Harmony Portfolios · Page 2 of 13 global investment management | harmony portfolioss Table of...

Harmony PortfoliosMulti-manager, multi-asset solutionsQ1 ended 29 March 2019

Page 2 of 13 global investment management | harmony portfolioss

Table of Contents

1. Portfolio objectives and overview 3

2. Portfolio commentary 4

3. Recent portfolio activity and positioning 6

4. Target portfolios 6

5. Fund and peer group performance 7

6. Market commentary 8

7. Market performance 11

8. Important notes 13

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The Harmony Portfolios are a long established range of globally diversified, multi-asset funds designed specifically to provide a cornerstone investment. The Harmony range consists of nine portfolios, each risk profiled and with a specific geographical and currency focus, housed in a Luxembourg UCITS structure with daily pricing and daily liquidity.

The full range includes:

• Momentum Harmony Asian Balanced• Momentum Harmony Asian Growth• Momentum Harmony Australian Dollar Growth• Momentum Harmony Europe Diversified• Momentum Harmony Sterling Balanced• Momentum Harmony Sterling Growth• Momentum Harmony US Dollar Balanced• Momentum Harmony US Dollar Growth• Momentum Harmony Cautious Income

As at the end of March 2019, assets under management across the nine Harmony Portfolios totalled USD 670.8 million.

The Harmony Portfolios investment philosophy is built on three core capabilities:

• Asset allocation• Investment selection• Portfolio construction

The asset allocation process is disciplined, robust and valuation driven, and builds portfolios with true diversification across a wide range of non-correlated assets. ‘Best of breed’ fund solutions are then used to construct each portfolio. We recognise that no investment house has a monopoly of skill in all disciplines: having an unconstrained choice allows us to choose the most appropriate investment managers for any particular asset class. We are objective and independent in our approach, with no incentive to utilise a specific provider in the underlying composition of the portfolios.

The Harmony Portfolios aim to create the best combination of investments to provide optimal returns relative to each of the eight mandates’ tolerance for risk.

The Harmony Portfolio range

The Portfolios are managed in London by a team of experienced investment professionals at Momentum Global Investment Management (MGIM), which has been offering investment management and advisory services to institutional and retail investors since 1998. The twelve strong multi-asset investment team have been responsible for the investment strategy and management of the Portfolios since their inception in 2004. Senior members of the investment team have been working together throughout most of this period.

Investors can be confident that their investments are being managed within a strictly regulated environment, and by a highly qualified and experienced team with significant resources across the globe. MGIM is wholly owned by MMI Holdings Limited in South Africa, a listed company with a market capitalisation of $3bn and a strong capital position with total assets of $50bn. MGIM is authorised and regulated by the Financial Conduct Authority in the UK and is an authorised Financial Services Provider in South Africa in terms of the Financial Advisory and Intermediary Services Act 2002 (FAIS).

The Investment Manager


Portfolio commentaryPortfolio Performance

The first quarter of 2019 saw a welcome rebound in markets following sharp falls at the end of last year. Just as the prior market rout was triggered by the US Federal Reserve’s tightening, the recovery was inspired by an about turn by the Fed, with an unexpected and sharp shift to monetary easing. As a direct result of this, January saw positive returns across almost all asset classes and by the end of the quarter the MSCI World index had gained 12.5% in USD terms. Fixed income markets also delivered positive returns, particularly higher risk areas such as high yield credit. As notable as the upward moves in equities were, the sharp falls in bond yields were equally significant. The yield on 10-year US Treasuries fell by nearly 30bps, taking them down to 2.4%, nearly a full per cent lower than the high recently reached in November.

