It’s been a difficult start to the year – Diversified Fund range update

Neil Birrell

Premier Miton's Chief Investment Officer

Neil Birrell, Premier Miton’s Chief Investment Officer and manager of the Diversified Fund range looks at how events over the course of the year-to-date have impacted the performance of the funds.

Firstly, I should say that the title of this note is not meant to show a lack of concern for the human heartbreak that we are witnessing in Ukraine. It is similarly not meant to be dismissive of the moves in markets that we have seen so far in 2022. It is merely meant to be descriptive of what I have experienced in the decision making process that I and the rest of the investment team apply through all market conditions.

The data in this note refers to the first two months of 2022. It is the most accurate way of comparing what has taken place in the Diversified Funds to major indices and will provide some colour to performance.

Backdrop

We entered the year concerned about the rapid rise in inflation in most regions which had been driven by the ultra-loose monetary policy of central banks through the pandemic (although it did start in the global financial crisis in 2008), spiking energy prices and supply chain shortages. Central bank policy was being adjusted to the new environment and markets reacted to that and the prospect of ensuing economic growth.

In economic terms, the invasion of Ukraine by Russia exacerbated all those factors to a point that markets took fright. Although not financially rewarding, it has been interesting to see how government bonds reacted more to the threat of even higher inflation (and possibly interest rates) rather than providing the usual safe haven. The FTSE Actuaries UK Conventional Gilts All Stocks Index fell by over 5%.

Equities suffered, unsurprisingly, although returns did vary. The NASDAQ 100 Index fell 11.8%, S&P 500 Index by 7.2% and FTSE Europe Index by 7.5%, culminating in the FTSE World Index falling 6.4%.

The UK showed an interesting divergence. The FTSE 100 Index, which has a heavy weighting in energy and resources companies, was up 1.4%, whist the FTSE 250 Index of medium sized companies fell 10.0% and the FTSE Small Cap Index was down 7.1%. This meant that the FTSE All-Share Index was only down 0.8%.

That’s a lot of numbers, but it sets the scene.

The funds

YTD performance to 28.02.2022. Source: FE Analytics, on a total return basis. Performance is shown net of fees with income reinvested, class B accumulation shares for the premier Miton Diversified Sustainable Growth Fund and class D income shares for all other funds. On 20.01.2020, these funds moved from a single pricing basis (mid) to a swing pricing basis. Please note that the full 5 year performance period is not available for all funds presented in the above table. Launch dates: Premier Miton Diversified Balanced Growth, Diversified Cautious Growth and Diversified Dynamic Growth Funds, 01.03.2019; Premier Miton Diversified Sustainable Growth Fund, 29.01.2018. *Please see important information for full source disclaimer.

Past performance of a fund is not an indication of how it will perform in the future. The share price of funds, therefore the value of your investment in the funds, and any income from them, can go down as well as up, and you could get back less than you invested.

The investment strategy we apply to equities is one of investing in what we see as good quality companies, with good growth prospects at attractive valuations. This means that, typically, we will only have limited exposure to oil or resource stocks or most large financials such as banks (which typically do well in rising rate environments). It also means that we move down the market capitalisation scale to find the companies we like. This has resulted in our equity portfolios underperforming the global and UK indices (including the mid and small-cap ones). There have been some individual companies that have done poorly as well. I will not detail those here, but will do so in later notes. The key point is that we remain confident of the medium and long term prospects of these companies and believe that short term dislocations will prove to be just that.

The fixed income exposure varies by fund, as does the make-up of it. However, we are defensively positioned in bonds, where we hold them, and in alternative fixed income, so the outcome there has been better than the gilt index, just making a small loss.

The property exposure is via REITs and listed property companies in the UK and Europe. We like this type of exposure because of the liquidity it provides, but that can work against you in stressed markets. The story here is the same as in the equity portfolio. We believe in their long term prospects.

