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Fund Manager Monthly Report - January 2016

23 February 2016

View the latest portfolio and market commentaries from our range of fund managers.

Aberdeen Asset Management (Asia) - Hugh Young

Far East

The fund declined by 5.36% in sterling terms, underperforming by 1.45%.

Asset allocation, including the currency impact, was slightly negative. Our heavy exposure to both Hong Kong and Singapore cost the fund, outweighing the positive effect from the underweight to Japan. At the stock level, our Japanese holdings were a significant drag on performance. While Fanuc’s third-quarter earnings met our expectations, the company downgraded its full-year forecasts for the second time. Chugai Pharmaceutical posted decent full-year results but turned cautious ahead of government drug-price revisions – due in April – that could affect its blockbuster oncology drug, Avastin. Mitigating the impact was Japan Tobacco, whose share price rose on news that it was seeking government approval to raise cigarette prices from April, which could boost operating profits.

Stock selection in Australia also hurt performance. Rio Tinto was hampered by the slowdown in China, which continued to weigh on commodities. Insurer QBE also fell amid lingering concerns that the local industry could potentially face higher losses from the recent spate of catastrophes.

Elsewhere, Keppel Corp was the biggest detractor in Singapore. It continued to be hindered by weakness in the oil market and the potential bankruptcy of one of its major customers, Sete Brazil.

Aberdeen Asset Management – Jamie Cumming


In January, the fund fell by 1.60%, outperforming the benchmark’s decline of 2.21%. Positive stock selection outweighed negative asset allocation.

At the stock level, Daito Trust Construction contributed to performance, boosted by higher demand for building projects in December. Pepsico remained resilient during the global sell-off. EOG Resources was buoyed by the oil-price recovery towards the end of the month.

Conversely, Fanuc’s shares fell after it downgraded full-year forecasts for the second time. It moderated expectations for smartphone robo-drill related sales, and was more conservative about factory automation sales in China and Asia. Standard Chartered announced that its deputy group chief executive Mike Rees will retire at the end of April. This is in line with our expectations, as the bank continues to restructure under CEO Bill Winters. The company continues to be affected by sentiment towards emerging markets, and China in particular, given its exposures.

In January, we introduced MTR Corporation, which boasts robust city-rail operations in Hong Kong and China, with a unique model that also allows it to develop property. Against this, we sold Zurich Insurance, disappointed with recent management changes, and concerned about its poor results. We added to Intercontinental Exchange, M&T Bank and Kerry Logistics, and trimmed Nordea.

Artemis Investment Management – Adrian Frost & Adrian Gosden

UK & International Income

You would have been an excellent hermit to be unaware of the difficult start for equities in 2016. The list of reasons for market difficulties grows by the day with China frequently cited as the culprit. However, in our view the essence of all the various rationales offered is that over recent years companies have struggled to grow yet valuations have continued to build in anticipation of this growth. Today we are at a crossroads with the prospect of a return growth receding, courtesy of a difficult macro environment. This left valuations looking too high. The result has been a correction as markets feel their way towards a valuation more in keeping with the outlook. There are reasons to be optimistic. The consumer is in clover courtesy of the rock bottom oil price but for now the debt distress in energy companies is concerning investors more than the long term positives that are at the heart of this distress. In summary, although the outlook is far from rosy, we feel that many problems are more imagined than real.

Our activity was to add to holdings across your portfolio and to sell General Electric. General Electric has done well and whilst there is much to like the weakness of its end markets suggests that we should bank the performance and revisit at a later stage.

Understandably the press is documenting the dividend risk to a number of the major constituents of the FTSE 100. Whilst we have some exposure, it is much more modest than recent history and therefore the dividend risk is manageable in the context of our distribution. Furthermore, in our judgment, share prices have largely moved to discount dividend cuts. We are at levels where other valuation metrics will begin to provide some support.

Artisan Partners – Dan O’Keefe, David Samra & James Hamel

Global Unit Trust & Global Managed

Global stocks sold off sharply to start 2016 with defensive sectors performing best. Volatility was predicated in large part on speculation of a Chinese “hard landing.” Equities and oil moved in near lock-step in January—when oil bounced back later in the month, stocks followed, though not enough to erase earlier losses. US GDP growth disappointed, decelerating to an annualized 0.7% rate in Q4 from Q3’s 2.0%. The US Fed left rates unchanged and hinted at further inaction, while the Bank of Japan adopted negative interest rates. Large-cap stocks beat smaller stocks, and growth trailed value.

Heightened volatility and global macro concerns have spurred questions whether January’s weakness augurs a more prolonged downturn. We are not macro prognosticators nor does our process require that we time market turns. However, we will note that it has been nearly seven years since the 2009 global market bottom, and some elements of the US economy are starting to look late-cycle to us. That said, we believe this remains a good environment for what we do—finding defensible franchises exposed to identifiable, long-term profit cycles at reasonable valuations. We are still finding pockets of growth, and the market selloff served to make valuations for a number of franchises more attractive.

Our portfolio trailed the MSCI All Country World Index in January. Among our bottom contributors were Fanuc and Abbott Laboratories. Industrial robotics leader Fanuc has been pressured as an anticipated deceleration in smartphone sales has sapped demand for its robodrills. However, its robot division is still growing solidly, which we believe presents a more compelling long-term runway. Abbott Labs has been contending with FX headwinds and general emerging markets macro weakness. We believe this solid franchise is more attractively valued now, and is being steered by a quality management team with credible plans to expand margins and use its strong cash flows to acquire complementary technologies.

Facebook was among our top performers. Its strong momentum in mobile monetization is being supported by growing engagement of existing users, improving advertiser adoption and successful ramping of its other platforms, including Instagram.

Amid a tough backdrop for emerging markets stocks, particularly in Brazil, leading Brazilian drugstore chain Raia Drogasil was a top performer. The company’s strong competitive positioning and solid execution is allowing it to continue taking share while improving its margins.

As unpleasant as volatility can be to live through in the near term, we believe our process can benefit from it. Given our long-term time horizon, volatility gives us opportunities to start new investing campaigns in compelling franchises and add to existing high-conviction holdings at relatively more attractive valuations.

AXA Investment Managers – Richard Peirson

Balanced Managed Unit Trust & AXA Managed

Global equity markets were weak due to concerns about slowing growth in China and mixed economic data from the US. Crude oil fell to its lowest level in 12 years. This was generally a two tier world with robust results from companies close to the consumer (who has had a massive ‘tax cut’ thanks to the fall in the cost of petrol/gas) and weakness from manufacturing businesses, many of which are experiencing recession like conditions. Any company providing goods and services to the resources industry is suffering particularly, while the slow-down in manufacturing in China is having a broader negative impact. Government bonds benefitted from this uncertain outlook though corporate credit performed less well as comments about a global recession and poor liquidity were unhelpful.

