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Fund Manager Monthly Report - November 2014

23 December 2014

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

Aberdeen Asset Management (Asia) - Hugh Young

Far East

The fund rose by 1.65% in sterling terms in November, outperforming the benchmark FTSE World – Asia Pacific Index’s return of 1.04%.

Key contributors included India and Korea. India, where we have a non-benchmark exposure, continued to rally on expectations of further reform. At the stock level, the core bank holdings outperformed the broader market, while Infosys continued to re-rate as investors’ optimism was further bolstered by its recent results that showed improving margins. In Korea, our core holding Samsung Electronics rose after the company announced a buyback of both the ordinary and preference shares.

The underweight to Japan detracted as the market outperformed the region on the back of the weakened yen. A delay in the sales tax hike also lifted sentiment. At the stock level, Chugai Pharmaceutical’s share price retreated after a strong run earlier in the year. Our exposure to the oil and gas sector through PTT Exploration & Production, PetroChina and Keppel Corp weighed on relative performance as crude oil prices plunged further. PetroChina fell sharply. While its exploration and production earnings will be hurt by lower oil prices, the company is also a play on China’s focus on the restructuring of its state-owned enterprises.

Aberdeen Asset Management (Glasgow) – Jamie Cumming


In October, the fund’s value rose by 1.31%, underperforming the benchmark’s return of 3.98%. Asset allocation, stock selection and the currency impact were all negative.

Holdings in the energy sector, including Italian-listed Tenaris, EOG Resources and Schlumberger in the US, cost the fund the most, as they were affected by falling oil prices. Tenaris also posted weaker-than- expected quarterly results because of lower sales of premium pipes. Despite current headwinds, management has a good track record of managing oil price fluctuations and the company’s net cash balance sheet is encouraging.

Against this, our technology holdings such as Oracle Corp in the US and Taiwan Semiconductor Manufacturing Company (TSMC) mitigated losses. TSMC’s share price rose following reports of increased orders from Apple.

In portfolio activity, we top-sliced US networking solutions company Cisco Systems following its price strength. We used the proceeds to add to UK-listed information services group Experian and US energy company EOG Resources.

Artemis Investment Management – Adrian Frost & Adrian Gosden

UK & International Income

In November the cavalry began to drift into town in the shape of markedly lower oil prices and continued weakness in most commodities. The market has rightly judged that this is the first good news for the consumer for a number of years.  For the UK stock market however the effect was muted by the significant oil and resource weighting.

We reduced our oil weighting by selling some BP and exiting BG, although in truth this was reactive rather than pre-emptive. In the US we bought General Electric which has been a pretty unpopular stock. The story is the utilisation of data via the internet to improve management of the stock of aero engines, locomotives and other pieces of ‘Big Iron’ all manufactured by General Electric.

On outlook there is much discussion as to if or when there will be a hike in interest rates. To our mind much of this discussion is of little consequence because it is unlikely to be a ‘hike’ rather a baby step. More importantly, it would be a sign that economies are healthy and have regained a degree of self-sufficiency rather than relying on the sugar rush of government stimulus.

Artisan – Dan O’Keefe & David Samra

Global Managed & Global Unit Trust

The short-term memory of equity markets was on full display during November. The MSCI All Country World Index rose 2.7% during the month, with the “panic” from October seemingly forgotten (all returns in local terms). The best performing major markets were Japan and Europe—both likely reacting to actions (or potential actions) taken by their respective central banks. Japanese equities rose 6.2% after the Bank of Japan announced a massive quantitative easing (QE) program. The European markets rose 3.7% as the European Central Bank continues to flirt with (but not commit to) more aggressive monetary stimulus programs. 

The biggest contributors to the portfolio this month were Oracle and Cisco. There was no company-specific news that drove the 8.6% increase in Oracle’s share price. Cisco shares rose 13.0% after reporting earnings that showed improving trends in its two largest businesses, which helped to assuage concerns around a recent product transition. 

