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ARE EMERGING MARKETS UNINVESTABLE?

TECHNICAL ANALYSIS: Q2 IS ALL ABOUT THE DOLLAR

HOW LEADING ASSET ALLOCATORS ARE HEDGING EQUITY RISK

April 2014 www.citywire.co.uk

By professor Robert Skidelsky

HOW INEQUALITY IS EATING CAPITALISM

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April 2014 55

CONTENTS

8 HOW INEQUALITY IS EATING CAPITALISMStructural inequality is killing demand and promotingdestructive debt cycles

14 GLOBAL LIQUIDITYPrivate flows take baton from Fed but Beijing drags down EM

16 GLOBAL INFLATION EXPECTATIONSPlotting the path of inflation in the year ahead

19 GLOBAL INTEREST RATE EXPECTATIONSWhat are the experts forecasting?

20 FUND FLOWSHedges up but no retreat from risk

22 STRESS TESTS Volatility: The dog that didn’t bark in Q1

23 LEADING INDICATORS: PMIsMeasuring conditions in major economies

24 UNMISSABLE CHARTSThree charts you can’t afford to miss

25 TOP GLOBAL ASSET ALLOCATORSFaith in ‘stymied’ equities begins to fail

29 TECHNICAL FORECASTS Key equity and currency forecasts

49 MIXED-ASSET ANALYSISHow are wealth managers hedging equity risk?

52 CITYWIRE FUND MANAGER RATINGSThe best UK (All Companies) funds

54 ASSET PRICE PERFORMANCEAll the key indicators for equities, alternatives,bonds, fixed income and property

APRIL 2014 / ISSUE 11

32 GLOBAL BONDS Global

33 PROPERTY Global Equities

34 ALTERNATIVE UCITS Volatility

35 NORTH AMERICAN EQUITIES North America

37 UK EQUITIES UK (All Companies)

38 EUROPEAN EQUITIES Europe

39 EMERGING MARKET EQUITIES Global Emerging Markets

40 EMERGING MARKET COUNTRY EQUITIES China

41 ASIA PACIFIC EQUITIES Asia Pacific Excluding Japan

42 ASIA PACIFIC EQUITIES Japan

43 EMERGING MARKET BONDS Emerging Markets Local Currency

44 ALTERNATIVE UCITS Currency

45 COMMODITIES Gold and Precious Metals

46 COMMODITIES Oil

48 COMMODITIES Industrial Metals

ASSET CLASSES AND SECTOR FOCUS An in-depth analysis of where to invest and the places to avoid in the year ahead

COVER IMAGE: REUTERS/Adrees Latif

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April 2014 7


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MACRO ANALYSIS

BY ROBERT SKIDELSKY, PROFESSOR OF POLITICAL

ECONOMY AT WARWICK UNIVERSITY

The crash of 2008 has produced an exceptionally high level of commentary on the current state of capitalism, as well as the more usual (and best-

selling) ‘how to get rich and why you went bust’ crop. Key topics have been the growth of inequality, the rising debt to income ratio, the future of work, and the strength and sustainability of the recovery.

French economist Thomas Piketty, American academic Erik Brynjolfsson, associate director of the Center for Digital Business at the MIT Sloan School of Management Andrew McAfee, economic and social theorist JeremyRifkin, and senior and associate fellow of the Rothermere American Institute, Oxford, Simon Head have written important books. American economist Larry Summers has been warning of ‘secular stagnation’. British businessmanAdair Turner has surveyed the field in a lecture at London’s Cass Business School. Banquo’s ghost is Karl Marx, nevermentioned, but present in everyone’s mind.

The most important topic is growing inequality, its causes, effects, and possible remedies. Britain’s five richest families are worth more than the poorest 20%. At a global level, the wealth of 85 billionaires is equivalent to that of half of the earth’s population.