January was a relatively quiet month in terms of activity and there was no significant change in asset allocation. Stock selection in equities was disappointing for we underperformed modestly in the UK, Europe, Japan and Emerging markets and more significantly in the US. In the US we own less big defensive companies and experienced savage sell-offs in a number of biotech stocks and with increased worries about recession in some more economically sensitive companies.

January’s weakness has continued into February with all equity markets under pressure and government bonds proving a safe haven. The banking sector has been particularly weak as the prospect of ‘zero’ interest rates for longer and a recessionary environment (which we don’t expect) undermines the likelihood of them having surplus capital and generating dividend growth. It is difficult to see what will end the self-feeding panic of recent days. Central banks could take action to support the credit markets, which have been part of the recent problem, but more likely we will need a rally in the oil price and some evidence that a recession in the US is unlikely. We are, however, beginning to see better value in equities which should provide some support in due course.

AXA Investment Managers – George Luckraft

Allshare Income Unit Trust & Diversified Income

Equity markets were weak as concerns grew as to the outlook for the world economy. The oil price continued to fall which reinforced decisions to reduce development spend. This will slow production and ultimately bring supply and demand into line.

The portfolio outperformed helped by a cash bid for KBC Advanced Technology at a premium of close to 50% to the price in the market. A lack of holdings of Barclays, Shire and Prudential was helpful for relative performance.

Both Quantum Pharma and Emis had slightly disappointing updates which adversely affected their shares. A new holding of GVC Holdings was acquired as they completed their purchase of The holding of New River Retail was increased in a fund raising by the company. The weighting in GlaxoSmithKline was also increased. The holding of Pendragon was reduced.

Markets are volatile and weak with rumours that certain investment banks have problems. As they unwind positions there will be some issues. The US and European economies are seeing weakness in manufacturing. The construction section of the US economy looks robust which should offset this weakness.

Babson Capital – Zak Summerscale

International Corporate Bond

January was a tale of two halves for high yield investors. The first half of the month saw markets decline, while the oil price continued its downward trajectory. One of the big drivers of market volatility was China, with the devaluation of its currency along with broader commodity price concerns dominating market sentiment. The tone across risk assets did improve towards month-end, with the significant bounce in oil prices along with a more positive narrative from central banks. The markets are expecting further easing from the European Central Bank in March following the decision by the Japanese Central Bank to adopt negative interest rates whereas there is now very low expectations of further US Federal Reserve rate hikes in the near term.

New issuance levels remained subdued in January. The US high yield market saw 13 bonds pricing with a total of $8.9bn, whilst in Europe the overall volumes were just shy of €1bn through two deals. Although the market volatility kept issuers at bay, a pipeline of pent-up issuance is building and these deals should start to materialise as the high yield market gains a more stable footing. The top contributors for the portfolio during January included names such as TPC Group, a global provider of products to the chemical and petroleum based industries; and First Data, a US provider of electronic commerce and payment solutions. The bottom contributors over January included names such as Kosmos Energy, a US oil & gas exploration and production company; and CEMEX, a multinational building materials company headquartered in Mexico.

Despite the continued market volatility feeding into the start of 2016, the fundamental corporate credit environment both in Europe and the US remains healthy outside the energy sector. Whilst we do not expect that we have seen the end of the market volatility, the SJP International Corporate Bond fund represents a very robust portfolio of our conviction names and we believe the market environment remains conducive for the strategy. With continued market weakness, we will aim to capture further opportunities as they arise and will look to selectively add to positions in the portfolio to enhance the fund’s overall risk-adjusted return.

BlackRock – Luke Chappell

UK & General Progressive

The UK & General Progressive fund returned -3.9% over January compared to the benchmark FTSE All-Share Index, which returned -3.1%.

January has seen a negative start for global equity markets and a stock market rotation whereby the UK oil majors outperformed, having significantly underperformed in 2015. The drivers behind recent events include a slowdown in Chinese economic growth, December’s rise in US interest rates, the falling oil price, high yield credit market worries and mixed US economic data points.

Within the fund, outperformance of RELX, Betfair, British American Tobacco and Compass was more than offset by underperformance from Capital & Counties, Shire and EasyJet. Not owning a number of large companies such as SABMiller, Vodafone and GlaxoSmithKline also impacted relative performance as these shares outperformed the falling market.

EasyJet results showed some short term impact from events in Paris and Egypt and Capital & Counties shares fell in line with other central London focused property developers. Shire increased its takeover offer for Baxalta, resulting in agreement, which saw the shares underperform. The deal is in line with Shire's strategy to grow its rare diseases business. On the positive side, companies that have demonstrated steady earnings growth outperformed including RELX, British American Tobacco, Compass and Reckitt Benckiser, whilst Betfair continued to perform well following positive market updates in recent months.

Activity over the period saw us purchase Just Eat and add to Shire. We reduced positions in BG Group, RELX and Capital & Counties.

We expect the global economy to grow slowly given modest domestic economic growth in the US, UK and Europe and slowing Chinese growth. The UK vote on European Union membership may provide a source of volatility for the UK currency and stock market over coming quarters. From a valuation perspective we remain constructive on UK equities relative to other asset classes but expect volatility to increase and highlight the ability of fundamentally driven active management to deliver investment returns when benchmark returns have been low. The portfolio invests in a concentrated but economically diversified portfolio of best ideas that aims to identify companies with structural growth, and those companies able to positively impact earnings through self-help.

BlackRock – Nigel Ridge

UK Absolute Return

The influence of slowing growth in China and another significant drop in the oil price fuelled aggressive selling which took many equity markets markedly lower. The falls moderated a little into month-end yet represent another period when market participants have been worried that weak global economy will deteriorate further. With central banks implying action was necessary; the most significant response came from the Bank of Japan which adopted a negative interest rate policy to help revive their economy.

The fund declined -1.9% (gross of fees) in the month. Away from short book gains and long book losses, financials saw the largest negative impact. The industrials and heath care sectors also saw a negative return while the short position in the FTSE 100 index future provided a notable positive contribution. The largest individual contributor came from Betfair helped by a trading statement from Paddy Power ahead of the business merging (in early February). A consumer services short contributed to performance as the business disappointed in what is an increasingly saturated pub and restaurant industry. Long positions dominated the list of top detractors with Carnival falling, despite the lower oil price, on concerns around the US consumer reigning in spending. From within financials, Capital & Counties fared badly as commercial real estate shares suffered from the growth fears which hit the sector particularly hard. The banking pair also detracted as the stresses in financial markets (rather than company specific news flow) impacted the long side more than the short side.