Among the largest detractors from the portfolio this month were Imperial Oil, Qualcomm and Serco. The decline in Imperial Oil is related to the price of oil, which fell approximately 18% during November. Qualcomm shares fell 6.6% during the month after reporting quarterly results that included a wide guidance range for next year’s earnings, mostly due to ongoing challenges collecting royalties on its intellectual property in China. Serco declined 41.3% after the new CEO disclosed that a review of its non-UK business revealed loss-making contracts that will require the company to pursue a significant rights offering. 

November was a return to the market trends we have seen for most of 2014, with full valuations and limited new investment opportunities. As a result, finding new securities with an appropriate risk/reward profile is difficult and the underlying discount to intrinsic value in the portfolio is near a historical low. Our team is focused on exercising prudence and patience as we search for attractive company-specific opportunities to deploy capital.

AXA Framlington – Richard Peirson

AXA Framlington Managed & Balanced Managed Unit Trust

The falling oil price was the major news during November. A glut of oil, particularly in the US, produced one of the fastest and most significant falls for many years. A meeting of OPEC members agreed to maintain current production levels which put further pressure on prices. Although this had a very negative impact on the shares of oil producers and oil services companies it should have a beneficial impact on consumer spending and hence growth in due course. Global equities rallied well over the month: UK equities lagged modestly and within the UK larger companies outperformed again: telecoms and pharmaceuticals were the strongest areas and resources by far the weakest. Government bonds also performed well given the deflationary influence of the oil price fall.

There was no significant change to our strategy during November. We have continued to hold more cash than is normal in the bonds and cash part of the portfolio, as we see very little value in government bonds. Investment returns were mixed and marginally disappointing during November: in equities we outperformed in the UK, Europe, Pacific ex Japan and Emerging Markets and underperformed in Japan and the US; in bonds we were too cautiously positioned in the UK and although we outperformed the benchmark in overseas bonds we were very underweight in a category that outperformed cash.

Sentiment towards equities has weakened again in early December: the oil price has fallen further, a snap election in Greece has focussed attention on the stability of the Eurozone and measures in China to regulate the banking system was seen as reversing some of the authorities recent stimulus measures. We still consider equities to offer better value than bonds and cash but see no immediate catalyst to push prices higher in the short term. In the UK, the general election in May is likely to become an increasingly negative factor in terms of investor sentiment even though the UK economy is performing relatively strongly at present.

AXA Framlington – George Luckraft

Diversified Income & Allshare Income Unit Trust

Equity markets were strong in November as investors continued to react to the increase in the scale of Quantitative Easing in Japan.  The other key development during the month was a large fall in the oil price following the failure of the OPEC meeting to announce any measures to try and support the price.

The fund was underweight in the oil sector and this helped performance.  Despite this the fund underperformed as many of the small cap holding did not participate in the rally.  Falls in stocks such as Anglo Pacific, Clarkson, HellermannTyton and Low & Bonar more than offset good moves in Cineworld and Topps Tiles.

During the month the holding of AstraZeneca was increased while some profits were taken in Ashtead and Microfocus.

The presidential election in Greece will cause some uncertainty.  In addition politics in the UK will be at the forefront of investors’ minds as the rhetoric in front of May’s general election increases.  This uncertainty is likely to mean that interest rates are on hold bolstering the attraction of good dividend paying shares.

Babson Capital – Zak Summerscale

International Corporate Bond

In November the International Corporate Bond Fund outperformed its benchmark and delivered a positive return against backdrop of wider market volatility. Developments in economies around the world had a mixed impact on the global high yield market during the month, with notable events including the Bank of Japan expanding its asset purchases, Mario Draghi hinting strongly towards more aggressive European Central Bank action as well as dramatic moves witnessed in the price of oil.

The pace of high yield new issuance picked up in the U.S. as the month progressed, including the second most active week of 2014.  New issue activity climbed to $33bn for the month in the U.S., with the year to date figure now at $348bn. In Europe, high yield bond issuance now stands at over €70bn for the year and has already exceeded the record full year volumes reached in 2013. The amount of senior secured bonds issued in Europe has also exceeded the previous largest annual volume issued since records began. This month, the top contributors to the Fund’s performance were names such as Vue Cinemas, a UK-based cinema chain; and New Look, a British high street fashion retailer. Detractors during the month included Shelf Drilling, a provider of shallow water drilling services worldwide; and Takko, a German value fashion retailer.

