Welcome to our latest investment commentary covering the third quarter of 2019. This update provides some more in-depth commentary on the markets and our views moving forward.

After two strong quarters, the third has been marked by a lack of direction, with portfolios generally delivering small positive returns. A number of factors have caused the markets to stall, with the trade tensions between the US and China being the main cause.

Our approach to owning a broader range of assets this year continues to serve us well and we are currently looking at another investment to further diversify our exposure. Gold, in particular, has been a strong contributor to returns since we purchased the ETFs on 1st April 2019. The Cautious and Balanced portfolios have exposure to physical Gold, which was up as much as 18% by the beginning of September.

Given the higher risk tolerance in the Growth and Unfettered portfolios, they have exposure to the Gold mining companies, which are more volatile; the Gold mining ETF was up as much as 50% over the same time frame.

Given the large returns in the Gold mining ETF, we decided to rebalance the Growth and Unfettered portfolios to lock in the profits and bring the position sizes back down to the original levels. Our timing here was spot on, with Gold retreating two days later.

As of 30th September 2019, the portfolio returns for this year are as follows:

• Defensive Income +9.4%
• Income +11.8%
• Cautious +11.2%
• Balanced +12.6%
• Growth + 16.0%
• Unfettered +17.5%

At the start of the summer we anticipated that we would see greater volatility in this quarter, and we made some changes to bring in some more defensive assets into the portfolios. Full details of these can be found at the end of the note.

Q3 2019 REVIEW

The markets have spent much of the quarter focussed on two main areas; the trade tensions and the Central banks. To be fair, these have been areas of focus for some time, but during this quarter, the focus has been more acute.

There had been hopes that the trade tensions may be thawing with a series of goodwill gestures from the US and China. However, at the beginning of August, President Trump surprised the markets by tweeting that China had not been co-operating and that he was going to levy further tariffs on their goods coming to the US. There was a sharp negative reaction to this, which was fairly short-lived, but led to a difficult August for markets.

The Central banks have been in focus because of the concerns around global growth. Both the US Fed and the European Central Bank (ECB) were due to deliver major announcements about their future intentions, which could have important implications for the major economies of the world. The outcome was that the Fed decided to cut interest rates again by 0.25%, whilst the ECB announced more stimulus measures. However, the tone from their meetings was not as accommodative as the markets had hoped, resulting in the markets not really moving much on the news. Furthermore, we feel it is difficult for the Central banks to have much of an impact on the global economy because of the ongoing trade tensions, which are impacting business sentiment and activity, whilst there are also signs monetary policy is decreasing in its potency and it is now a fiscal response that is required.

Just when we thought that the quarter was over without any further drama, it emerged Trump had been actively encouraging the President of Ukraine to investigate the Biden family. The CIA whistle-blower, who had been listening to the phone conversation, has come under intense intimidation but the exposure has nevertheless got the Democrats talking about beginning impeachment proceedings. Clearly one to watch.

In response to the various tensions and growth concerns, bond yields continued to decline. The UK 10 Year Gilt yield fell to its lowest level since the 1980s, hitting a low of 0.36%. in 1994, this yield was close to 9%!

The Brexit uncertainty is continuing to have an additional impact on the UK economy, with poor economic data being seen. The political developments make it very difficult to know what the eventual outcome may be and so as we have pointed out in previous notes, we have opted for a more neutral position to either outcome.

OUTLOOK

Our outlook remains similar to the last quarter in that there will be a tug of war between the trade tensions and the central banks. At this stage it seems that the trade tensions are having a greater impact globally. Just when one thinks that things are improving between the US and China, a new development emerges to take us away from a deal being done. A recent example is the US Government suggesting they may restrict or block Chinese companies listing on the US stock markets, which they have since denied.

Given the US election is just over a year away, we believe Trump may try to time a deal so that it reflects positively on him for the election. This is now a fairly common view and of course assumes he is still in office by then! A trade resolution is likely to be very positive for markets.

The central banks are doing all they can and have made it very clear that it is now a fiscal response that is needed. Many Governments are reluctant to do this because they do not want to build up deficits, but it appears they may not really have a choice.

Our risk diversification measures taken earlier this year, such as the purchase of infrastructure and Gold, continue to do well for us so far. We are likely to be making some minor changes this quarter, to further enhance the balance in the portfolios and help navigate any further volatility we may see.

CHANGES MADE

We were fairly active in making some changes early in the quarter, with the main theme being to add to investments that could offer a little more protection for the portfolios. This was done for all portfolios except the Defensive Income portfolio, which was already defensively positioned since June. We have summarised this change below:

July 2019 – Given the strong returns seen this year, coupled with some concerns around trade, we felt it would be sensible to add some protection. This involved adding more to our Gold positions, lowering the equity content in our Cautious portfolio and adding to funds that had demonstrated protective qualities during more difficult markets. The timing of these was fantastic because just one week later the markets fell due to the Trump tweet as noted earlier.

September 2019 – Growth and Unfettered portfolios are rebalanced to lock in the gains made in the Gold ETF.

A full account of the July changes can be found below:

Portfolio Sold (S) / Reduced (R) Bought (B) / Added To (A)
Income BMO UK Income Leaders ETF (S)

Baillie Gifford Japanese Income (S)

Invesco Global Financial Capital (S)

Invesco Global ex UK Index (S)

Evenlode Income (B)

Morgan Stanley Global Income (B)

SPDR Euro Dividend Aristocrats ETF (B)

Tideway Hybrid Capital (B)

Cautious iShares MSCI Japan ETF (S)

Invesco Global Financial Capital (S)

Premier Defensive Growth (S)

UK, EM, US equities (R)

Church House Tenax (R)

Royal London Short Duration Credit (B)

Man GLG Strategic Bond (B)

Miton European Opportunities (B)

ETFS Physical Gold ETF (A)

Balanced iShares MSCI Japan ETF (S)

Invesco Global Financial Capital (S)

Invesco Global ex UK Index (S)

Investec Enhanced Resources (S)

Polar Global Convertibles (S)

JPM Macro Opportunities (R)

Fundsmith Equity (B)

Lindsell Train Global Equity (B)

KLS Arete Macro (B)

Miton European Opportunities (B)

ETFS Physical Gold ETF (A)

Growth Artemis US Smaller Companies (S)

Baillie Gifford Japanese Smaller Companies (S)

Invesco Global Financial Capital (S)

Investec Enhanced Resources (S)

Polar Global Convertibles (S)

JPM Macro Opportunities (R)

Lindsell Train Global Equity (B)

KLS Arete Macro (B)

Miton European Opportunities (B)

iShares Gold Producers ETF (A)

Unfettered Artemis US Smaller Companies (S)

Invesco Global Financial Capital (S)

Investec Enhanced Resources (S)

iShares S&P 500 ETF (S)

JPM Macro Opportunities (R)

Lindsell Train Global Equity (B)

KLS Arete Macro (B)

Miton European Opportunities (B)

iShares Gold Producers ETF (A)

Fundsmith Equity (A)

L&G Global Infrastructure Index (A)

We hope you find this review informative and look forward to hearing from you if you have any questions.