Carrington Investment Approach

Welcome to our latest investment update on the markets. In addition to our normal update, we have included a fund spotlight piece from Mohsin Bukhari, Head of Investment Research. This will be included in the update from now on. We felt it would be useful to focus on one of our holdings by lifting the bonnet and giving you a bit more insight.

For this edition, we have written a note on the Standard Life Europe ex-UK Smaller Companies fund but first, an update on the markets..

Politics has taken centre stage over the past few months. The markets have generally taken a positive view of the change of administration in the US, despite President Trump’s shortcomings and the ongoing investigations. The elections that have taken place in Europe so far have not followed the populist path, as many feared, but have instead opted for more centrist candidates.

Political events will continue to dominate headlines with the UK election result and BREXIT negotiations. Tensions in the Middle East and North Korea and concerns over President Trump are also likely to figure quite highly over the coming weeks and months. Whilst we do not see rises in all markets and sectors, we do remain positive on the outlook for our holdings. Over recent months we have seen much less volatility in equity markets and year-to-date all of our managed offerings are ahead of their benchmarks. The Pound remains relatively weak versus the US Dollar and the Euro, particularly now given the election result.

Exchange Traded Funds, commonly known as ETFs, are getting a lot of consumer press coverage because of the lower charges they offer over conventional funds. We continue to research the ETF market to see how we can effectively incorporate them into our portfolios without affecting the performance outcome. They are getting quite a lot of consumer press coverage because of the lower charges they offer over conventional funds. At the current time, there are not enough ETF offerings across all sectors to replicate our active holdings and in some instances, none exist that cover what we own. Although important, price is not the only consideration we need to take into account when selecting funds.

As an example of this conviction, we did own a UK Mid-250 tracker (ETF) in our higher risk portfolios. Following the Brexit vote, we felt the UK Housebuilders would come under pressure and so we wanted to avoid having any exposure here. However, the index had quite a high weighting to this sector and so we saw merit in switching to an active fund which shared our view.

We have now constructed a full ETF portfolio offering to reflect a low annual charge, but we would not choose to invest our own money in such a portfolio as we still think there is merit in accessing specific sectors of the market via active funds.

Below are more specific sector thoughts on markets from our Investment Director, Eric Woodward.

Equity Markets

We feel that although the US economy is recovering well, we see better value elsewhere. In the UK, we feel we should tilt away from the larger companies although the FTSE 100 has re-rated to reflect Sterling weakness. We continue to favour the more domestically facing smaller and mid-cap companies.

Now that the French elections are out of the way, we feel Europe offers good prospects for the coming year. There is the overhang of the Italian elections, but we do not know yet when these will take place and they may well be held in 2018.

We remain positive on Asia although less so on Japan. Political tensions may keep the region muted short-term. On the whole we continue to expect enhanced returns from equities.

Fixed Interest

We remain quite cautious on this area and have reduced how much we own, because when interest rates do start to rise, some parts of the fixed income markets do not do as well. Our alternative holding in the Atlantic House fund, which is a fund of structured products, has served us well.

Cash and Bank Deposits

These are clearly risk free assets – up to £85,000 with any one institution. Interest rates are unlikely to rise in the UK and Europe in the immediate future, and we should see further increases in the USA, but they will be modest.

All increases, when they come, will most likely be at a quarter of one percent at a time, so very gradual. We expect to see rates peak around 3.5% but not for a few years to come.

Summary

We are aware of the short-term risks to market sentiment and these will probably lead to some periods of increased volatility. Headlines such as election results, Brexit and concerns over President Trump’s actions with the FBI will affect the market. We are, however, selectively optimistic about the possible returns from a well-managed portfolio of assets and feel that 2017 may well prove to be favourable for equity markets.

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Fund Manager Insight

Mohsin recently met with Andrew Paisley of Standard Life to discuss the Europe ex-UK Smaller Companies, one of the funds we currently hold. Herewith some insight into what was discussed…

FM details

 

 

 

 

 

With the European elections taking centre stage during the first quarter of 2017, we felt it was worth meeting the European fund managers we have invested in. We chose to meet Andrew Paisley, manager of the Standard Life Europe ex-UK Smaller Companies fund. Andrew’s team has a strong track record but faced some challenges into the end of 2016.

Andrew shared our views that the European elections are likely to be a non-event and so he was more focussed on the macro backdrop and the companies he has invested in. He felt that regardless of the results, many of the businesses he has invested in will continue to do well due to their international revenue streams.

The German business, Nemetschek, continues to be a key feature of the fund. Construction has traditionally been a paper based industry, but Nemetschek are looking to change this with their information management software helping to improve the efficiency of the construction and architectural industries. Regardless of the political environment, this business will continue to penetrate the market and are already present in 140 countries.

Irish property business, Hibernia, also features as one of the key holdings in the fund. The business focusses on Dublin property development, particularly within the office sector, which has seen a great deal of demand since the financial crisis and more recently following the Brexit vote. They are the dominant figure in the Dublin market and although they are very concentrated in terms of geography, their clientele are from across the world.

We feel the macroeconomic picture for Europe has improved as of late and feel very comfortable with the fund and with the manager. The manager joined Standard Life in August 2014 and has accumulated over 400 million Euros in the European share class. The UK share class remains small at £50 million demonstrating our ability to identity funds that are under the radar of most of our competitors. We purchased the fund on 18th April 2016 and it has done very well for us; it is currently up 35.7% since purchase.

We look forward to hearing from you if you have any questions or why not tweet us your thoughts and comments @Carringtonviews?

 

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