Gross exposure was taken lower to around 113% during the month before we added to core holdings given the (negative) price action taking the level to 128% by month end. Importantly, the fund continues to hold notably lower risk than that of the UK equity market. The net exposure ended the month at 20% net long. We have revisited the investment thesis across our diversified financials positioning where even lower valuations continue to support attractive upside. Our selective names exposed to the US economy also remain in place though we are closely monitoring the growth in the region where the health of the US consumer remains supportive.

BlueBay Asset Management – Polina Kurdyavko

Strategic Income

This month, the portfolio returned -0.97%, an outperformance of 39 bps relative to the benchmark index, primarily down to very good credit calls on the month.

On the positive side, a major driver of this month’s returns was our underweight positioning in metals & mining credits, e.g. zero exposure to the Zambian copper producer, First Quantum, which traded lower on the month given the ongoing weakness in commodity prices. Also being overweight in Argentine credits (in particular oil credit YPFDAR) was additive to relative returns as Argentina continues to show signs of positive reforms and more progress was made in the ongoing negotiations with the holdouts. Elsewhere, our underweight in higher beta, oil-sensitive credits in countries such as Colombia, Ghana and Iraq were also positive for performance.

The main detractor from performance was our underweight bias in Israel which was one of the better performing markets on the month. Also our off benchmark position in Venezuelan state-owned oil producer PDVSA detracted as oil touched new lows.

We remain somewhat cautious into 2016. From a bottom-up perspective, our base case forecast is for defaults to rise to 5-7% (up from 3.7% in 2015), but not spike to high double digits; we do not believe we are in the middle of, or are going into, an EM crisis, rather a prolonged “muddle through” with heightened dispersion, where weaker credits should be punished and stronger credits will certainly have room to perform. This was the case in 2015 and we believe it will be the case again in 2016. We expect global central banks to provide a reasonably supportive backdrop, as the ECB, PBoC and BoJ are all on a continued easing path while although the Fed did manage to hike in December, the more recent rhetoric has been on the dovish side and the expectation for further hikes this year has lowered. While there could be some pressure on spreads in the more cyclical sectors of our market, we do not believe that this should meaningfully detract from the compelling yields on offer in this space, in particular in the high yield segment, despite the volatile start to the year. The key risks on our radar in the near-term include quasi-sovereigns as they represent a large portion of our opportunity set, the Middle East, given the oil backdrop, and subsequent depletion of reserves, plus the heightened geopolitical risks and Asia – China in particular; China has performed very well of late given the strong technicals, and the pricing is now quite tight. If we were to see more weakness, and a reverse of the technical, there is scope for some downside here, in particular in the high yield segment.

Columbia Threadneedle – Richard Colwell, Stephen Thornber & Jim Cielinski

Strategic Managed

In local-currency terms, the MSCI AC World index fell 5.4% in January, as further market turmoil in China and dramatic swings in the price of oil fed concerns about the prospects for the world economy. In the US, the S&P 500 fell into “correction” territory as US oil slipped below $30 per barrel for the first time in 12 years. Besides falling demand in China, oil prices were pressured by high stockpiles of the commodity and the lifting of sanctions against Iran. In Europe, Belgium, Portugal and the Netherlands held up best, while Germany, Ireland and Spain were among the weaker performers. Japanese equities were especially weak early in the month, but rallied after the Bank of Japan (BoJ) unexpectedly introduced a negative interest rate for certain deposits in an attempt to encourage increased lending.

The UK Growth and Income portfolio strongly outperformed the benchmark over January. The overweight position in Wm Morrison Supermarket and Imperial Tobacco proved especially helpful, while the underweight in Home Retail also boosted returns.

The Global Equity Income portfolio also outperformed its index in January. Stock selection was particularly strong in financials and consumer staples. At the stock level, the fund benefited from overweight positions in Reynolds American, Philip Morris and McDonald’s. The Investment Grade portfolio slightly underperformed its index in January, while the US High Yield portfolio outperformed the benchmark over the period.

EdgePoint – Tye Bousada & Geoff MacDonald

Global Equity

The portfolio underperformed its benchmark, the MSCI World Index, in January as financial markets started the year beset with downside volatility. The major detractors to performance included TE Connectivity Ltd., WABCO Holdings Inc., American International Group Inc. and Clariant International Ltd. On a sector basis, underperformance was concentrated in the industrial and financial sectors.

The return of fear to financial markets has resulted in investors herding to ‘safety sectors’ such as consumer staples, telecommunications and utilities. In investing, when everyone does the same thing, it usually shows up in valuations. The current period of market volatility is no exception as ‘safety sectors’ are trading at rich price-to-free-cash-flow multiples. Not only are these sectors expensive today, we believe they’re unlikely to grow quickly over the next three to five years. In contrast, we’re attempting to invest in businesses that are likely to be materially bigger in the future even if the economy isn’t growing at a fast pace. Further, we try to buy future growth today and not pay for it. Not unexpectedly we are finding value in the sectors that have been hardest hit by the current volatility such as industrials (WESCO International Inc. and Flowserve Corp.), information technology (Ubiquiti Networks Inc.) and financials (Wells Fargo & Co. and Realogy Holdings Corp.). Cash levels have moved downward as we deployed cash to our best investment ideas that are trading at discounts to our assessment of intrinsic value.

Invesco Perpetual – David Millar

Multi Asset

2016 saw one of the worst ever starts to a year for equity markets, as concerns over global growth and the state of China’s economy, coupled with the fresh lows in commodity prices, took their toll. Asia suffered the brunt of the bearish sentiments, with equity markets in China and Hong Kong suffering double-digit losses. However, equity markets experienced a rebound towards the end of the month, with central bank actions, at least temporarily, proving supportive. The European Central Bank again hinted at broader stimulus (after December’s disappointment), the US Federal Reserve tempered optimism by again including language that hinted the US economy could fall victim to a global malaise and the Bank of Japan shocked markets by moving interest rates into negative territory.

We added a new volatility idea to the portfolio. We believe that the volatility of the Japanese yen is likely to be a pinch point in Japan and that its volatility is currently too cheap when compared to the US dollar. We believe the currency is likely to be more volatile than is currently priced in and implemented the idea using volatility swaps. So, we are long volatility in the euro vs Japanese yen currency pair and short volatility in the euro vs US dollar pair.

The fund moved marginally higher in January. Some of our more ‘risk on’ ideas were unsurprisingly the biggest detractors, however, our relative value equity ideas in the US, which take a view on the performance of large caps vs small caps and the consumer staples sector vs the consumer discretionary sector, were strong performers offering useful diversification qualities. A number of our currency ideas also performed well during the month, with the Japanese yen strengthening against the Korean won, the Norwegian krone strengthening against the pound, the US dollar outperforming both the Canadian dollar and the euro and the Chilean peso appreciating against the Australian dollar.