Against this supportive market backdrop the Harmony Portfolios all posted gains, of between 3.9% to 10.5% in base currency terms (net of fees, A share class). The US Dollar Growth and US Dollar Balanced Funds performed particularly well with gains of 10.5% and 7.9% respectively, thus capturing most of the upside in the US equity market. This was largely driven by outperformance from our underlying managers, led by Granahan whose small cap growth strategy returned over 30%. At the lower end of the range the Sterling Growth and Sterling Balanced Funds delivered smaller gains of 5.3% and 3.9% respectively, reflecting weaker returns for the UK equity market and particularly from our value orientated managers in that area, as well as the appreciation in Sterling relative to most other currencies.

Our recent tactical asset allocation decisions over the past year have been accretive to performance. Having entered 2018 carrying the lowest levels of risks that we had held for several years we were able to increase risk levels towards the end of last year as market valuations improved, particularly through adding to equity positions. This proved highly accretive to performance with developed markets having now rallied by around 20% from their nadir in late December.

Having benefited from our decision to increase equity exposure in the last quarter of 2018, we felt it appropriate to reduce those holdings somewhat in March given stock markets and valuations have recovered materially. Our outlook for equity markets remains constructive but we believe a degree of consolidation is likely, so moderating our exposure now provides room to use any periods of weakness as an opportunity to accumulate risk assets again on lower valuations.

Somewhat unusually, the rally in risk assets has coincided with a significant rally in government bond markets as interest rate expectations have tumbled on the back of very dovish messaging from the US Federal Reserve (Fed). This has benefited Portfolio performance as we gradually accumulated Treasury bond holdings over the last two years (as interest rate expectations fall the value of fixed rate bonds rises). This rapid about-turn in market pricing makes some sense given Fed guidance, but in our opinion may have gone too far. Although the global economy has slowed this could well turn out to be a late cycle lull and unlike the market consensus we would ascribe a greater than zero probability to the chance of another interest rate rise in the US later this year. If market expectations did adjust in that direction then there could be substantial downside in longer term Treasury bonds, therefore we reduced our holding in a Treasury bond that matures in 2043 and allocated the proceeds from both this and our equity reductions to a shorter-term bond, that matures in 2020 and which is far less vulnerable to changes in interest rate expectations.

Portfolio Changes


On the 16th of January 2019 we launched a new Cautious Income Fund, representing the ninth strategy within the Harmony Portfolios range. Like the other Portfolios the Cautious Income Fund is a multi-asset, multi-manager UCITS fund, but is designed specifically to be a lower risk strategy that will provide a stable income over the medium to long term as a core holding for investors.

The Fund is highly diversified across multiple asset classes and compared to other risk profiles there is a lower allocation to equities and higher allocations to fixed income and listed property and infrastructure, areas which generally offer higher yields and lower return volatility. Portfolio construction is unconstrained such that the Fund can be invested wherever the best opportunities lie, with no persistent country or regional biases, but any resulting currency risk is majority hedged back to the base currency.

Notably this is the first Fund within the Harmony Portfolios range to offer distributing share classes. The objective is to deliver a stable level of income of 3-4% p.a., through quarterly distributions, whilst at least maintaining the capital value. The Fund is available through various currency hedged share classes, denominated in dollars, sterling or euros. Distributing share classes will pay quarterly distributions, whilst accumulating share classes will effectively reinvest the income received from underlying investments, resulting in relatively higher NAVs for those classes.

Investors are right to be worried about trade wars, Brexit and most importantly slowing global growth. However, with no signs of inflation on the horizon central banks have considerable leeway which allows them to keep policy relatively loose and reduces the fear of policy errors. The recent shifts in monetary policy globally and sharp falls in longer term interest rates provide strong support for valuations of risk assets. The policy backdrop will likely remain supportive through this year and we expect some of the major areas of uncertainty which have held back confidence and investment, notably US-China trade wars and possibly even Brexit, to begin to lift.

We therefore expect further progress in markets during 2019. However, we also recognise the risks of an unfavourable outcome to some of these events, as well as the longer-term problem of excess debt in many countries, which contain the seeds of a more serious economic slowdown. These uncertainties are enough to keep investors nervous and to trigger bouts of volatility, especially following the sharp rise in markets this year. Some period of consolidation is therefore quite likely, but we view the medium-term outlook as broadly positive and would use periods of weakness to accumulate risk assets.

