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.
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. 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. 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.
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.
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.
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: Thanks, Simon. So, across our models, we've maintained our asset allocation positioning over the quarter.
Using the balance model as an example, we've continued to hold a slight underweight position to equities. While maintaining an overweight to fixed income. We have however, made a couple of key changes within our equity allocation. 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 quite 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. We've got more political stability and we're starting to see that positive turn in sentiment, and it's a combination of these factors which lead us to believe that now's the time to take advantage of these opportunities.
We've also slightly reduced our position to emerging markets. Now since the start of the year we've seen positive performance in the region, however there are challenges that still exist for these countries, most notably in China. Although we believe emerging markets will benefit from interest rate cuts in the U.S. and a weaker dollar, we are cautious about being overly exposed at this moment in time.
So, in terms of fund changes in the U.K., we've increased our exposure through the Vanguard FTSE 100 index, and that's 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% allocated to mid and small cap companies.
Higher interest rates have been a huge headwind for mid and small caps over recent years, and we believe that the strong potential embedded within these companies is interest rates fall. Within emerging markets, we've trimmed our positions, but we remain diversified with exposure to both growth and value funds.
It's important to note that our exposure to emerging markets is through actively managed funds, and we believe it's imperative to utilise the expertise of active fund managers to be able to navigate the risks and take advantage of opportunities within the region. It's important to note the concentration risks that persist in global and U.S. index funds. Although these stocks have been huge contributors to the market rally, we're starting to see a broadening out of market returns as inflation eases. Investors are starting to look at other areas of the market outside their magnificent seven, which appear better value. The potential sector rotation will impact these concentrated passive funds. Therefore, we believe it's important to remain and to have an active approach.
Turning to performance, at the start of the year we held a degree of caution for equity markets given the economic uncertainty and persistent inflation. As a result, our portfolios were underweight in equities. Now what's transpired over the year is actually strong performance in these equity markets, mainly driven by a select number of mega cap U.S. companies.
Even though we've had less risk embedded into our portfolios, our performance has still held up well over the first half of the year. Our U.S. equity allocation, as one may expect, has been the largest contributor to returns across the portfolios, and this has been closely followed 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 bonds and property. These assets are sensitive to interest rates, and with higher interest rates holding, the returns have been somewhat limited. However, we believe that interest rates have peaked, and as cuts prevail, that's when we'll start to see positive price movement for 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 underweight position, our portfolios have still participated well on the upside. The key attributors to performance have really been our geographic positioning and strong fund selection.
Finally, just looking at our performance figures since inception, dating back to February 2015, this highlights how we've performed long term throughout different market conditions. With our focus on risk management, we've been able to offer a degree of protection in periods of market weakness, while still capturing market upside, and we've outperformed the ARC peer group.
The final thing to highlight is our new quarterly reports. We've designed these reports to really help support advisors. When analysing and reviewing our models within these reports, we now go into further detail on the underlying positioning, doing a deeper dive into exposure across the market cap spectrum, and also looking at exposure to value and growth, we have greater analysis on performance attribution, explaining reasons behind our relative performance.
Whether this is the result of our asset allocation decisions or fund selection. We also provide greater detail on portfolio positioning and outlook. We hope that these provide enough information to fully understand our portfolios, not only reflecting on how they've performed and why, but also how we're positioned for the future.
Simon Taylor: Thank you for that presentation Andrea. I think some of the key takeaways I took from that are that 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.
So, Andrea, in your presentation, you mentioned, that we'd improved our quarterly reporting. Can you bring that to life for advisors, please?
Andrea Yung: So really what we've designed, is a report for advisors to be able to utilise these documents and really understand and review our models.
So, we go into further detail looking at not only how the portfolio is positioned, but also having a look at how it's performed, greater analysis on attribution, and a forward outlook as well. So how are we currently positioned and what do we expect going forward.
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 July. I think we've done that, but, over to you, Andrea, for a bit more detail around what we've done and why we've done it.
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 organisations 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?
Andrea Yung: 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, our equity style and 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, uh, for an update on our managed portfolio service.
Thank you and goodbye.