Invesco Perpetual – Paul Read & Paul Causer

Corporate Bond

High yield bond markets have had a difficult start to 2016. At an aggregate level the difference in yield between high yield and government bonds is now at a level not seen since 2012. In fact outside of the systemic banking and Eurozone crisis this “spread” has rarely been this wide. At the heart of the weakness has been the energy sector. This has had a dramatic effect on the US high yield market where energy companies represent around 10% of the market. In Europe the sector is not a large component of the market, but for those European issuers with direct exposure to commodities, some bond price declines have been dramatic, particularly within more junior forms of debt. Reflective of the deterioration in sentiment there was only a very small volume of high yield bond issuance. Barclays estimate that just €900m was issued in European currencies a 93% fall on the €12.4bn issued in January 2015. Data from Merrill Lynch showed European currency high yield bonds returned -1.1%, US high yield returned -1.7% with US high yield energy companies returning -8.7%. All returns are total returns, sterling hedged.

The recent period of volatility has started to create some opportunities. However, there remain reasons to be cautious. Defaults and downgrades in the energy sector are likely to increase this year, the global economy is slowing, the extent of the slowdown in China is unclear and emerging markets are under pressure. On the other hand there are signs the economic recovery in Europe is taking hold with low oil prices and loose monetary policy providing further support. Credit quality has been stable with the default rate in Europe last year little more than 0.5%. Against this backdrop we are maintaining liquidity in the fund through cash and government bonds and are starting to selectively add exposure to existing holdings that we like that have cheapened.

During the month of January 2016, we participated in a new issue of Intesa 7% 31/12/99 (Financials). We added to our positions in Valeant 4.5% 15/05/23 (Pharmaceuticals), the AA 5.5% 31/07/22 (Service), and Jaguar 3.875% 01/03/23 (Auto). We sold our position in Telenet 6.25% 15/08/22 (Cable).

J O Hambro – John Wood

UK & General Progressive

A mixture of strength in our consumer services names (owning Relx and Compass Group), sector exposure (having zero exposure to the poor-performing financials sector), and the portfolio's large cash balance in a month marked by a sharp sell-off in global stock markets accounted for the portfolio's significant outperformance.

Readers of these commentaries will know from our relentless repetition that absolute valuations within the UK stock market, artificially inflated by quantitative easing and distortive extreme monetary policy, have long been unattractive to us as fundamental investors in the absence of an improvement in underlying corporate fundamentals. But with many stock markets hitting multi-year lows in recent days, the assumed omniscience of the world's major central bankers seems as if it is finally being questioned by market.

Whether the central banks' obsessive pursuit of inflated financial asset prices that means there will be yet another lurch towards the dregs of the now largely empty monetary punchbowl remains to be seen. But regardless of the latest chicanery of central bankers, our focus will remain: judiciously allocate capital to quality companies with strong balance sheets run by skilled management teams with a long-term, investment-led approach. These companies will ultimately offer the enduring compounding growth that we believe will serve our clients well over time.

Loomis Sayles – Ken Buntrock

Investment Grade Corporate Bond

IG corporate markets began the year with a harsher tone as spreads widened during January. Weakening corporate fundamentals, Chinese and global growth concerns, and significant commodity weakness were the primary reasons for the poor performance. Increased concern that weakness abroad is beginning to negatively impact the US economy has caused both equities and corporate credit to sell off. Given the spread weakness we have witnessed since mid-2015, we believe that the value proposition for US IG has significantly improved. In the Euro space, IG continues to be better positioned than US IG from a credit cycle perspective, but valuations are substantially less appealing. Euro IG corporate continues to benefit from a supportive ECB, as well as from lagging other developed credit markets in terms of the credit cycle. Despite weaker economies and lower yields, we continue to evaluate specific bottom-up opportunities. UK IG performed the worst of the developed markets during January after being the top performer for 2015.

US IG Corporate selections weighed on returns for the month, particularly in the banking and communications sectors. Overall, however, selections in US dollar denominated holdings did prove to be positive contributors. Preferences in Euro holdings, particularly corporates, also detracted from performance while choices in the UK space were neutral.

In January we were in the midst of a large commodity terms of trade shock. It appears to be more of the same in 2016, with commodity price volatility, and continued political and geopolitical risks. We expect that US GDP growth will be between 2.0 and 2.5% for the year. In the UK, the recovery will continue, however, uncertainty over the upcoming EU referendum may weigh on performance in coming quarters. Europe remains supported by the ECB. We expect GDP growth to be around 1.4% supported by QE, weak oil prices, and a weak euro.

Magellan – Hamish Douglass

International Equity

During the month, we continued to build our position in Apple and reduced our positions in IBM and Microsoft. On 31 January, the portfolio held investments in 25 companies, with the top ten investments representing 45.6% of the portfolio’s total assets. The portfolio held 15.0% of its assets in cash at the end of the month.

The portfolio is currently positioned to take advantage of the following major ongoing investment themes:

*Technology/software: We believe that entrenched global software companies boast enormous competitive advantages and exhibit attractive investment characteristics.

*The move to a cashless society: There continues to be a strong secular shift from spending via cash and cheque to cashless forms of payments, such a credit cards, debit cards, electronic funds transfer and mobile payments. The explosion of smart and internet connected devices will accelerate this shift on a global basis.

*US housing: A recovery in new housing construction, together with investment in existing housing stock, should drive a strong cyclical recovery in companies exposed to the US housing market, while providing a boost to the overall economy. *US interest rates: It is likely that US short term and long-term interest rates will “normalise” over the next two or three years as the US economy recovers.

*Emerging market consumption growth: Through investments in multinational consumer franchises.

During the month, the portfolio returned -0.9% in sterling terms, before fees, this compares with a benchmark return of -2.3%, giving relative performance of +1.4%. In sterling terms, the largest contributors were Tesco (+0.4%), Microsoft (+0.2%) and PayPal (+0.2%) while the largest detractors were eBay (-0.5%), Lloyds Banking (-0.4%) and Intel (-0.3%). In sector terms, Consumer Staples (+0.7%) and Consumer Discretionary (+0.1%) contributed positively to performance while Financials (-1.0%) and Information Technology (-0.8%) detracted. Geographically speaking, the United States (-1.2%) detracted from performance while the Netherlands (+0.1%) was a positive contributor.


Majedie – James de Uphaugh

UK Growth & UK & General Progressive

The portfolios slightly underperformed the market in January, returning -3.14% (UK & General Progressive) and -3.30% (UK Growth) versus an index decline of -3.08%.

January was a volatile start to the year for equity investors. In part, this was due to the continuing weakness in the oil price – Brent crude fell to 12-year lows below $28 a barrel – which was influenced by concerns over the pace of Chinese economic growth and Iran’s return to the oil market. A red-screen month left investors hoping the adage of the ‘January Barometer’ setting the weather for the year ahead will prove false.