But market moves in the past year have once again illustrated the benefits of true diversification which will remain vital in the year ahead to withstand the inevitable bumps on the way through this extraordinary cycle. Our investment team continues to focus on building resilient portfolios with a wide variety of underlying return drivers, with equities at the core, supplemented by a wide range of diversifying asset classes such as fixed income, property, infrastructure, gold and liquid alternatives.

New Harmony Portfolios Cautious Income Fund

Looking Forward


Recent activity - Q1 2019Date Holding initiated/ Increased Holding sold/ Decreased Harmony funds

March

Short maturity US Treasury bonds

Developed market / emerging market equities and listed real estate

All except Asian Funds

Short maturity US Treasury bonds (Aug 2020)

Long maturity US Treasury bonds (Nov 2043)



All except Asian and AUD Funds

Asian Funds

Asset Allocation Manager selection decision

Target PortfoliosCautious Balanced Diversified Growth

Equities 31.0% 38.0% 51.0% 62.0%

Fixed Income 45.5% 33.5% 21.5% 13.0%

Property / Infrastructure 14.5% 11.0% 11.0% 11.0%

Alternatives 7.5% 10.0% 10.0% 7.5%

Commodities 0.0% 4.5% 4.5% 4.5%

Cash 1.5% 3.0% 2.0% 2.0%

Total 100.0% 100.0% 100.0% 100.0%

These target weights are correct as at the time this report is published and are indicative of the managers’ medium term outlook for markets, which is driven principally by their assessment of relative valuation opportunities. Target weights are based on the Cautious Income, USD Balanced, Europe Diversified and USD Growth Funds respectively. Allocations may vary for the other Balanced and Growth Funds in the range.


Fund and peer group performance


Market commentary - Q1 2019from the Momentum Investment Desk

After the carnage of Q4 2018 came the recovery, with equities enjoying one of the strongest starts to a year in decades. Just as the market rout was triggered by the Fed’s tightening, so the recovery was inspired by an about turn by the Fed, with an unexpected and sharp shift to easing. However, the surge in January, the strongest since 1987 (which those with a sufficiently long memory will recall was the year of Black Monday, October 19th, when the Dow suffered its biggest ever percentage point fall in a day, 23%….), faded and by the end of the quarter the prevailing mood was more cautious. Nevertheless, the return of 12% from global equities in Q1, led once again by the US, recovered much of the ground lost in Q4 2018 and left Wall Street within 3% of its all-time high.

Figure 1.1: Global equity markets had a strong first quarter of 2019

Source: Bloomberg, Momentum GIM. Returns in local currency terms

As notable as the big move in equities, and perhaps of greater importance, was the move in bond yields, with sharp falls particularly in longer maturities and especially during March. The yield on the 10-year US Treasury fell by 28bps, taking it down to 2.4%, and producing a return of 2.2% in Treasuries for the quarter; since the cyclical peak in the yield in early November 2018 there has been a fall of some 83bps, an extraordinary move as we enter the 11th year of a global economic expansion. Bond markets around the world followed, with 10-year yields in Japan and Germany falling back into negative territory, while credit markets produced exceptional returns, 5% for US investment grade, 7% for High Yield and 6% for Emerging Markets. During March one of the closely watched lead indicators of a recession, the 3 month-10 year Treasury yield spread, inverted, yet US recessionary fears are not reflected in credit markets, where spreads narrowed in the past 3 months.

Despite the Fed’s shift to an easier policy the US dollar strengthened over the quarter, largely because of weakness in the Euro, where the ECB also signalled a looser stance. Sterling was a notable outperformer, despite the Brexit saga, as the market interpreted the endless political machinations as likely to lead to a softer Brexit. In commodities, the notable move came in the oil price, up 27% and recovering about half the ground lost in the fourth quarter of 2018, taking it back to its levels of a year ago. Here supply constraints arising from the reimposition of US sanctions in Iran, the crash in production in Venezuela as its political crisis deepens, and the continuation of OPEC and Russian production cuts have outweighed the impact of softer demand and continuing growth of shale oil production in the US.