In alternatives we seek investments that are attractive in their own right, but which are lowly correlated with bond and equity markets. These can include listed hedge funds, infrastructure and private equity. In stressed market conditions these investments can become more correlated to mainstream assets. But over the period they barely fell, with the hedge funds making a positive contribution. I compare these assets, overall, with broad hedge fund indices and they outperformed.

Within alternatives we include defensive strategies, which are designed to protect the funds in extreme market moves, or tail-risk events, such as the early stages of the COVID crisis. Markets have not moved sufficiently for these to kick in yet, but we are confident that in any further significant sell-off, these insurance policies will pay out.

The hedges

These have worked. We have put option strategies in place on the S&P 500 Index and the NASDAQ 100 Index, as well as positions that benefit from higher equity market volatility. They are structured to benefit from general market sell-offs, which have taken place. However, the specific falls we have experienced in the UK (both at index level and in our positions) have been greater than the protection the hedges could provide.

They were a significant positive contributor to all the funds (varying between 1.01% and 1.24%) and they remain in place. These hedges are actively managed and will be reviewed as we go through March.

To summarise

Some sections of the funds have done well and as I would have hoped, others, less so, through 2022 to the end of February. By the time you read this note, events and markets will have moved on, but at the time of writing what has been described remains the same, the quantums have just changed.

To address the “less so” element; the share prices of companies are impacted by many factors, one of which is how the company itself is doing, in other words, its operational results. These are not always correctly reflected in prices because of macro, broader market, sector or geo-political factors; we believe that is the case with a number of our holdings.

The hedges worked, but not enough to compensate for some of the equity positions. The tail risk protection is still to kick in.

What next?

For markets; that’s a tough call

For us; we will continue to manage the funds as we always have, focused on the long term but willing to “play what we see” in the short term.

We will write another note to follow this, which will give examples of companies we like for the long term, but whose share prices have suffered in the short term.

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Risks

The value of investments may fluctuate which will cause fund prices to fall as well as rise and investors may not get back the original amount invested.

Alternative investments: These typically behave differently to traditional investments such as bonds and equities. They can include a range of assets such as specialist lending, private equity, hedge funds and gold. Adding alternative investments to a portfolio can help to make it more diverse but can also make it more volatile.

Equities (shares) can experience high levels of price fluctuation.

Government and corporate bonds generally offer a fixed level of interest to investors, so their value can be affected by changes in interest rates. When central bank interest rates fall, investors may be prepared to pay more for bonds and bond prices tend to rise. If interest rates rise, bonds may be less valuable to investors and their prices can fall.

A hedge is designed to offset the risk of another investment falling in price. It can also act as a limit on potential gains if the investment that has been hedged increases in value.

In some instances, for example, when market conditions generally are difficult, holdings in a fund may be difficult to sell and buy at the desired price. The fund value could fall as a result.

Property values can rise and fall sharply depending on the strength of a country’s economy.

Some of the Diversified funds may experience high volatility due to the composition of the portfolio or the portfolio management techniques used.

Put-options are a type of derivative and can be used for a number of reasons. For example, they can be used to protect the value of an underlying investment or group of investments against a fall in value. They can be thought of as an insurance policy. These can make a fund more volatile from time to time.

Future forecasts are not reliable indictors of future returns.

IMPORTANT INFORMATION:

For Investment Professionals only. No other persons should rely on any information contained in this document.

Whilst every effort has been made to ensure the accuracy of the information contained within this document, we regret that we cannot accept responsibility for any omissions or errors. The information given and opinions expressed are subject to change and should not be interpreted as investment advice.

All data is sourced to Premier Miton unless otherwise stated. Persons who do not have professional experience in matters relating to investments should not rely on the content of this document.

*The Premier Miton Diversified Growth, Balanced Growth and Sustainable Growth Funds are classified in the IA Mixed Investment 40% to 85% shares sector, which we believe is a meaningful comparator to help investors assess the performance of the funds.

The Premier Miton Diversified Cautious Growth and Diversified Income Funds are classified in the IA Mixed Investment 20% to 60% shares sector, which we believe is a meaningful comparator to help investors assess the performance of the funds.