European high yield bonds outperformed their U.S. counterparts in November as investor sentiment in the commodity market impacted U.S. companies in the energy sector. We believe this volatility may present us with some buying opportunities where we can take advantage of the pricing dislocation in companies with strong underlying credit fundamentals that may trade lower given the prevailing market environment. Combining the potentially attractive current market opportunities with our existing positioning in the portfolio, we believe the International Corporate Bond Fund continues to provide a robust source of attractive risk-adjusted returns.

BlackRock – Market Advantage team

Alternative Assets

After the short but intense liquidation pressures in October, most markets (with the exception of commodities) remained calm this month. The key event was the sharp drop in oil prices, spurred initially by increasing production from the US, and subsequently compounded by the decision from OPEC to maintain their current level of production output. Economic data during the month indicated a continuation of multi-speed growth. In the US, GDP growth in the 3rd quarter was revised up to 3.9%. The US economy is now growing at the fastest 6-month pace since the second half of 2003. While the unemployment rate has fallen, minutes from the November FOMC meeting acknowledged potential headwinds from Asia and Europe, and maintained that any increase in rates remains data dependent. In contrast, European inflation slipped as energy costs fell, and the European Commission cut its eurozone growth forecast for 2014. With forward looking indicators also falling and interest rates already close to zero, news flow continued to revolve around the potential for broad-based quantitative easing early next year. In the UK, although unemployment dropped to 6.0% and indicators confirmed a solid recovery, persistently low inflation led the Bank of England to keep interest rates unchanged. Japanese Q3 GDP fell 1.6%, putting the country back into recession. The Bank of Japan (BoJ) opted to maintain quantitative easing measures. In emerging markets, Chinese data deteriorated further with the HSBC Flash Manufacturing PMI falling to its lowest level in six months. In response, the People’s Bank of China cut interest rates by 0.4%. Falling oil prices meant poor performance from Latin American equities, while Russian markets were cushioned somewhat by a simultaneous depreciation of the rouble (versus the US dollar).

The fund delivered positive performance during November*. All assets in the portfolio delivered positive performance with the notable exception of commodities. Key contributors to returns were inflation-linked and investment grade corporate bond exposure (FTA UK Index-Linked Gilt Over 5Year Index +5.6%, Markit iBoxx $ Investment Grade Index +3.2%). Developed equity exposures also delivered positive returns, although falls in oil weighed on clean energy exposure (S&P Global Timber & Forestry and Water indices +6.6% and 3.7% respectively, S&P Global Clean Energy +0.6%). Commodities were the only detractor, with the Dow Jones UBS Commodity Index falling 2.0%.

BlackRock – Luke Chappell

UK & General Progressive

The UK Focus portfolio returned 5.2%* over the month outperforming the benchmark FTSE All-Share Index, which returned 2.9%. 

UK equities rose in November, extending the rebound that began in October after the more positive economic data from China, the US and expectation of further stimulus from the European Central Bank (ECB).  The decision by OPEC to leave oil production levels unchanged led to a sharp fall in the oil price and underperformance of the oil & gas sector, with corresponding outperformance of beneficiaries of lower oil prices in the travel & leisure sector. Pharmaceutical, tobacco and mobile telecommunications sectors also led the equity market higher

Within the fund, Johnson Matthey rose after reporting an increase in first half profits, which were slightly ahead of expectations as stricter European regulations helped sales of their auto-catalysts and US truck volumes have been strong. The company lifted its full year profit forecast and increased the interim dividend by 9%.  Throughout the month, a large number of the fund’s holdings delivered good performance with Reed Elsevier, Compass, Wolseley, Next, British American Tobacco, Capital & Counties and Shire all outperforming. Easyjet rose following the lower oil price given the positive impact this is likely to have on costs.

The main detractors to relative performance included BG Group, although the underweight exposure to the oil sector was beneficial overall, and Vodafone, which is not held.  Vodafone rose as market commentators speculated that recent consolidation in the European telecom market would result in improved pricing and returns on 4G capital expenditure.

Activity over the period saw us add to Shire and reduce positions in Rio Tinto, Melrose Industries and Berkeley Group.