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

31 Dec 14 Jan 28 Jan 11 Feb 25 Feb 11 Mar 25 Mar

Major equity market cumulative returns(local currency)

United States

United Kingdom

Continental Europe

Japan

Developed Markets

Emerging Markets


The key drivers of markets this year have been the increasing evidence of slower global growth, most prominent in China and Europe, and to a lesser extent in the US, and the response of central banks to this slowdown. Having pivoted to a more dovish, patient policy approach in December and January the Fed delivered a surprise to the market in March when in effect it called a halt to its tightening cycle. Reducing its growth and inflation forecasts for both 2019 and 2020, and pointing to growth slowing more than expected, less supportive financial conditions, persistent inflation undershoots and downside risks from Brexit and trade, the Fed removed expectations for interest rate rises this year, whereas previously it had anticipated two rises, and set out a timetable for ending its balance sheet run off programme by October 2019. This means that quantitative tightening, which has significantly reduced liquidity in markets, will be brought to an end earlier than previously anticipated. Arguably the biggest influence on global markets in 2018 has been the Fed’s tightening of policy. Unlike other central banks, the Fed is well advanced in its tightening cycle; with four rate rises in 2018 Fed Funds have been increased by 2.25% over the past three years and the balance sheet has been shrunk from its peak of $4.5tn in October 2017 to $4tn today, with an ongoing monthly reduction of $50bn – a material cut in liquidity in by far the most important global currency.

Figure 1.2: The 3-month Treasury Bill and 10-year Treasury yield curve inverted for the first time since 2007

2.20%

2.30%

2.40%

2.50%

2.60%

2.70%

2.80%

31 Dec 14 Jan 28 Jan 11 Feb 25 Feb 11 Mar 25 Mar

3 month - 10 year Treasury yield curve Inversion

3 month Treasury Bill 10-year Treasury

Source: Bloomberg, Momentum GIM.

The significance of this shift should not be under-estimated. Its impact on markets has been amplified by a similar pivot by the ECB, the world’s second most important central bank. Having ended its QE programme at the end of last year, the ECB reacted to the alarming fall in growth in the Euro area, with economies in Italy and Germany either in or flirting with recession, others slowing sharply, and the spectre of deflation reappearing, by slashing its growth and inflation forecasts in March. The ECB pointed to risks to the downside and brought forward plans to provide banks with another round of cheap financing as well as pushing back its guidance on interest rate rises, which are now off the agenda completely for this year and probably most of 2020 too. Perhaps little wonder then that interest rates across the maturity curve fell sharply in government bond markets; but surprising that yields have fallen so rapidly back into negative territory in longer maturities in Europe. Now at -7 basis points, the yield on the 10-year German government bond is close to its Brexit induced lows of 2016 and is giving rise to comparisons with Japan, where interest rates were reduced to zero 20 years ago and have remained stuck around there ever since.


In China the well documented slowdown in growth, partly structural as the economy rebalances away from exports and investment towards consumption and services, partly due to deteriorating demographics and partly due to the debt overhang and the impact of the trade war with the US, produced a policy response from the authorities. Monetary policy has been progressively eased, with cuts in banks’ reserve requirements, easier credit made available to SMEs and tax cuts announced from 1st April. After sharp falls in 2018 the Chinese stock market has been the notable outperformer so far in 2019, up by 24%, reacting to the policy stimulus as well as the encouraging signs of progress in the trade talks with the US. China’s growth rate will slow this year, with the official target set at 6-6.5%, continuing the gradual path to a lower level, but still contributing substantially to aggregate global growth.