Banks were a key detractor to your portfolios’ performance, as the sector continues to deal with legacy issues. Our holding Royal Bank of Scotland (RBS) warned that it will post its eighth successive net annual loss for 2015 and revealed a £3.6bn hit from litigation charges and pension costs. The state-backed bank said it had accelerated a payment into its defined benefit pension scheme to plug the deficit, resulting in a £1.6bn hit to its equity. RBS also earmarked an extra £2bn to cover conduct charges in the US and UK. Joining RBS in negative performance territory was Barclays, highlighting the anxious sentiment that the Banking sector attracts, in the context of uncertainty around interest rates. We believe UK banks have been rebuilding their businesses strategically, and are taking a long-term view of our preferred holdings.

The rising values in the defensive, ‘bond proxies’ of the market such as Consumer Goods and Utilities, continue to weigh on your portfolios’ performance. We believe these sectors are overvalued, offer false safety and therefore we do not share the market’s appetite for these areas.

The main source of positive performance in your portfolios emanated from our positions in Food Retail; Tesco, unloved by the market, posted higher than expected sales for Christmas: a 1.3% rise in like-for-like sales for the festive period – significantly above the 2.3% drop predicated by analysts. Similarly, Wm Morrison boosted performance as it too exceeded sales’ expectations.

We believe the unsustainability of the current low oil price will be revealed as global demand – including from China – ticks up, the effects of reduced Oil sector capex materialise, and the US shale industry weakens from the wounds inflicted by Saudi Arabia’s recent oil strategy. For now, however, the storm must be weathered. Your holding in BP, whose Chief Executive Bob Dudley predicted an oil price recovery in the second half of 2016, was another positive contributor to the portfolio, as the oil price went on to rebound from the month’s previous low.

Majedie – Chris Reid

UK Income

The SJP UK Income fund underperformed the market in January, returning -5.3% versus an index decline of -3.1%.

January was a volatile start to the year for equity investors. In part, this was due to the continuing weakness in the oil price – Brent crude fell to 12-year lows below $28 a barrel – which was influenced by concerns over the pace of Chinese economic growth and Iran’s return to the oil market. A red-screen month left investors hoping the adage of the ‘January Barometer’ setting the weather for the year ahead will prove false.

Negative sentiment towards Banks persisted during the month. Piraeus Bank was a particular drag on performance, as its CEO resigned amid claims of political pressure for him to do so. However, we entered this position in Q4 2015 after the recapitalisation at a third of book value. Therefore, we believe the stock offers much promise for the patient investor. Citizens Financial Group in the US and Lloyds Bank in the UK also weighed, but on the positive tack not holding HSBC and Barclays helped your portfolio.

In addition, on the positive side, Pearson swept to the top of the attribution leader board on the back of its announcement that it would cut a tenth of its workforce. The restructuring plan is expected to reduce overheads by £350m within two years. Admiral Group was also boosted by talk of bid interest from industry peers ahead of its founder and chief executive, Henry Engelhard, stepping down in May.

Manulife – Paul Boyne & Doug McGraw

Global Equity Income

Global equity markets declined in January, as many of the concerns that weighed on investors at the end of 2015 continued into the first month of 2016. Concerns about a global growth slowdown, particularly in China, and commodity weakness, led by declining oil prices, remained in focus. The month ended with an equity market rally, largely as a result of the Bank of Japan’s surprise decision to adopt negative interest rates. US equity markets outperformed other regions.

Stock selection in the consumer discretionary sector and overweight exposure to the consumer staples sector contributed to outperformance. Individual contributors to performance included Macy’s, Inc., Verizon Communications Inc. and Koninklijke Ahold N.V.

Underweight exposure to the utilities and energy sectors detracted from performance. Individual detractors from performance included Novartis AG, HSBC Holdings plc and Huntington Bancshares, Inc.

During the month, we sold McDonald’s Corp. and Accenture PLC.

We believe US equity markets have slightly above-average valuations on earnings but are highly valued on a cyclically adjusted price-to-earnings basis. European multiples are less expensive than their US counterparts, in our view, and appear to have more earnings recovery potential, although much of this is sourced in structurally challenged industries.

MidOcean Credit Partners – Jim Wiant

Strategic Income

2016 started on a volatile note and was a tale of two halves. By January 20th, the S&P 500 was down by nearly 12% as China continued its devaluation policy and oil traded negative 12 of the first 13 sessions resulting in a 30% decline. Since January 20th, oil and other risk assets (including equities and high yield bonds) bounced as the tone improved and rallied into the end of the month. The market benefited from BoJ’s decision to adopt negative interest rate policy and the perception that US Fed rate hikes could be pushed back. For the month of January, the S&P 500 finished down -4.96% and the JP Morgan US High Yield Index returned -1.81%. The yield-to-worst (YTW) for US high yield rose to 9.70% with a spread of 833bp over Treasuries. As we discussed in our prior commentary, we have deliberately positioned the portfolio to diminish market risk. The market volatility has presented significant opportunities to make investments in high-quality businesses at attractive risk-adjusted yields and we continue to take advantage of those opportunities. These positions are characterized by a strong risk profile and business prospects while avoiding exposure to meaningful commodity risk or economic cyclicality. We continue to maintain relatively short portfolio duration. Our portfolio positioning held up well during the month January, generating positive performance.

Oldfield Partners – Richard Oldfield

High Octane

This was the third worst January in equity markets since 1928 and has made us all worry that something bigger and worse is in store. A bear market is generally defined as a market which has fallen more than 20% from its peak, and many markets, including world markets as a whole in the form of the MSCI World Index, had done that by the third week of January. The Financial Times published a table which showed returns in the year following the declaration of a bear market in the US which has happened nine times in the last 60 years. On only three occasions did the market fall in the ensuing year; the average return was +10% - a little more than the long-term average return of equities. Prevailing gloom leads us to expect something worse once a 20% fall has happened, but the reality is generally quite different. Of course, the circumstances which have led to a 20% decline are inevitably rather bleak, and it is difficult in the midst of these circumstances to see the brighter prospect; but difficult circumstances create lower valuations which generally result in good returns.

An average is only an average, and this could be one of those times when worse follows. A great deal hinges on the US economy: is recession on the way or not? One of the features of the fall in capital spending has been weakness in the energy sector; yet high energy prices have preceded every recession since 1970, and lower prices are a stimulus to the consumer economy. Very low, almost non-existent, interest rates would also be a very unusual precursor to recession; and employment levels, housing and car sales are all strong. We doubt that the US will have a recession in the near future. It is uncomfortable to be relying heavily on an economic prognosis when we are always sceptical about such forecasting, our own or that of others. But it does seem to us that currently a US recession, and global recession, are embedded in the valuations of many companies which, in the absence of recession, are extremely attractively priced. We include in this the oil sector where we believe that the present oil price is unsustainably low.