Eurozone economic activity remains subdued despite increasingly supportive policy response from the European Central Bank, whilst in the US the ending of quantitative easing is contributing to uncertainty. We expect that inflation expectations and medium term GDP growth will remain modest, thereby limiting the risks of a substantial correction.  In the longer-term, recovering global growth and confidence about monetary policy, which will remain loose to allow economies to pay down fiscal deficits, is a positive backdrop for corporate earnings and equity valuations.  In a world of low but positive global economic growth we look for companies that can meet expectations for earnings growth.

Edgepoint – Tye Bousada

Global Equity

When we invest, we focus on key characteristics such as quality of the business, strength of the management team, defendable barriers to entry and of course an appropriate entry price. Most importantly, we ensure we have a proprietary idea about the business that isn’t recognized by others. An excellent example of this is TE Connectivity Ltd, one of the best performing holdings in November.

TE Connectivity is the world’s largest provider of connectivity solutions, representing 18% of the world’s connector market, twice the size of its nearest competitor. A connector is a device that connects wires or fibres together and is required in every application that contains electronic circuits. TE Connectivity’s products are used in the global aerospace and automobile industries. 

TE Connectivity illustrates our focus on continually upgrading the quality of our investment portfolio. We recently sold our positions in two other auto parts manufacturers, Delphi Automotive PLC and Tenneco Inc., because our proprietary ideas in these investments played out and the expected return going forward had come down. Simply put, we felt the risk/reward profile was no longer favourable. In contrast, we see better expected future returns going forward for TE Connectivity due to our view that margins will expand over the next five years and content per vehicle will continue to grow, views that we do not feel are currently reflected in the stock price.

Invesco Perpetual – Paul Read & Paul Causer

Corporate Bond

The European high yield bond market delivered a positive return through November with performance once again skewed toward higher quality bonds. Government bond performance was an important contributor to returns with bund yields falling over the month. In part this was driven by falling inflation expectations as a result of falling food and energy prices. A point underlined by the sharp fall in the oil price and OPEC’s (Organisation of the Petroleum Exporting Countries) subsequent decision not to cut its production target. This decision was particularly felt in the US high yield market, which has a significant weighting to Energy companies. There was some further single name weakness in the sector. Supply in the European high yield market was relatively quiet with Barclays estimating issuance of €1.7bn across all currencies in November 2014 compared to €7.5bn in November 2013. According to data from Merrill Lynch, European currency high yield bonds had a total return of 1.0% with BB rated bonds returning 1.1% and CCC and below 0.5%. (All in Sterling hedged returns).

Fund Strategy

High yield bond yields remain low by historical standards. But they remain relatively high compared to the yields available on core government bonds, like Gilts and Bunds.  In terms of positioning our exposure is skewed toward higher quality well established high yield names, predominately rated BB.  One sector we do still like are financials, notably banks, where we think aggregate yields offer value relative to the wider market. In our view, ongoing structural and regulatory reform should continue to be supportive of subordinated bank debt. Our strategy is relatively defensive with exposure tilted to higher quality high yield bonds and higher yielding investment grade issues. The fund has a sizable allocation to liquid assets, including cash. This positions the fund to react quickly as market opportunities arise.

Portfolio Activity

In a busier month of trading, we bought new issues in Walgreen 2.875% (Pharmaceuticals) and John Lewis 4.25% (Retails). We sold our position in Firstgroup 5.25% (Transport), and added to our position in Belden 5.5% (Manufacturing).

Invesco Perpetual – GTR team

Multi Asset

The team added a short inflation idea to the portfolio in the UK during November. Despite the apparent robustness of the UK economic recovery, we believe the underlying economy has structural rigidities that make a lasting strong recovery less likely and recent economic releases have moderated. Against this backdrop, we believe UK inflation expectations look high, particularly relative to Eurozone equivalents.

The fund ended the month strongly. The broad-based equity rally benefitted a number of the fund’s equity ideas. Our UK and global equities ideas were particularly strong and our long German equities idea benefited as the DAX closed higher for 12 straight days. Our selective emerging market debt idea also performed well as Hungary and Polish yields fell to record lows on expectations of quantitative easing in Europe while South African yields dropped as the central bank reduced its inflation forecast.  Meanwhile, nagging doubts about the sustainability of the US recovery and disappointing inflation numbers also saw yields falling in the US, which benefited our long duration idea. On the downside, some of our volatility ideas were in negative territory as the likelihood of continued ultra-loose monetary policy saw volatility return to historically low levels.