While less important than events in the US and China, Brexit continues to dominate headlines and political discourse in the UK and Europe, as well as overhanging the UK economy and financial markets. As the original Brexit day has come and gone and the EU has cost yet another Conservative Party Prime Minister, the political morasse appears set to continue. With the PM’s Withdrawal Agreement now seemingly dead, uncertainty is as intense as ever. It is impossible to forecast with any confidence the outcome of the latest turn of events, whether it be a long extension to the UK’s exit, a ‘no deal’ exit, a general election, or conceivably some last-minute renegotiation of the Withdrawal Agreement enabling it to meet the approval of Parliament. The greatest fears of the market remain a disorderly Brexit and a general election giving rise to a Corbyn led government which would most likely put the shorter term disruption of a ‘no deal’ Brexit firmly in the shade. Sterling is likely to be the most sensitive market to the eventual outcome, whereas the UK stock market, undervalued and heavily dependent on revenues from outside the UK, could perform relatively well.

Investors are right to be worried about trade wars, Brexit and most importantly slowing global growth; leading indicators continue to point to weaker growth, especially in Europe. While returns from bond markets have been good in recent months the falls in yields point to structural as opposed to purely cyclical concerns, and mean that future returns will be lower from here. Furthermore, equities have recovered a substantial portion of the falls in the fourth quarter of 2018 and at current levels are not priced for further deceleration in growth or indeed a slide into recession.

However, there is no sign of inflation on the horizon, despite the length of this economic cycle and the low levels of unemployment, especially in the US. This provides considerable leeway to central banks and eases the fear of policy errors. With the Fed and ECB having turned dovish the liquidity tightening of last year is out of the way and financial conditions have improved substantially. Interest rate rises are a distant prospect across the developed world. Low rates improve debt sustainability for borrowers, and this has been reflected in tightening credit spreads and falling longer term bond yields. While trade wars and Brexit remain concerns, the progress of the US-China talks has been encouraging and both parties need to conclude a deal. The same could be said of the UK-EU negotiations but here political intransigence is holding back a satisfactory conclusion. Eventually a satisfactory conclusion will likely be reached, and the current intense uncertainty will be lifted, no doubt with more surprises on the way. Low interest rates and subdued inflation support growth, and the fiscal loosening in China will begin to have some positive impact, shoring up growth in the world’s second largest economy. In the US the consumer, the driver of growth, is in good shape and should underpin growth this year, albeit at lower levels than last year when tax cuts provided a one-off boost.

While we recognise the risks, we do not share the concerns of some that the inversion of the yield curve (or at least parts of it) in the US points to the inevitability of a recession within the next 12-18 months. Global growth has weakened and is a concern but the usual triggers of a recession, either systemic financial problems and an ensuing liquidity crunch or excessive growth leading to capacity shortages, inflation and a sudden tightening of policy, are absent. Furthermore, ultra loose monetary policy has made it easier for yield curves to invert, suggesting that recession risks are being exaggerated.

The big shift in monetary policy and the sharp falls in longer term interest rates provide strong support for valuations of risk assets. The policy backdrop will remain supportive through this year and we expect some of the major areas of uncertainty which have held back confidence and investment, notably US-China trade wars and possibly even Brexit, to begin to lift. We therefore expect further progress in markets during 2019. However, we also recognise the risks of an unfavourable outcome to some of these events and resulting extended uncertainty, as well as the longer term problem of excess debt in many countries, which contain the seeds of a more serious economic slowdown. These uncertainties are enough to keep investors nervous and to trigger bouts of volatility, especially following the sharp rise in markets this year. Some period of consolidation is therefore quite likely, but we view the medium term outlook as broadly positive and would use periods of weakness to accumulate risk assets.


Market Performance



Important notes

Momentum Global Investment Management is the trading name for Momentum Global Investment Management Limited. This document does not constitute an offer or solicitation to any person in any jurisdiction in which it is not authorised or permitted, or to anyone who would be an unlawful recipient, and is only intended for use by original recipients and addressees. The original recipient is solely responsible for any actions in further distributing this document, and should be satisfied in doing so that there is no breach of local legislation or regulation. The information is intended solely for use by our clients or prospective clients, and should not be reproduced or distributed except via original recipients acting as professional intermediaries. This document is not for distribution in the United States.