Orchard Street – Philip Gadsden

Property Unit Trust

The portfolio valuation as at 31st January 2016 was flat month on month.

We have completed a lease renewal at Unit D21, West Thurrock, extending the term by 5 years. The rental income has been increased by 13% from the 3516 sq ft warehouse.

The portfolio vacancy rate is 7.9% compared with 8.8% for IPD and the initial yield on the portfolio is 4.7% which compares with 5.0% for IPD as at 31st January 2016.

Property Life and Pension funds

The portfolio valuation as at 31st January 2016 was up 0.2% month on month.

We have completed the sale of a retail warehouse at Raleigh Weir in Essex for £7.65m, slightly ahead of valuation. We anticipate limited rental growth at the single let older style Homebase unit which is in a marginally compromised position with limited parking.

We have completed a new 10 year lease at 166 Bilton Road, Hayes, Middlesex. The occupation of the 5,055 sq ft warehouse has secured a rental income of £51,000 pa and leaves one vacant unit which is currently under offer.

The portfolio vacancy rate is 6.8% compared with 8.8% for IPD and the initial yield on the portfolio is 4.9% which compares with 5.0% for IPD as at 31st January 2015.

RWC – Nick Purves

Equity Income

It has been a volatile start to 2016 with investors continuing to worry about global growth, corporate earnings and leverage. The FTSE All-Share Index suffered from particular weaknesses in banks and wider financial services, basic resources and industrial companies. Oil in dollar terms fell to levels last seen in 2003.

The fund benefitted from a strong performance from food retailers. A slight increase in like-for-like growth in sales for the first time since January 2012 at WM Morrison signalled that management changes are beginning to bear fruit. Tesco also experienced a better Christmas trading period. Both companies are taking steps to reduce their debt levels as they reshape their businesses to cope with changing consumer buying habits, the threat of discounters and historic over-expansion. The market responded very positively to the sings of a turnaround with Tesco shares up 25% and WM Morrison up 19% from their January lows.

Unilever also performed very strongly, earnings per share rose 12% over the previous twelve months, driven by better-than-expected organic growth, an FX tailwind and an uptick in gross margins. The home care and refreshments businesses were particularly strong, and emerging market growth remained robust.

GlaxoSmithKline also performed well during the month. The company was under the spotlight last year for its business strategy and questions were raised over the sustainability of the dividend. We believe Andrew Whitty, the CEO, should be given a chance to implement his plan for the business; the rebound in the share price might suggest the market is taking the same view.

The fund continues to be relatively defensively positioned. We remain concerned about corporate profitability coming off the back of record profits over the last few years. Aggregate profit margins are under pressure against weakening economic growth. Leverage is a further key concern. Credit markets are showing signs of stress as seen in the increase in the high yield or junk bond market where spreads are widening and defaults are increasing. Should the market offer opportunities to invest in good companies at attractive valuations the fund has the cash to do so, thereby helping us to ensure that we meet the long term objectives of the fund’s unit holders.

Sands Capital – David Levanson, Sunil Thakor & Perry Williams

Global Equity

We focus on the underlying fundamentals and long-term growth prospects of our businesses, not short-term stock price movements. The Global Growth portfolio is characterized by relatively low turnover, therefore positions are not frequently adjusted. As a group, our portfolio companies continue to execute and deliver solid business results.

On a relative basis, the top five contributors to investment results were Facebook, ASML Holding, Airports of Thailand, CP All, and Las Vegas Sands. Airports of Thailand (AOT) operates six international airports located in Thailand that handle more than 80% of the country’s air traffic. Thailand is accessible for a large number of people—about 50% of the world lives within a five hour flight radius—and is consistently ranked as one of the world’s top tourist destinations. AOT reported strong fourth quarter results at the end of November, led by tourism from Chinese travelers. Overall, domestic and international passenger volumes grew in line with our expectations (up 25% and 20%, respectively). However, increased volumes from low cost carriers (LCCs) resulted in aircraft service income growth that was slightly below our estimates, as LCCs receive a three-year discount on aircraft fees to encourage flights from China. Despite this, margins improved by 4%, as AOT demonstrated continued significant operating leverage. We continue to believe AOT will benefit from rising incomes in Asia, which we expect to drive increased demand for travel to popular and convenient destinations like Thailand.

The top five relative detractors from investment results were Regeneron Pharmaceuticals, BioMarin Pharmaceuticals, Charles Schwab, Workday, and Alibaba. In 2015, Alibaba initiated multiple enhancements to its online marketplaces that pressured gross merchandise volume, a key growth metric, and monetization. Its third quarter results, released in late January, demonstrated these initiatives are beginning to bear fruit. The company’s take rate—what it earns on each transaction—grew for the second straight quarter, driven by significant monetization growth on Alibaba’s mobile platform. The company continues to make progress on other strategic initiatives, including logistics, cloud computing, and online-to-offline services. Additionally, Alibaba is gaining market share in areas that have historically been a source of strength for competitors, including service to Tier 1 cities, and categories like electronics and grocery. We continue to view Alibaba as the primary platform for online purchases within China, and as such, the company should remain a beneficiary of the overall secular shift to ecommerce.

There were no purchases or sales during January.

Schroders – Kevin Murphy & Nick Kirrage

Managed Growth Unit Trust & Schroder Managed

It was a turbulent start to 2016 as renewed instability in the Chinese equity market and a further deterioration in the oil price weighed on risk assets. Equities fell sharply while perceived safe-havens rallied. While Mario Draghi’s indication that the European Central Bank could reconsider its policy in March led some to expect another cut in the deposit rate, worries about China, the oil price and nonperforming loans in the Italian banking sector still left the European equities nursing hefty losses.

Concerns about the domestic economy also weighed on some parts of the UK market, as reflected in a marked decline in the value of sterling as investors pushed out their expectations for the first UK interest rate rise. Weakness in commodity prices weighed again on the market’s heavyweight resource sectors.

The UK equity holdings outperformed the FTSE All-Share benchmarks. The fund’s top-performing holding over the period was Wm Morrison Supermarkets after it revealed an increase in like-for-like sales at its Christmas trading update and lowered year-end net debt guidance. Meanwhile, Tesco performed well following very robust Christmas and third-quarter trading updates, with like-for-like sales in both periods well ahead of consensus expectations. The other top performer was Home Retail after J Sainsbury confirmed it had made an offer for the company’s Argos business (with terms subsequently agreed following the period end). Home Retail also agreed to sell of its Homebase business to Australia’s Wesfarmers. On the negative side, Royal Bank of Scotland performed poorly after it warned of further provisions in a year-end trading update and Barclays also performed poorly in line with wider weakness in the banking sector.