The growth of inequality has been the result of two forces. The first has been pulling the incomes of the very wealthy top 10%, 1%, or even 0.1% of the income

Structural inequality is killing demand and promoting destructive debt cycles

HOW INEQUALITY IS EATING CAPITALISM

88

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April 2014

MACRO ANALYSIS

distribution upward. The second has been depressing the incomes of those at the bottom of the income distribution – not just the bottom 10%, but the bottom 50%, and even the bottom 90%. Today, this middle 40% is called the ‘squeezed middle class’.

Piketty has analysed the forces that benefit the rich. ‘Supermanagers’ are able to set their own pay, benefitting from changes in social norms and business culture that normalised extremely high pay. This has been most evident in the US and the UK, especially in the financial sector. Piketty calls it ‘meritocratic extremism’ – the overzealous desire to reward success. Turner singles out the ‘financialisation’ of advanced economies – pay in the financial sector has increased much more rapidly than in other sectors for people with similar skills.

The rich get richerAstronomical pay in the financial sector has certainly become more ‘taboo’ since the crisis, but bankers’ bonuses have started to exhibit a steep upward trend again, more than in line with the recovery of the economy. Regulation could limit this, but it is chiefly aimed at achieving financial stability, not reducing inequality, and hardly anyone makes the connection between the two. Furthermore, it’s not just the financial sector: Piketty points out that 80% of the top income groups are not in finance. They are top executives of manufacturing firms, plus the superstars of the entertainment industry.

Very high incomes from labour are just one side of the story. The rich are also getting richer because of the ease with which they are able to convert high incomes from labour into capital ownership, and, as a result, returns from capital. The rich are able to obtain higher returns on capital than the poor, through economies of scale and access to the best advice. The re-emergence of land as a scarce factor of production in the centres of big

cities such as London has afforded its owners increasing ‘rents’. And to the extent that there is a (quasi) fixed supply of homes, property purchases by the rich make home ownership less affordable for the poor. The cost of a typical London home – £362,699 as of March 2014 – is over twice as high as in the rest of the country. The gap is the widest it has ever been.

The result is that even people who do not earn any income from labour, but who have inherited large sums, see their wealth grow at an accelerated pace. Liliane Bettencourt, a Paris-born businesswoman whose father founded L’Oreal, saw her fortune increase from $2 billion to $25 billion between 1990 and 2010 – the same pace at which Bill Gates, who did work for a living, saw his climb.

But the crux of the issue is whether the accelerating wealth of the rich is really a problem. If it is not done at the expense of the rest, what’s wrong with it? Conventional economics believes that the rich spend enough of their incomes to ‘lift all boats’. Additionally, rising asset prices benefit everyone through what economists call the ‘wealth effect’. Furthermore, the more unequal the society’s wealth and income, the more saving it will do, and therefore the more investment it will have. These are different versions of ‘trickle down’. They are the standard arguments against any undue attempt to compress differentials.

Inequalities of growthThe principal economic argument against large inequalities is that it narrows the consumption base. In textbook terms, we say that the poor have a ‘higher propensity to consume’, so redistributing wealth from the rich to the poor would have the net effect of increasing consumption. But would it not also reduce saving?

Not necessarily according to Keynes. Keynes was the first economist to reverse the classical connection

'Heiress Liliane Bettencourt's fortune grew from $2bn to $25bn between 1990 and 2010 – the same increase as entrepreneur Bill Gates'


9April 2014

MACRO ANALYSIS

between saving and investment. He wrote that it was not thrift that built cities but enterprise, and enterprise was driven by profit. If profit expectations are low, as in a recession, it is not more saving that we need, but more consumption, to give businessmen the expectation of a market. This is an argument for re-distributing income in a slump.

Turner brings the further charge against rising inequality, especially if it is associated with house prices, that it increases the reliance of the economy on debt, which makes it less stable by encouraging boom and bust. The savings of the rich, he says, ‘can be intermediated [...] to provide credit to the poorer (or at least “less rich”) people attempting to maintain or increase consumption despite stagnant or falling real incomes’. But this credit flow ‘simply enables demand to be maintained at the level that would have pertained

(without credit growth) if economic growth had not been accompanied with rising inequality. Thus, ‘we seem to need credit growth faster than GDP growth to achieve an optimally growing economy’. That inevitably leads to crisis and post-crisis recession, which in turn causes more inequality. So we are caught in some sort of vicious cycle. In the UK, household leverage rose from 15% of GDP in 1964 to 95% by 2008.