Prospective investors should inform themselves and if need be take appropriate advice regarding applicable legal, taxation and exchange control regulations in countries of their citizenship, residence or domicile which may be relevant to the acquisition, holding, transfer, redemption or disposal of any investments herein solicited.

Any opinions expressed herein are those at the date this material is issued. Data, models and other statistics are sourced from our own records, unless otherwise stated herein. Unless otherwise provided under UK law.

We caution that the value of investments, and the income derived, may fluctuate and it is possible that an investor may incur losses, including a loss of the principal invested. Past performance is not generally indicative of future performance. Investors whose reference currency differs from that in which the underlying assets are invested may be subject to exchange rate movements that alter the value of their investments.

Investment inherently involves an element of risk. It cannot be guaranteed that the performance of any fund mentioned henceforth will generate a return and there may be circumstances whereby no returns are generated or the principle invested is lost or eroded. As a result investors may not get back the original amount invested. Investors should ensure that they fully understand the risks associated with the Fund and should consider their own investment objectives and risk tolerance levels.

Prior to investing in a fund it is suggested that all potential investors read the prospectus and either Key Investor Information Document (KIID) or Key Financial Statement (KFS) in tandem with the offering documentation. Investors are advised to seek professional investment

advice before making any investment decisions.

This disclosure has not been reviewed by the Securities and Futures Commission (SFC) of Hong Kong.

Our investment mandates in alternative strategies and hedge funds permit us to invest in unregulated funds that may be highly volatile. Although alternative strategies funds will seek to follow a wide diversification policy, these funds may be subject to sudden and/or large falls in value. The illiquid nature of the underlying funds is such that alternative strategies funds deal infrequently and require longer notice periods for redemptions. These Investments are therefore not readily realisable. If an alternative strategies fund fails to perform, it may not be possible to realise the investment without further loss in value. These unregulated funds may engage in the short selling of securities or may use a greater degree of gearing than is permitted for regulated funds (including the ability to borrow for a leverage strategy). A relatively small price movement may result in a disproportionately large movement in the investment value. The purpose of gearing is to achieve higher returns associated with larger investment exposures, but has concomitant exposure to loss if positive performance is not achieved. Reliable information about the value of an investment in an alternative strategies fund may not be available (other than at the fund’s infrequent valuation points).

Under our multi-management arrangements, we selectively appoint underlying sub-investment managers and funds to actively manage underlying asset holdings in the pursuit of achieving mandated performance objectives. Annual investment management fees are payable both to the multi-manager and the manager of the underlying assets at rates contained in the offering documents of the relevant portfolios (and may involve performance fees where expressly indicated therein).

Momentum Global Investment Management Limited (Company Registration No. 3733094) registered office at The Rex Building, 62 Queen Street, London, EC4R 1EB. Momentum Global Investment Management Limited is authorised and regulated by the Financial Conduct Authority in the United Kingdom, and is an authorised Financial Services Provider pursuant to the Financial Advisory and Intermediary Services Act 37 of 2002 in South Africa.

© Momentum Global Investment Management Limited 2019

Momentum Global Investment Management Limited Momentum Global Investment Management Limited (Company Registration No. 3733094) has its registered office at

The Rex Building, 62 Queen Street, London, EC4R 1EB. Momentum Global Investment Management Limited is authorised and regulated by the Financial Conduct Authority in the United Kingdom, and is an authorised Financial

Services Provider pursuant to the Financial Advisory and Intermediary Services Act 37 of 2002 in South Africa.

For more information, please contact

Anastasiya VoloidinaDistribution Servicese: [email protected] t: +44 (0)207 618 1806www.harmonyportfolios.com

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