The Premier Miton Diversified Dynamic Growth Fund is classified in the IA Flexible Investment sector, which we believe is a meaningful comparator to help investors assess the performance of the fund.

Source: FTSE International Limited (“FTSE”) © FTSE 2022. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE under licence. All rights in the FTSE indices and / or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and / or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

For your protection, calls may be monitored and recorded for training and quality assurance purposes.

A free, English language copy of the fund range’s full prospectus, the Key Investor Information Document and Supplementary Information Document are available on the Premier Miton website, or you can request copies by calling us on 01483 306090.

Financial Promotion is issued by Premier Miton Investors. Premier Portfolio Managers Limited is registered in England no. 01235867. Premier Fund Managers Limited is registered in England no. 02274227.  Both companies are authorised and regulated by the Financial Conduct Authority and are members of the ‘Premier Miton Investors’ marketing group and subsidiaries of Premier Miton Group plc (registered in England no. 06306664). Registered office: Eastgate Court, High Street, Guildford, Surrey GU1 3DE.

005997/100322

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The content of the pages of this website is for your general information and use only. It, and the products and services described within it, are subject to change without notice. We shall not be liable to you, or any third party, for any amendment, modification, suspension or discontinuance of any product or service described on our website. Neither we, nor any third parties, provide any warranty or guarantee as to the accuracy, timeliness, performance, completeness or appropriateness of the information and materials made available on this website.

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Disclaimer

This section of the website and the content it contains is for retail clients only and by persons who are resident in the United Kingdom [who are not US persons]. Professional advisers should refer to the Professional Advisers site.

The content of the pages of this website is for your general information only. It, and the products and services described within it, are subject to change without notice. We shall not be liable to you, or any third party, for any amendment, modification, suspension or discontinuance of any product or service described on our website. Neither we, nor any third parties, provide any warranty or guarantee as to the accuracy, timeliness, performance, completeness or appropriateness of the information and materials made available on this website.

You acknowledge that such information may contain inaccuracies or errors and we expressly exclude liability for any such inaccuracies or errors to the fullest extent permitted by law. Your use of any information or materials is entirely at your own risk, for which we shall not be liable.

The information contained on this website does not constitute an offer or solicitation to sell or purchase shares in the funds or portfolios or to provide you with other products or services. Any application or investment must only be made on the basis of the relevant documentation of the investment, such as, for example, terms and conditions. The information on this website does not constitute any investment, tax, legal or other advice. Persons who do not have professional experience in matters relating to investments should always consult with an independent financial adviser before making an investment decision. Any opinion expressed on individual funds, services or products represent the views of the individual at the time of preparation and should not be interpreted as a personal recommendation to buy or sell or otherwise trade all or any of the investments that may be referred to.

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This section of the website and the content it contains is for professional financial advisers only and should not be relied upon, or circulated to, retail clients. Retail clients should refer to the Private Investor's site.

The content of the pages of this website is for your general information and use only. It, and the products and services described within it, are subject to change without notice. We shall not be liable to you, or any third party, for any amendment, modification, suspension or discontinuance of any product or service described on our website. Neither we, nor any third parties, provide any warranty or guarantee as to the accuracy, timeliness, performance, completeness or appropriateness of the information and materials made available on this website.

You acknowledge that such information may contain inaccuracies or errors and we expressly exclude liability for any such inaccuracies or errors to the fullest extent permitted by law. Your use of any information or materials is entirely at your own risk, for which we shall not be liable.

The information contained on this website does not constitute an offer or solicitation to sell shares in the funds or portfolio or to provide you with other products or services. Any application or investment must only be made on the basis of the relevant documentation of the investment, such as, for example, terms and conditions. The information on this website does not constitute any investment, tax, legal or other advice. Persons who do not have professional experience in matters relating to investments should always consult with an independent financial adviser before making an investment decision. Any opinion expressed on individual funds, services or products, represent the views of the individual at the time of preparation and should not be interpreted as a personal recommendation to buy or sell or otherwise trade all or any of the investments that may be referred to.

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