Finally, Piketty charges rising inequality with ‘undermining the meritocratic values on which democratic societies are based’.

However, policies to increase the incomes of the poor relative to those of the rich encounter formidable obstacles. The obvious one is the political resistance to higher taxes. But there are two more subtle ones which arise from the structure of the modern economy itself. The first is globalisation, which reduces the value of low

skilled workers in advanced economies, relative to more competitive labour markets like China.

The second has to do with the impact of new technology on jobs. On the one hand, digital technology enables ‘ordinary’ people to leverage their talents, for example, YouTube stars such as Jenna Marbles, a comedian with more than 13 million subscribers on the website, thus bringing them higher levels of income. But this only applies to a minority, and the potential for technology to create new jobs is limited. The displacements are likely to exceed the replacements. The extent to which technology displaces jobs depends on the ‘elasticity of substitution between capital and labour’ – or in ordinary language, the extent to which machine can replace labour. Simon Head explains how automation does not necessarily knock out the lowest paid jobs, like cleaners, because these are not very routine.

Technology and the richWhat about the effect of new technology on the rich? The outcome is unclear. On the one hand, technology raises the rewards to capital: once you have incurred fixed costs, the marginal costs of using digital goods approach zero – that is, robots don’t have to be paid. The result is what Adair Turner calls a ‘huge wealth accumulation without much savings/investment’. Digital technology thus tends to promote ‘winner-takes-all’ markets.

However, there may be an opposite effect. Digital technologies are more easily replicated, so their marginal

'Keynes wrote that it was not thrift that built cities but enterprise, and enterprise was

10


April 2014

t necessarily knock out the lowesters, because these are not very routine.

he richct of new ch? The On the y raises al: once xed costs,f using digitalo – that is, robots d. The result is alls a ‘huge wealth ut much savings/echnology thus inner-takes-all’

ay be an opposite ologies are more their marginal

MACRO ANALYSIS

value may fall over time, and the rewards to capital willshrink. Jeremy Rifkin explains how capitalism may end up‘destroying itself’ because automated systems producegoods at virtually zero costs, and you can’t make moneyout of free goods.

This is possible, but it ignores the importance ofnetwork externalities and brand reputation. Brandcompetition will continue, creating fashions in digitalgoods. And users get locked into brands. As Turner puts it, ‘teenagers all use Facebook, because all teenagers useFacebook’. So though the prices of some digital goodswill fall towards zero, those of others will be kept high,which means that profits are still to be made.

These opposing effects mean that no one can knowfor sure what effect the new

Secular stagnation is built around this theme. In an IMFspeech in November last year, Larry Summers said that around 2008, there was ‘too much easy money, too much borrowing’, yet ‘capacity utilisation wasn’t under any great pressure; unemployment wasn’t under any remarkably low level; inflation was entirely quiescent. So somehow even a great bubble wasn’t enough to produce any excess in aggregate demand.’ Or in other words, a bubble was necessary in order to achieve a decent level of growth. Without a bubble, growth would have been very low; the economy had a ‘negative natural rate of interest’. est .

The British disease The British recovery is well under waay, but there are someworrying signals. The real level of invvestment remains about 20% below its pre-crisis peak which, according to the TUC, corresponds to an annuaal £50 billion nvestment gap. Clearly, if the naturall rate of interestwas positive, investment would be boooming, especiallygiven the low interest rates, quantitative easing, and so on. Furthermore, the Office for Budgeet Responsibilityreports that increased consumer spennding is supported by a fall in the savings ratio, rather than byy higher incomes. The same happened in the run-up to thhe crisis: people funded their expenses by borrowing. Thhis means that theproblem is not structural overconsumpttion, but structural under-consumption, disguised by debt accumulation, an untenable position in the long term.