J O Hambro – John Wood

UK & General Progressive

The last commentary written this year brings opportunity for reflection on to what has changed in 2014. The answer is very little. The 12 months are drawing to a close with absolute valuations in the stock market still bearing little relation to underlying corporate fundamentals, while the lessons of the financial crisis and the destructive power of excessive leverage remain unheeded.

At face value, the fact that developed stock markets are either at or near all-time highs, as with the S&P 500, or at least are not far adrift of previous high watermarks, could indicate a resilience to equity markets that provides a platform for further gains over the months ahead.

After all, markets have had plenty to contend with this year: the end of quantitative easing in the United States, a recurrence of deflation fears in the eurozone amid stalling growth, Russia flexing its military muscles in Ukraine, a terrible Ebola outbreak in western Africa and now a plunging oil price. We take a less benign view. In our, admittedly minority, view, the current market environment and prevailing investor behaviour have worrying parallels with 2007. Our fear is that the ends are justifying the means; investors are investing with the outcome in mind – yield – but are inadequately pricing, or even ignoring entirely, the risks being taken to achieve these outcomes.

In common with 2007, the root of the problem is leverage. But this time it isn't the banks behind the build-up of leverage. Instead, the current facilitators of the credit boom are broadly-speaking the corporate bond market. Anchored against a mispriced risk-free rate, the 10-year US treasury yield, a rate that has been badly distorted by quantitative easing, cheap corporate debt is again fuelling speculative activity within a number of areas – property, private equity, infrastructure and hedge funds – as the scramble for yield by investors in a low return world continues. This recourse to the bond market has seen record issuance in high yield debt and deteriorating levels of protection within issues. This ramp up in non-investment grade debt could have painful consequences should a credit event hit and liquidity levels dry up. As to what form that credit event could take, we do not know. Certainly an oil price that has fallen to US$64 a barrel won't help those US shale energy operators that have loaded up on debt. Meanwhile, in the sovereign bond markets, fiscally-challenged Spain and Italy have 10-year sovereign yields hovering around just 2% while the UK 10-year gilt yield is at a paltry 1.89%, despite a budget deficit running at 5% of GDP.   

Our concern is that the developed world has never been as sensitive to a rise in interest rates as it is today. The bulls argue that, with wage inflation dead and deflation rather than inflation occupying the thoughts of most central banks in the developed world, rates will remain at rock bottom levels for the foreseeable future. But what if wage inflation is not dead but simply sleeping?

Loomis Sayles – Ken Buntrock

Investment Grade Corporate Bond

The UK remains one of the faster expanding economies in the G7 as it continues to move forward. Growth has slowed somewhat in recent months, but indicators still reflect solid expansionary levels overall. The UK labour market has continued to heal, though improvements in wage levels are yet to be seen. The Global expansion is currently being led by the US, albeit at a slower pace than many originally expected. Central bank policies should begin to diverge, with the US and UK considering tightening, while the ECB and Bank of Japan are taking more accommodative stances. Fundamentals continue to be supportive of global credit and there has been strong demand for new issues, but signs of deterioration have surfaced in some areas, notably the oil and energy spaces, as we approach year end. 

UK Investment Grade (IG) bonds posted positive returns in November after a bout of softness in the third quarter. Quarter to date has been solid, though performance relative to Gilts has been modestly weak. UK IG has outperformed Gilts year-to-date, largely due to the rally throughout the first half of the year. Lower rated bonds continue to face headwinds relative to higher quality peers, a trend that is true in virtually all major corporate bond markets. Similarly to the USD IG market, corporate spreads have widened since September. Retailers and Pharma were the primary underperformers on an excess return basis. Supermarkets and Insurance posted the strongest returns.

The UK Gilts curve has generally experienced downward pressure in 2014, which has been positive in terms of absolute performance. The 10-year Gilt is at lows for the year, and levels last experienced in the summer months of 2013.

