Steady and Stable
It has now been 10 trading days since we sold partially out of the markets on the 7th February 2018 and we have seen the markets fall and then reinflation over the period with valuations today still generally lower on an indices level than they were when we sold. The worst index YTD is by far the FTSE 100 which is -5.37% and further justifies our stance in having an underweight exposure to the UK even when we are fully invested. It is becoming marginal as to the benefit of our move to cash as the indices over the last week have risen. The chart below looks at the YTD returns and references volatility and returns against some of the world’s major global indices. We have though created strong stability and certainty and those are two phrases which are synonymous with OCM and our investment strategy and style.
Over the last 10 days we have spoken to many and analysed what happened and many feel it was an algorithmic trade that was kinked to increased volatility and bond yields being over 2% on the 10 year that caused the selloff that then became a matter of private investors running for the hills. The bounce last week happened when institutional investors returned noting we are still seeing private investors fearful of investing. It is also interesting to note that there are many comments relating to the algorithms in that the settings will have been changed now so if the same scenario happens again the result should not be as catastrophic and shocking for markets but as yet that has not been tested.
As a result we will not be reimplementing the previous portfolio and have developed a more defensively positioned portfolio that should provide more balance and prevent us from having to take such action again in the short term, The new portfolios are retaining though a 7% – 12% cash weighting that we will be invested if and when the FTSE 100 becomes a buying opportunity which in our opinion is if it falls below 7000. It is today floating around 7270. Another advantage of holding cash is that many of the non-equity assets in an environment of rising interest rates become toxic and assets that are designed to hedge equity become a drag themselves rather than a positive contributor. Holding cash as a hedge against risk even though it becomes a drag on performance is something that we will increasingly use as we progress towards the end of this economic cycle.
Data is still strong, so we are reinvesting.
It is though important as we start to assess the environment of renewed volatility and uncertainty that we go back to the firm footing of data analysis. Data economically remains strong and although equities have pulled back it is still expected that we have at least a further six to nine months of positive equity returns before we get to a point whereby interest rate increases will push up bond yields to a point whereby there will be a full-blown asset rotation. We are therefore reinvesting tomorrow as we are seeing significant signs that the markets have calmed down and no one is panicking anymore, and the new environment of increased volatility is one that we are all now accustomed to.
Model Portfolios and Indices
Over the week the indices have bounced and although our returns are positive they have in no way matched the indices. In hindsight that means we should have reinvested a week ago but that is not how we operate, and the key is stability and certainty and our actions are supported in the charts above and the mandates we have with our clients.
The data above will not directly correlate to the indices as there is always a delay in pricing because the US markets close significantly later than the European markets and the Asian markets. The data set above reflects the last close and much of the days movements will not yet be reflected in the portfolios due to pricing delays. You cannot therefore directly correlate indices to the portfolios. The value of investments may fluctuate in price or value and you may get back less than the amount originally invested. Past performance is not a guarantee of future performance. Performance figures quoted include the fund manager charges but exclude other fees such as adviser, custodian, switch, and/or discretionary investment management fees. Unless otherwise instructed and accrued, income is reinvested into the portfolio.
As we are prepping everything for the rebalance and reinvestment into the new portfolios tomorrow please excuse the shorter market commentary, but it is important that we ensure nothing is missed and with nearly £350m of actively managed assets this is a big task. If anyone has any questions though please contact us and we will endeavour to answer ASAP.
Jason Stather-Lodge CFP, MCSI, APFS
CEO & Founder
Chartered & Certified Financial Planner
Chartered Wealth Manager