Economies of the British type may thuus be between a rock and a hard place. Increased inequuality will have a deflationary effect on overall demand. Zeero or negative nterest rates encourage the poor to borrrow rather than save. Yet increased household leverage (bborrowing) eventually causes a crisis, and the debt ovverhang meansthat recovery is slow. In turn, this causes mmore inequality. Poor people are more likely to lose their jobs and face obs and face

'The problem is not structural overconsumption, but structural under-consumption, disguised by debt accumulation'


1111April 2014

technology will have on incomes and jobs.

One of the main problems faced by advanced economies is a return to low growth, as this implies greater inequality.

The ‘fundamental force for divergence’, argues Piketty, is r>g. When the return on capital r exceeds the growth of the economy

g, wealth grows faster than output and income, so inequality increases. In the longrun, he predicts that

g will not exceed 1-1.5%, partlybecause of slower demographicgrowth, whereas the average

return on capital will be 4-5%.

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adisetP

MACRO ANALYSIS

About the author Lord Skidelsky is emeritus professor of political economy at the University of Warwick. His three-volume biography of the economist John Maynard Keynes received numerous prizes, including the Lionel Gelber Prize for International Relations and the Council on Foreign Relations Prize for International Relations.

repossession in the downturn, especially as they tend to face higher interest rates than the rich.

So what, as Lenin said, is to be done?Piketty wants a progressive tax on capital as well as

a progressive tax on income. But here the challenge is how to achieve international cooperation. Without cross-border agreements, there will just be tax evasion, so the regulation will become self-defeating.

We could implement a higher minimum wage, although this might cause a negative effect on employment. And we could aim to slow down the rate of globalisation in order to relieve the short-term pressure on wages in rich countries, giving their workers more time to adapt to new job opportunities.

There is also the educational route to higher incomes. But here, Piketty has a fair point. He says that inequalities will just be translated upward. In the past, ‘the bottom group, which had once only finished grade school, moved up a notch on the education ladder, first completing junior high school, then going on to a high school diploma. But the group that had previously made do with a high school diploma now went on to college or even graduate school’. So there is no easy escape from inequality by climbing the educational ladder.

At this point in time, the chief task is to identify the most important structural issues facing late capitalist societies of our kind. It will be the task of politics to create an agenda capable of tackling them.

'Increased inequality will

on overall demand'

12


April 2014

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GLOBAL LIQUIDITY

77%

16%

GLOBAL POLICY vs PRIVATE LIQUIDITY

GLOBAL LIQUIDITYThe popular narrative of the last year has been that globalmarkets are taking their first tentative steps into a lower-liquidity world, out from under the protective wing of theworld’s central bankers.

While seductive and appealing as an easy narrative,this is not entirely borne out by an analysis of cross-border capital flows. ‘Official’ liquidity – to a first-approximation, money supply – has broadly declined,but this is almost directly mirrored by recovery in cross-border private capital investment.

Globally, this aggregate has retrenched sincethe period of peak optimism throughout 2013. But beneath this, much of the developed world outside of the eurozone, continues to enjoy capital supplyhistorically consistent with solid growth over a 12-18month period ahead.

‘Developed market liquidity remains far stronger than [emerging markets],’ said Michael Howell, managing director of CrossBorderCapital.

‘The developed market private sector remains strong at an index level of 82.7. Cross-border flows to developed markets jumped to 52.2 [in March] from 39, perhaps again signalling a flight to quality.’

With the Bank of Japan remaining super-accommodative and the Fed actually quietly easingvery slightly at the beginning of the year, official developed money supply has helped paper over cracksthat have appeared in private confidence in Q1.

While the pace of Fed tightening ensured thatglobally, 2014 would be tougher and more volatile

Private flows take baton from Fed but Beijing drags down EM

than 2013, Howell added the real polarity was between a robust private developed world and an enormous liquidity sink in Beijing sucking in emerging markets(see box far right), currently at a dangerously fragileliquidity value of 13, well below historical average.

‘We are currently seeing EM dragged down by three largely external forces. One, western and particularly

US capital has restructured post-Lehman and lowered its breakeven costs to such an extent that productionis re-shoring.

