Yeah, I can answer to the opportunities because I think beneath the surface of 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 in 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 the risk part of that question.

    Andrea Yung: So I think the main risks 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 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 in certain 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?

    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 incentivize 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 skeptical 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 ISAF.

    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 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.

Quarterly reports

Balanced Portfolio Quarterly Report PDF
Cautious Portfolio Quarterly Report PDF
Cautious Plus Portfolio Quarterly Report PDF
Defensive Portfolio Quarterly Report PDF
Growth Portfolio Quarterly Report PDF
Income Portfolio Quarterly Report PDF

 

 

Learn more about our speakers

Simon Taylor
Simon Taylor

Head of Strategic Partnerships & Platforms

Ronelle Hutchinson
Ronelle Hutchinson

Senior Investment Director

Andrea Yung
Andrea Yung

Investment Director

Simon Taylor
Simon Taylor

Head of Strategic Partnerships & Platforms

Ronelle Hutchinson
Ronelle Hutchinson

Senior Investment Director

Andrea Yung
Andrea Yung

Investment Director

Investec Wealth & Investment (UK) is a trading name of Investec Wealth & Investment Limited which is a subsidiary of Rathbones Group Plc. Investec Wealth & Investment Limited is authorised and regulated by the Financial Conduct Authority and is registered in England. Registered No. 2122340. Registered Office: 30 Gresham Street. London. EC2V 7QN.