Schroders – Mike Hodgson

Multi Asset

It was a turbulent start to 2016 as renewed instability in the Chinese equity market and further deterioration in the oil price weighed on risk assets. Equities fell sharply while perceived safe-havens like US Dollars and government bonds rallied.

The TOPIX Index returned -7.4% amid concerns about the impact of the yuan’s devaluation on Japan’s export sector. Losses were pared by the BoJ’s move to introduce negative interest rates.

Mario Draghi’s indication that the ECB could reconsider its policy lent some support to equities. However, worries about China, the oil price and Italian non-performing loans resulted in the MSCI EMU index returning -6.3% in total in January.

The S&P 500 in the US fell by -5%, negatively affected by fears of slowing global and domestic growth.

Continued weakness in commodity prices also weighed on sentiment and the FTSE All-Share recorded a loss of -3.1%.

Reflecting the increased market volatility, exposure in the MSCI Vol Target was gradually decreased from c.72% at the start of the month to c.52% at the end of the month. The reduction in equity exposure mitigated part of the equity market losses.

As the MSCI 10% Vol Target continued to fall (ending the month at 97.5% of the average put strike level), the downside put option overlay increased in value having a positive contribution to returns and thus further mitigated losses.

Schroders – Mike Hodgson

Strategic Income

After a turbulent start to the year the majority of global equity markets fell sharply over January (in local currency terms). While impacted by the turbulence in equity markets, the portfolio posted only slightly negative performance as it benefitted from the strengthening dollar and the call overwriting strategy.

While the allocation to Asian equities outperformed comparators it had a negative impact on local currency performance given that the region suffered from the instability in China. The other key performance detractor (in local currency terms) was the exposure to European equities.

In a month when the British Pound depreciated versus both the US Dollar and the Euro, the fact that FX risk was left unhedged had a positive impact.

As the market posted negative performance, the calls ended the period out of the money. This had a positive impact on performance thus enhancing returns for the month.

While the synthetic risk management overlay was activated during the month exposure to equities was only reduced briefly and thus the impact on returns was not significant.

Select Equity – George Loening & Chad Clark

Worldwide Opportunities

Unit Trust & Worldwide Managed Global equity markets had a challenging start to the year, as weakening macro data and some surprising policy shifts from Chinese economic officials led investors to fear for global growth prospects heading into the Q4 earnings season. Defensive sectors including Utilities, Consumer Staples and Telecom outperformed, while Materials and Financials underperformed during the month. The Sub-Account returned -4.9% on a net basis in January 2016 versus a -2.4% decline for the MSCI ACWI. The account’s cash levels decreased by 3% during the month, ending January at 5% of assets.

The top three contributors in the month were O’Reilly Automotive, a US automotive aftermarket parts retailer and distributor; Compass Group, the world’s largest provider of outsourced contract catering services to the private and public sectors; and Fastenal, a global distributor of industrial and construction supplies. We continue to believe that Compass Group is well positioned to benefit from the increased outsourcing of food services, and the Company is also resilient to a slowing economy given its predictable business characterized by multi-year contracts with over 90% retention rates. The largest detractors in the month were Misumi Group, a Japanese global distributor of customized factory automation components; Julius Baer Group, the Swiss private bank; and Sensata, a manufacturer of sensors and controls primarily to the auto and off-road vehicle markets.

While the outlook for global growth continues to be more precarious today than it was six months ago, valuations which were becoming more reasonable last quarter have become even more so since. Sudden market drawdowns, such as the one we are currently experiencing, tend to open up significant discounts to the intrinsic values of approved-list businesses. Given the risks that are building, however, we will be patient with allocating new capital and expect to continue to take advantage of additional volatility ahead.

State Street – Mihaly Domjan, Nick Pidgeon & Jennifer Yazdanpahani

Money Market

Market sentiment was poor in January. Weak Chinese purchasing managers’ index (PMI) numbers brought about renewed fears of a hard landing for China’s economy, and weakness in oil and commodity prices continued to worry investors. Despite a stellar rise in US non-farm payrolls, global stock markets plummeted. At January’s meeting of the European Central Bank’s Governing Council, President Mario Draghi opened the door for further ECB action as early as March after sounding much more concerned about the outlook for the eurozone economy, both in terms of growth and inflation.

Meanwhile, the Monetary Policy Committee kept interest rates on hold at 0.5% for the 82nd meeting in succession. This was unsurprising given the continued fall in oil prices, renewed concerns about the health of the global economy, and the weaker near-term outlook for UK growth. The minutes of January’s meeting highlighted that the near-term inflation outlook had weakened and that recent news on wage growth and productivity was disappointing. Ian McCafferty remained the lone MPC hawk voting for a rate hike, leaving the vote at 8-1 for the sixth successive month. If global weakness persists some commentators expect him to join his colleagues in voting to keep rates on hold.

CPI inflation was positive for the second consecutive month in December, rising to 0.2% from 0.1% in November, in line with consensus expectations. The rise in CPI resulted from an easing in fuel price deflation and a pick-up in core inflation from 1.2% to 1.4%. Inflation is expected to average only around 1% in 2016. UK employment growth accelerated again, with a 267,000 quarterly increase in the three months to November. This reading was up from an increase of 207,000 in October and takes the ILO unemployment rate down from 5.2% to 5.1%, the lowest level since 2006. In contrast, UK labour market figures showed further weakness in wage growth; headline pay growth slowed from 2.4% to 2.0%, the weakest growth since February 2015, down from a peak of 3.3% in May 2015 and consistent with Bank of England Governor Mark Carney’s view that employers are using the period of low inflation to hold wages down.

In a speech at Queen Mary University, Governor Carney outlined three key metrics for assessing the timing of policy tightening: sustained growth momentum “relative to trend; domestic cost growth compatible with 2% inflation, and core inflation “moving notably” towards the CPI goal. He stated that, “We need to see cumulative progress in these three areas to have reasonable confidence that inflation is on track to return to the target and that a modest tightening in monetary policy will be necessary to ensure it does so sustainably”. With oil prices falling, volatility from China, and pay moderation, Carney added that the conditions were not currently right to tighten monetary policy. The market is now pricing the next hike well into the second quarter of 2017.

December’s gains in the Libor curve were reversed in January as the six-month fixing dropped two basis points and the 12-month fixing fell seven basis points, back to June 2015 levels. Investment levels out to six months held firmer, remaining mostly unchanged over the month. Twelve-months yield fell a few basis points in line with changing rate-hike expectations. At the fund level, the weighted average maturity remained around the mid forty-day range with a slight increase in assets under management offsetting investments placed out to six-month duration. Short-end liquidity investments were mostly managed using gilt repo. The fund continued to focus on diversification by both geographical location and sector, whilst maintaining high credit quality.