Magellan – Hamish Douglass

International Equity

During the month of November, we reduced the position in Danone and increased the holding existing in Unilever on valuation grounds. Other trading was limited to active portfolio rebalancing.

As at 30 November 2014, the portfolio consisted of 27 investments, with the top-ten holdings representing 48.39% of the portfolio. The portfolio held 9.88% of its assets in cash at the end of the period.

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

  • Technology/software: We believe that entrenched global software companies enjoy enormous competitive advantages and exhibit attractive investment characteristics.
  • Internet/e-commerce convergence: There are a number of internet enabled businesses that have very attractive investment characteristics with increasing competitive advantages.
  • 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.
  • US interest rates normalising: As the US economy recovers, the Federal Reserve will increase the federal deposit rate and begin to reduce the size of its balance sheet.
  • US housing recovery: A recovery in new housing construction should drive a strong cyclical recovery in companies exposed to US housing and also provide a strong boost to the overall economy.
  • Emerging market consumption growth: Through investments in multinational consumer franchises.

During the month, the portfolio returned +7.26% in sterling terms, before fees, this compares with a benchmark return of +4.21 %, giving relative performance of 3.05%.

In sterling terms, the largest contributors to performance were Target (+1.04%), Wal-Mart (+0.70%) and Lowe’s (+0.69%). Meanwhile, the only detractor from absolute performance was Google (-0.03%).

In sector terms, Consumer Discretionary (+2.45%), Information Technology (+1.96%) and Consumer Staples (+1.65%) made the largest positive contributions, there were no detractors in absolute terms.

Geographically speaking, the United States (+5.58%), Switzerland (+0.44%) and the United Kingdom (+0.36%) made the largest positive contributions, there were no detractors in absolute terms.

Majedie – James de Uphaugh

UK Growth & UK & General Progressive

Your funds returned 4.3% in November, outperforming the FTSE All-Share index by 1.3%.

They key economic data from the month was the oil price hitting – and remaining at – its lowest level since mid-2010. OPEC met and decided to maintain production levels, a clear challenge to the US shale producers. As far as we are concerned, this is good news for the European consumer, where we have been adding exposure in recent months to good effect: Marks & Spencer produced a trading update which showed clear signs that its operational improvements were beginning to bear fruit in terms of margin improvement. This is a company in which we have invested a great deal of research effort, as well as our clients’ capital; whilst there is still a long way to go, this tangible progress is gratifying. Of the other consumer stocks, Carnival and Ryanair were beneficiaries of the lower oil price and WM Morrison rose from depressed levels as investors recognised a strong balance sheet, albeit acknowledging its challenging market position. Vodafone too was a leading contributor as evidence emerged of greater data usage amongst its customers across all its regions. More widely in the European Telecommunications sector, there are encouraging signs of regulatory improvements, allowing for consolidation of service providers and in turn higher profits, further investment in networks and ultimately a better customer experience.

We have been adding selectively to areas that we feel are clear beneficiaries of a lower oil price, at the expense of Integrated Oil companies and some Utilities. We remain cautious on Emerging Markets, where a slowdown could be good news for the western consumer in terms of commodity prices.

Manulife – Paul Boyne & Doug McGraw

Global Equity Income

Stock selection in the industrials and financials sectors contributed to the strategy’s performance. Individual contributors to performance included Macy’s, Inc., Mondelez International, Inc. and Koninklijke Philips N.V. All three companies benefited from solid third-quarter earnings.

Stock selection in the telecommunication services and information technology sectors detracted from the strategy’s performance. Individual detractors from performance included Nippon Telegraph and Telephone Corporation, Statoil ASA and Qualcomm, Inc. Nippon cut its full-year operating profit outlook, while Statoil struggled with the decline in oil prices. Qualcomm noted that 2015 results could be hampered by regulatory investigations.

Oldfield Partners – Richard Oldfield

High Octane

This is the last newsletter we will send in a very difficult year, the worst for us in terms of relative performance (compared with the world indices) since 1999. That period was followed by one of strong outperformance, and we naturally hope for the same again. There are certainly some parallels, in the expensiveness of large sections of markets and the inexpensiveness of other large sections. We are convinced that in time the commitments that we have in a portfolio whose companies have an average price earnings ratio of only 12 and a price to cash flow ratio of less than 6 will pay off.

