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Quarterly MPS performance update

For financial advisers using our Managed Portfolio Service

Our quarterly portfolio video update about our Managed Portfolio Service

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.

Note: This video was recorded before the UK's 2024 Autumn Budget

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.

Note: This video was recorded before the UK's 2024 Autumn Budget

 

 

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    Download the slides in the update PDF 3.64 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. 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 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.

    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 Ronelle Hutchinson, Senior Investment Director here at Investec Wealth and Investment.

    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. 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 percent, 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, 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.

    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. 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 capital 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. 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.

    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 reduce our exposure to macro hedge fund type strategies, which are more defensive and add to our global equity exposure. Our outlook on the global economy is becoming more positive and inflation is largely under control. In terms of key fund changes, we've reduced JP Morgan Global Macro Opportunities and added the L&G Global Equity Index.

    Within the US, we've also reduced the L&G US Index, in favour of US small caps. Many small cap companies have faced huge headwinds over recent years in the face of weak economic data and higher inflation. They're currently trading at significant discounts relative to not just historic levels but also to larger cap peers.

    Our preferred fund in this space is Estroda US Smaller Companies. And what we like about the fund is how the team have a strong valuation discipline and take a more conservative approach relative to other small cap peers. We prefer this rather than taking undue risk through exposure to speculative growth companies.

    And this fund offers us a compelling way to invest in US small caps without being exposed to that additional risk factor. 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 to be solely invested in these market cap weighted index funds.

    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, perform very well towards the end of the quarter. And this is on the back of a Chinese government stimulus, which has helped to support sentiment.

    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 are still participated in the market rally, while taking a lower level of equity risk.

    And finally, looking at our performance since inception, this highlights how we've performed long term throughout different market conditions. We've been able to provide a degree of protection in periods of market weakness, while still capturing market upside. And we've continued to outperform the ARC peer group across all of our models. 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 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. 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 the 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.

    Simon Taylor: And we've got another couple of questions here, which are clearly very much focused on the US markets and the upcoming presidential election. 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 are 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 these sectors as a wave of deregulation, or the potential of a wave of deregulation, benefits these sectors.

    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?

    Andrea Yung: Although we have seen some negative sentiments towards UK in recent weeks surrounding the autumn budget, we can see that a lot of this has already been priced into the market. And if we take a longer-term view and look past that political noise, we can see, and we know that valuations remain attractive.

    And also, the largest companies in the UK, their markets, their revenues, are derived globally, and it's not just domestic. So, with that, keeping that in mind, we've not made any changes, specifically in line with the autumn budget.

    Looking at our equity composition, around 25 percent of this is allocated to UK equities, while 75 percent is allocated overseas. So, we still have that global exposure. Now within fixed income, we do have exposure to UK gilts. And this is through the L&G All Stock Gilt Index. And around 12 percent of the portfolio is allocated to gilts in our medium risk portfolio.

    Simon Taylor: Now I mentioned in my 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?

    Andrea Yung: So looking within the equity exposure, what we've tried to do is move away from the concentration to these large cap megastocks 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.

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

Access previous quarterly updates

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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.