Tweedy, Browne – William Browne, Tom Shrager, John Spears & Robert Wyckoff

Global Equity

Turbulence resurfaced as the New Year got underway with global equity markets buffeted by volatile oil prices, deepening concerns about growth in China, and the sense that the efficacy of monetary largesse may have run its course. In our experience, downside volatility often inures to the benefit of price disciplined value investors, and the SJP portfolio finished the month 131 basis points ahead of its benchmark.

As one might expect, our food, beverage and tobacco holdings, led by Diageo, Nestle and Imperial Tobacco, had solidly positive returns for the month, as did pharmaceuticals such as Glaxo and J&J. We also had a nice jump in Verizon shares as they had a favourable earnings report. In contrast, there was continued weakness in all of our bank and insurance holdings, including HSBC, Standard Chartered, SCOR and Zurich Insurance, among others. The more cyclical components of the portfolio, including our oil & gas and industrial holdings, also were under pressure during the month.

For a number of years now, we have been in a market environment where equity valuations have been propelled forward largely by expansive monetary policies despite muted economic growth. This decoupling of prices from underlying fundamentals seems to be manifesting itself today in enhanced downside volatility. If the screw has indeed turned, as we suspect it has, we believe disciplined value investors should gain considerable ground on benchmark indices in the weeks and months ahead.

Twenty Four Asset Management – Gary Kirk

Diversified Bond

It’s difficult to remember a more sombre start to a year, with sentiment overwhelmed by a deluge of uncertainty regarding global growth and increasing geopolitical fears. Oil prices continued to decline as Iran prepared to add supply, to already weak demand and record inventory levels, pushing WTI crude to new lows of $28.50 a barrel. In addition, China reported growth of 6.8%, just 0.1% below consensus but enough to trigger broad based selling amid increased speculation as to the accuracy of reported data.

A slightly more dovish statement from the FOMC and hints from Draghi that the ECB are likely to consider widening their QE program, did help to stabilise the markets briefly, but at very low levels and investor seems to be universally cautious.

As regards performance, there were very few hiding places; the S&P 500 lost over 5%, the Hang Seng -10% and the Euro Stoxx index -7.0%, while WTI oil declined another 12%. Relatively, fixed income fared better, but still struggled; US HY returned -1.58%, Euro HY -1.14% and UK HY -0.90%, while the bank AT1 sector lost 2.47%. In a classic flight to safety, US Treasuries returned 1.89% and Gilts returned 3.8%.

Facing such weak markets, the fund also struggled, returning -0.94% for the month.

Twenty Four Asset Management – Gary Kirk

Strategic Income

It’s difficult to remember a more sombre start to a year, with sentiment overwhelmed by a deluge of uncertainty regarding global growth and increasing geopolitical fears. Oil prices continued to decline as Iran prepared to add supply, to already weak demand and record inventory levels, pushing WTI crude to new lows of $28.50 a barrel. In addition, China reported growth of 6.8%, just 0.1% below consensus but enough to trigger broad based selling amid increased speculation as to the accuracy of reported data.

A slightly more dovish statement from the FOMC and hints from Draghi that the ECB are likely to consider widening their QE program, did help to stabilise the markets briefly, but at very low levels and investor seems to be universally nervous and universally cautious.

As regards performance, there were very few places to hide; the S&P 500 lost over 5%, the Hang Seng -10% and the Euro Stoxx index -7.0%, while WTI oil declined another 12%. Relatively, the fixed income markets fared better, but still had a poor month; the US HY index returned -1.58%, Euro HY -1.14% and UK HY -0.90%, while the bank AT1 sector lost 2.47%. In a classic flight to safety, US Treasuries posted a total return of 1.89%, while the Gilt index returned 3.8%.

Facing such weak markets, the fund also struggled, returning -0.79% for the month.

Wasatch Advisors – Ajay Krishnan & Roger Edgley

Emerging Market Equity

Weakness from China was responsible for most of the overall decline in the emerging-markets benchmark during January. The portfolio was relatively flat for the month, as our smaller position in Chinese equities limited our exposure to the main source of negative performance. India and Mexico remain the two most-heavily weighted countries in the portfolio, and we plan to further increase their weightings to the maximums allowed by our mandate.

One of the Indian companies we added in January was Welspun India Limited—a global supplier of home-textile products, such as towels and bed linens. The company is looking to the hotel and hospital segments as its next major areas of growth. Already the largest integrated towel manufacturer in Asia and a leading supplier to U.S. retailers, Welspun hopes to make inroads into the European Union when import duties on Indian textiles are reduced or eliminated. During the past decade, India’s higher-quality cotton and natural cost advantage over competing countries have enabled its textile producers to capture a growing share of the markets they serve.

For emerging markets overall, we believe the declines of the past five years have brought equity valuations down to very attractive levels. Moreover, we believe recent indiscriminate selling of equities and currencies across emerging markets presents attractive opportunities for 2016.

Wellington Management – Haluk Soykan


Gilt yields fell over January, led by the 10-year point of the curve falling 29bps, and followed closely by the 2- and 30-year parts of the curve falling 25 and 24bps respectively. Gilt yields plummeted steadily over the month amid domestic issues of near-zero inflation, price pressures softening and nervousness over a potential “Brexit”, in addition to global turmoil with tension in the Middle East and the World Bank cutting its global growth forecasts. The year began with a rocky start as weak oil prices and the slowdown in China continued to impact global financial markets. Equities sold off substantially across developed and emerging markets, the US dollar rallied strongly, most major global government bond yields declined and credit spreads widened. The UK’s inflation picked up modestly in December to an 11-month high as a surge in air fares offset lower food and clothing prices. The unemployment rate declined to 5.1%, the lowest in ten years, however wage growth slowed. US Q4 GDP growth slowed, driven by softer consumer spending and a decline in exports. The Europe flash manufacturing PMI softened in January and industrial production fell, mainly driven by falling energy prices and a decline in capital goods. The BoJ cut its benchmark rate into negative territory in an effort to spur inflation and economic momentum, while the ECB, RBNZ and Riksbank all indicated possible further policy easing.

During January the portfolio underperformed the benchmark, returning 2.00% while the benchmark returned 2.02%.

The UK economy continues to be characterised by low inflation, a slowing economy, widening imbalances and a huge risk around the EU referendum. Domestic demand has slowed in recent months despite better employment and wages. There is a risk that marginal propensity to spend out of income falls (or savings rises) if household debt is high and inflation expectations remain low. Housing will be the key determinant of the household saving rate and the propensity to consume. “Brexit” concerns, imminent macro prudential measures and any tax hike on buy-to-let schemes could lead to a fall in housing prices and break the income consumption.

The information contained herein represents the views and opinions of our fund managers and not those necessarily held by St. James’s Place Wealth Management.

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Some of the products and investment structures documented within this article will not be available to our clients in Asia. For information on the funds that are available please get in touch.


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