Neil Birrell
Premier Miton’s Chief Investment Officer and manager of the Diversified fund range
For information purposes only. The views and opinions expressed here are those of the author at the time of writing and can change; they may not represent the views of Premier Miton and should not be taken as statements of fact, nor should they be relied upon for making investment decisions.
Out of favour; very recent performance
I have been asked one or two questions about recent performance in the last week or two. It seems a little ironic given we have just completed ten years of pleasing absolute and relative performance for the Premier Miton Diversified Growth Fund. But it is just as important to explain performance numbers that are less good as it is to explain very good ones.
I do not look at what our peers are doing in their funds, so cannot comment on why we may do better or worse than them. I can see little point in looking, I would much rather spend the time thinking about what we are doing.
In the early part of the year, it seemed that the peak in interest rates was in sight and that inflation might be coming under control, or that was the hope anyway. Then the turmoil in the banking sector had such a dramatic impact on the expectations for interest rate changes and the economic outlook more broadly, that the ramifications were felt throughout just about all asset classes. This has not been favourable for the funds.
Markets moved rapidly to the view that interest rates were peaking (and would very soon be falling), inflation was under control and the recession wasn’t a major concern. Therefore, assets that were sensitive to these factors did well. Bonds, overall, were unsurprisingly strong and within that those more sensitive to interest rate moves did better; our bond portfolios are short dated and less sensitive to this factor.
Perhaps the move in equity markets is more interesting. They were strong overall as well, but there was a clear change in leadership; we moved back to technology companies leading the way again, just as they did less well as interest rates rose, that reversed. We saw large companies outperform small, the US do well and the UK not so well. Again, not how the Diversified funds were positioned.
We have always had exposure to real estate through listed property companies and Real Estate Investment Trusts; we like the long-term prospects for a number of sub-sectors. Tighter lending conditions are almost inevitable following the banking problems and property companies need debt. They suffered another downturn as a result of that.
Finally, sterling has been the strongest G10 currency this year. Although we have had a good portion of the funds’ non-sterling exposure hedged, the rise in sterling has been a bit of a head wind.
To summarise, market conditions did not suit how we were positioned, but we remain of the view that the current positioning of the funds is appropriate for the outlook as we see it.
In favour; current positioning
The Federal Reserve, European Central Bank and the Bank of England all announce their next decisions on interest rates in early May. Representatives from each of them have suggested that increases are likely to be forthcoming. That really shouldn’t be surprising. The banking “crisis” does not look like a crisis and inflation is not anywhere near where they want it to be. It is therefore likely that market hopes and expectations are to be disappointed. As we do not yet know the full effect of all the rate rises we have had so far and with interest rates remaining higher, along with tighter credit conditions, economic growth will be under significant pressure, with a recession very much on the cards.
Therefore, we remain happy with having little interest rate sensitivity in the bond portfolio, and an equity portfolio that is balanced and favouring companies that should do relatively well in more difficult economic conditions. We have a preference towards medium and small sized companies, as that is where we see greater value and better quality companies that can grow.
We have a bias towards the UK at present as it looks cheap by international comparison. We have, though, recently introduced some exposure to the large technology companies through a derivative relating to the NASDAQ 100 index outperforming the S&P500 index. If earnings growth becomes scarce, the technology sector could continue to do relatively well.
Our property exposure has suffered; the listed pan European real estate market is now trading at around a record discount to its underlying net asset values. This is despite the inflation protection characteristics of real estate over time and the structural rental demand for property in key markets such as European capital city prime offices, logistics, storage and healthcare. We retain alternative investments as a diversifier and with the aim of achieving returns that are lowly correlated to bonds and equities.
Finally, we still have portfolio hedges in place to help protect against equity markets suffering from recessionary conditions and falling earnings; a likely outcome in our view, as rates stay higher for longer to beat inflation. It is difficult to join the optimism that has pushed asset prices higher recently.
As to the funds’ positioning, we are happy as we are. On the outlook for financial markets, we are more cautious than we were following their recent rises.
