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12 August 2009

Property Allocation

Since the beginning of 2007 the property allocation for all CPM models has been minimal both in absolute and relative terms. Until very recently this stance worked well and whilst the current trends in yield and rental growth are still negative, since 2007 prices both in the physical and quoted markets have come a long way off. Since the peak in 2007 property prices in the UK have fallen around 45%. It is difficult to predict whether we have reached the bottom, however it is undeniable that simply by looking at property yields, this asset class looks more attractive than a couple of years ago. If compared to current bond yields, property yields looks particularly attractive.

Whilst price and rental growth trends are still negative, considering the yield currently offered by property assets we decided to reduce our underweight position. The target exposure to this asset class has now been increased to around 2/3 of our benchmark weighting.

These purchases have been financed by decreasing our allocation to Government bonds. We are planning to further reduce our allocation to conventional Government bonds in some models, and at the same time close our bet on index linked bonds and bring the weighting back to neutral.

Source: Bloomberg and CB Richard Ellis Property Research. Data as at 30.06.09

2 April 2009

We decided to invest a small portion of our models in commodity-related investments by purchasing the Schroder Commodity Fund and the ETF Securities Physical Gold ETF. These purchases were partly financed by selling the Lyxor Global Titans ETF, the Impax Environmental Fund and by reducing the cash in our models. No action however was taken for our conservative models, to reflect their cautious risk profile.

Following a spectacular rise after the turn of the century, last year commodities witnessed an equally dramatic fall. Between the end of June and the end of December the Rogers International Commodity Index fell around 60 per cent. Since then and with no clear indications of improvement in economic conditions, commodities prices remained broadly in a trading range.

Whilst current economic forecasts for 2009 are still pretty gloomy and likely to show further deterioration in GDP growth expectations, our view is that the aggressive economic policies implemented by governments and central banks will start to produce a number of effects (and possibly side-effects). Global economies are expected to avoid a depression and after the second half of 2009 we should start to witness an improvement in leading economic indicators.

One of the possible side effects of the current expansionary monetary conditions however could be a return of inflation and even if the resurfacing of growth should be positive for equities, persistent and higher than desired inflation might cause equities to produce low real returns.

Within this scenario, we decided to allocate small portions of our portfolios to gold and other commodities, which should react well to both inflation and economic growth.

We still are unsure whether equity markets have reached a turning point and we still prefer to keep a prudent approach; therefore in order to keep equity weightings to neutral, after the recent strong rally we decided to sell the Global Titans ETF.

The sale of the Impax Environmental Fund should be viewed in the broad current context of low energy prices and general government priorities, where environment-related policies and energy-saving products are unlikely to be in investors' and policy-makers' focus.

24 February 2009

We are making a number of small changes to our Hedge Funds holdings. In particular, after a good start of the year we are reducing our exposure to this asset class to neutral. Our overall exposure to alternative investments will be cut further and become significantly underweight. The major underweight will still remain property, which accounts for only a fraction of the benchmark allocation.

These trades are to be implemented over the coming months and cash raised from these sales will not be reinvested; therefore our fixed interest and liquidity position will be increased. Within fixed interest our major bet remains in corporate bonds, which we believe offer value compared to Government bonds. Corporate bonds are a major component of our bond portfolios.

Our view on alternative asset classes remains fairly cautious and these trades are consistent with this view; they also reflect the current approach adopted for new investments, whereby purchases of alternative investments have been implemented over longer periods of time than in normal circumstances.

3 June 2008

We have purchased a holding in Advance Frontier Markets for our Medium-Term Growth, Long-Term Growth and Aggressive CPM models. Advance Frontier Markets is a fund of funds investment trust specialising in investing in frontier markets (smaller, less liquid emerging markets) and managed by Progressive Asset Management. Progressive Asset Management's investment team has an established track record of producing absolute returns with low volatility and low correlation with most developed and emerging markets. The fund's main investments are currently within the Middle East and Africa, which we consider attractive and are otherwise difficult for us to access directly. This purchase has been funded through selling the holding in BlackRock Latin America. Latin America has outperformed the broader emerging market indices over the last few months and this was a good opportunity to sell this position while retaining our core GEM exposure through the Gartmore and Lazard funds.

25 April 2008

Within our more aggressive models we added a holding in Impax Environmental Markets to enable investors to benefit from rapid and sustained capital growth in environmental markets. This covers three primary areas - companies within alternative energy, water treatment and pollution and waste technologies and resources. Environmental policies and market deregulation worldwide are key secular drivers in stimulating a rapid growth of expenditure in this area, examples including renewables, energy efficiency, filtration of water, insulation, solar cells and biofuels. The Impax Group has over £1bn in funds under management and is dedicated to environmental investment. The team has a strong 14 year track record in identifying opportunities in this sector which we believe will emerge as a strong theme over the next few years.

17 March 2008

For our UK models within our property allocation we exited the SWIP Property Fund and invested in the F & C Commercial Property Trust to take advantage of the discount to NAV at which this investment trust is trading. The F & C fund is a large liquid fund (size GBP745m), investing predominantly in long leasehold commercial properties in the UK. The overall performance has been strong compared to peers, the gearing is lower and the dividend yield of six per cent is more securely covered than is the case with others in the sector. The fund has a diversified tenant base of 400 existing tenants in 29 properties with a very low vacancy rate of 1.3 per cent and an average lease length of 8.8 years offering good visibility of income. Historically large discount to the underlying value of its assets (22 per cent) offering an opportune entry point.

4 March 2008

Within our more aggressive models we added the Merrill Lynch Latin American Fund. The valuations of these markets remain lower than many in the emerging markets area and the region is a major beneficiary of Chinese demand for raw materials (Brazil is the largest exporter of iron ore to China) as well as soft commodities (sugar, coffee, grain , cotton , soy beans etc) Many years of social and political change in Latin America are now beginning to bear fruit with more conservative policies by central banks slowly helping to create stable economies and large current account surpluses. The Merrill Lynch Fund has a strong track record, typically holding 50-75 stocks in the area with its largest positions in Brazil, Mexico and Chile.