In November, the top five performers in local currency terms were all Japanese: Japan Airlines (+17%), Nintendo (+16%), Kyocera (+15%), MUFG (+13%), and Toyota (+13%). The fall in the exchange rate of the yen, however, reduced these gains by 6% in US dollar terms. The worst performers included the three energy companies, BP, Eni, and Lukoil, all down 5%.

The fall in the oil price has been the big event of the last several weeks. Many of the same people who were arguing a few months ago that oil would move comfortably in a range between $80 and $100 are now just as emphatic that a new equilibrium price is around $60. It is interesting that while spot prices have sunk over the past year, the five years futures price is still at about $84. As James McIntosh wrote in the FT, “The oil fall might turn out to be temporary”. There is a self-correcting element: lower oil prices stimulate more demand; and more important eliminate higher cost supply. One of the issues is exactly where the marginal cost of production is. The research organisation IHS believes that 80% of US shale oil production in 2015 would be economical at a price of oil between $50 and $69, not the much higher level, of more than $80, which has been argued by others. In any case, any reduction in production in the US would probably take time to come through. In controlling supply OPEC is not the power that it used to be, now accounting for only one third of overall production. Saudi Arabia, in refusing to support a reduction in OPEC production, may simply be acknowledging the decline in the cartel’s influence.

We have moved a long way from the view which prevailed a few years ago that the world was approaching peak oil. Yet it is still true that reserves of oil companies have been declining, with new exploration failing to replace those reserves despite an increase in E&P costs from around $65 billion in 2001, for the major integrated companies, to $309 billion last year. Non-OECD consumption of oil has been increasing by 2.5% per annum since 1980. China in the last decade has increased its consumption from 1.7 barrels per person per annum to 3 barrels, and without dramatic changes there is a long way to go: in the US oil consumption is 21 barrels per person per year. Renewables and new technology, and legislation, may change the whole picture but that would be a big bet. It seems more likely that oil consumption over the medium term will continue to grow, and that with the costs of exploration having grown, the marginal cost of production will ensure a higher oil price.

The three oil companies which we hold appear to us attractively valued even at the current oil price. Eni, which has been an energy conglomerate, has been disposing of many of its assets. BP, though still facing residual Macondo issues, has firmly emphasised value over volume and is increasing its returns to shareholders; and Lukoil is priced at only $2.50 per barrel of reserves and, in spite of some effect from sanctions, is likely to increase production, and returns to shareholders through dividends.

Of the outperformers, Japan Airlines is a natural beneficiary of the fall in fuel costs. The company has had a remarkable turnaround, with a focus on profitability. Scepticism about Japan is understandable after two and a half decades of decline, but we think that the extent to which companies are gradually becoming more focussed on returns is underrated. One illustration of this is in the amount of share buybacks to improve return on equity. So far this year there have been Y3.4 trillion of buybacks by a total of 400 companies, roughly three times as much as in any previous year. One may be cynical about buybacks where, as has been the case frequently in the US in the last couple of years, they are carried out with newly borrowed money. But these buybacks in Japan are being done out of the large piles of cash in Japanese balance sheets which Western investors have often criticised as inefficient. We have seven Japanese companies in the portfolio, and four of them have net cash rather than net debt. In many Japanese companies there is a large gap between price and value, but there has been doubt as to whether the value would ever be realised since the priorities of management have been different. This is now changing.

Orchard Street – Chris Bartram

Property Unit Trust

The portfolio valuation as at 30th November 2014 was up 0.7% month on month.

The 8,593 sq ft Unit 12 at Chelmsford Industrial Park has been re-let following a comprehensive refurbishment. We have secured a new tenant at an annual rent of £55,000 in line with ERV. 

The portfolio vacancy rate is 1.9% compared with 8.9% for IPD and the initial yield on the portfolio is 5.6% which compares with 5.5% for IPD.

Life & Pension Property Funds

The portfolio valuation as at 30th November was up 1.1% month on month.