‘Two, China has put on her monetary brakes fairly hard. This is disrupting regional capital flows and unhinging the Asian supply chain. This will likely be a long and not a short-term monetary squeeze.

‘And three, in the 1960/90 period the yen/US$ drove the tempo of the Asian business cycle, and may be doing so again given the yen’s recent collapse. In short,

Global Liquidity

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GLOBAL LIQUIDITY

62%10%

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CHINA - COMPOSITE RISK

CHINA - LIQUIDITY RISK

The China composite risk index – a combination of FX, liquidity and exposure risks – has steadily climbed over the course of more than two yearsand sits at a level not seen since the great crash. Liquidity risk has particularly climbed over Q1as the People’s Bank of China accelerated its attempts to drain excess capital. The underlying tensions which have come to a head are likely to continue playing out for years.

All data calculated with40-year historical average cross-border liquidity as index value of 50.

SOURCE: CrossBorderCapital

American restructuring, Chinese downsizing andJapanese competitiveness are doing the damage.’

This suggests that full EM weakness remains unknowable and unpriceable, despite some investors noting that from a valuation perspective, prices areconsistent with high future returns.

In particular, further currency devaluations – with associated volatility and uncertain political and economic repercussions – might be required to put the region on a steadier footing.

China - Composite Risk

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In contrast, frontier mmarkets better insulated against the Asian trade cycle reemained relatively supported, and have moved into a much closer correlation with developed markets thann their developing peers.

‘2014 will be trickier tthan 2013: we recommendsome move into treasurries and the US dollar, bottom-fishing in gold and a shhift away from high yield,’ said Howell. ‘It is probaably not time to bail out of developed market stocks yet, but nor is it time to pile into emerging markets.’’

0 20 40 60 80 100

LIQUIDITY SCALE

JapanAfricaUSAustraliaUKRussiaChinaIndiaLatin AmericaEmerging MarketsEurozone

April 201416


GLOBAL INFLATION EXPECTATIONS

US INFLATION EXPECTATIONSINFLATION PROXIES UK INFLATION

Gold’s rally from the lows of Q4 2013 might be better read not as an aggregate gain in global inflation pricing, but as an increase in inflation-sensitive buyers as a component of the global market.

Despite Indian buyers being rationed by currency controls since September, physical consumer gold purchases actually reached a record in 2013, but even that was insufficient to outweigh paper sales.

Given the simultaneous tightening in sovereign yields over the first quarter, safe haven demand against a series of potential risks – including deflation – might be the more likely motivating factor.

The exit of money from gold last year did mean capitulation by goldbug inflationistas however, meaning the ground may be laid for a recovery in inflation pricing.

One place no such signal of renewed strength is currently apparent is the CRB Commodity Index, which remained marginally down over the first quarter.

US inflation expectations have shifted out over the past year but remain heavily grounded, at a forecast maximum of 0.02% growth over 14 months, according to the Cleveland Fed survey.

Over the quarter, the long end of the curve remained essentially unchanged while the short end has tightened from 0.015% to 0.012%.

With the Fed upping its estimate of two year rates over the quarter, the sustained fall in US Tips prices over the last year (to an annual loss of 8.4% in 2013) has begun to tempt investors back.

This is likely to be based on the cheap optionality of pricing rather than a sudden resurgence in expectations however, with the CPI hovering just above 1%, well below the 2% fed target.

The final Tips auction in March attracted a bid/cover ratio of 2.48 versus a previous figure of 2.31, having steadily ticked up over Q1.

Two factors were driving the inflation-linked gilt market at the end of the first quarter: a £7.4 billion fall in expected issuance to £31 billion this year following improved tax receipts, and the largest spread between CPI and the benchmark RPI since 2011.

‘The RPI data provides an upside surprise to expectations for linker carry,’ senior RBC economist Sam Hill told Bloomberg at the end of March, saying inflation-linked were likely to outperform.

While CPI has fallen steadily since early 2012 from 3.57% to 1.7%, RPI has remained much more stable, falling from 3.93% to 2.76%. The continuing strength of sterling and moderating commodity pricing has helped stem the previous driving force of imported inflation, while the estimated output gap remains fairly large.