At Gildersome Spur Industrial Estate in Leeds we have renewed the lease on Unit J until February 2019. This transaction has secured a rental income of £165,000 pa on one of the largest units at the park (42,829 sq ft) which has contributed to a valuation uplift of £1.5m.

We have re-geared three Homebase leases at Tunbridge Wells, Rayleigh Weir and Upton on the Wirral. The leases at Tunbridge Wells and Rayleigh have been increased to 15 years and 10 years respectively whilst at Upton we have split the existing lease between Homebase and Argos adding £61,000 of income in the process. As a result of this asset management initiative the combined valuation has increased by over £2m.

Following the exit of IBRC at Old Jewry in the City in June 2014 we have completed a comprehensive refurbishment of the reception area and the vacant office accommodation.   The property was re-launched to the market during November to a positive reception.

The initial yield on the portfolio is 5.2% compared with 5.5% for IPD and the vacancy rate is 8.7% against 8.9% for IPD.

SW Mitchell Capital – Stuart Mitchell

Continental European, Greater European & Greater European Progressive Unit Trust

We remain optimistic on the outlook for European equities. The gradual recovery in the European economy continues to progress very much as we might have expected. In particular, we have been comforted by the generally positive tone of our recent meetings with company managements, in marked contrast to the more despondent mood amongst investor over the summer months. Notably, the economies of the periphery continue to rebound. Spanish house prices, for example, are now rising for the first time in six years. Mortgage approvals also rose by an impressive 28% in July. In fact, dramatically improving construction confidence suggests that the Spanish economy could grow by some 3% next year.

Credit conditions, furthermore, appear to be improving across the region. The TLTRO and purchases of asset backed securities and covered bonds should help lower bank funding costs, most notably, in the periphery of Europe. The recently published ECB lending survey was also very encouraging. The results of the AQR, furthermore, suggest that the financial system is better capitalized than many had feared. The recent, almost 10%, fall in the value of the Euro relative to the Dollar should also help support the export sector. The sharp fall in the oil price should likewise help stimulate growth. We are, as a consequence, confirmed in our long held view that recovery is gradually taking root across the region – as in Spain – especially in a number of economies which have embraced austerity. From a company earnings point of view, a mixture of recovering revenues combined with stringent cost control and strict capital discipline, should generate surprisingly strong earnings growth. This is at a time when expectations are still framed by fears of a ‘Euro crisis’, and valuations are at mostly at historically extremely compelling low levels.

In fact, share prices currently imply that almost 50% of European companies will face declining ROCE’s in the future. Where high valuation levels still prevail, however, is among more internationally orientated companies. These still trade on ‘cultish’ valuations with many investors continuing to put their trust in continuing vigorous emerging market growth. Our company visits suggest, however, that the growth outlook from the emerging world has slowed significantly. We therefore remain committed to more Europe-centered, domestically orientated, companies. These now constitute almost two thirds of our investments. Companies from the periphery of Europe represent 32% of our investments.

On a recovery basis, for example, the Italian media group, Mediaset, represents great value. The same holds true for our holdings in Intesa Sanpaolo and Banco Popular. Utilities now constitute a growing 25% of the fund including investments in Orange, RWE and Eiffage.

Banks make up a further 24% of the fund. We still believe that the market has failed to appreciate the benefits of a rapid recovery in financial margins coupled with draconian cost cutting and easing regulatory pressures. We have focused on the strongest retail banking franchises such as BNP and Santander where we believe that returns should rather rapidly return to pre-crisis levels. Our favourite growth companies, such as Zodiac and Essilor make up the remainder of the portfolio.

Wasatch Advisors – Ajay Krishnan

Emerging Market Equity

During the month of November, strong performance from our stocks in countries such as India, the Philippines, Indonesia and Brazil enabled the portfolio to surpass its benchmark, the MSCI Emerging Markets Index. Our lack of investments in Russia and Korea also were sources of outperformance for the portfolio during the month, as the benchmark’s positions in those countries declined and were headwinds for the Index.

Although Colombia was our worst-performing country during the month, our long-term outlook for Colombia remains positive. Conversely, despite November’s positive stock returns in Turkey, a lack of improvement in the country’s fundamental backdrop has caused us to re-examine our holdings there.

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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