Outside of London, the Bank of England said it remained relaxed about house price inflation, although it noted steps might be required to moderate some mortgage multiples.

US TIPS YIELD CURVE

% y

ield

5 years 10 years 20 years 30 yearsTIME TO MATURITY

-1.0

-0.5

0.0

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1.50

1.75

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% r

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CLEVELAND FED INFLATION EXPECTATIONS

30 months1 month 10 months 20 months

UK INFLATION-LINKED BONDS YIELD CURVE

% y

ield

5 yrs 20 yrs15 yrs10 yrs 30 yrs 50 yrsTIME TO MATURITY

-1.0

-0.8

-0.6

-0.4

-0.2

0.0

SOURCE: Cleveland Federal Reserve

SOURCE: Reuters

SOURCE: Reuters

SOURCE: Reuters SOURCE: Reuters

SOURCE: Bank of England

GOLD SPOT

US

$

1,000

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Mar-14Mar-13Mar-10 Mar-11 Mar-12

CRB COMMODITIES INDEX

US

$

Mar-14Mar-13Mar-10 Mar-11 Mar-122,500

3,000

3,500

4,000

CPI INFLATION PROJECTIONS

pre

dic

ted

% r

ate

2014-Q1 2016-Q12015-Q1 2017-Q10

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2

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4

MedianRange of uncertainty

ND EIGHTEEN POINT FIVE THREE 118

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224.45

31.51

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FOUR FIVE

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superior total returns over the long term, due to

the often underestimated effects of compounding

(the regular returns generated through a dividend)

on income.

A company’s long-term prospects are crucial

in achieving this, as paying a dividend comes at

an opportunity cost. Clearly, the more money a

company returns to shareholders, the less it leaves

available to reinvest or spend elsewhere. As a

result, only companies able to grow consistently,

and manage their capital efficiently, are able to

achieve both over the long run.

At the heart of this is the importance of capital

stewardship, which reflects (and enforces) a

company’s commitment and ability to follow a

dividend policy. We therefore focus on those

companies confidently reinvesting capital in order

to grow (both in earnings and cash flow terms) in

the future.

Performing under multiple scenarios

In keeping with the search for excellent stewards

of capital, we believe investors should also

prioritise considerable credit analysis of dividend-

paying companies. Credit analysis should be

in-depth, allowing for stress testing across a range

of scenarios. The ultimate question is, under the

stress test, does free cash flow (following capital

expenditure) offer sufficient dividend cover? For

quality thematic equity income, the answer should

almost always be ‘yes’.

The perfect storm for quality high dividend

investment in 2013 has passed. Now, longer-

term valuation methodologies – like discounted

cash flow (valuing equity through discounted

future cash flows) and dividend discount model

(calculating value based on the dividends the

company pays out) methods – are providing

persuasive signals for investment back into the

high yield segment.

As thematic investors, we believe that

appropriate valuation methodologies should

be combined with robust credit analysis, key

corporate strengths, and the positive influence

of compelling global trends to form a unified,

coherent investment process.

Source: Financial Adviser newspaper.

This document is for investment professionals only and should not be relied upon by private investors. Please note that the value of shares and the income from them can fall as well as rise and you may not get back the amount originally invested. This can be as a result of market movements and also of variations in the exchange rates between currencies.

Sarasin & Partners LLP a limited liability partnership registered in England and Wales with registered number OC329859 and is authorised and regulated by the Financial Conduct Authority. © 2014 Sarasin & Partners LLP – all rights reserved.

Mark WhiteheadPartner and Fund Manager

Propelled by the broader macroeconomic picture,

where the strain on yield is considerable, investors

are increasingly looking towards global equity

income. The world contains a wealth of dividend-

paying companies, across varied geographies and

industries. But with a growing supply of seemingly

similar products available, what really makes a

strong global equity income investment?

Identifying high quality income equities requires

a robust and clearly defined investment approach,

with a proven and consistent process.

We believe that the most compelling

approach is a thematic one, taking in the long-

term influences impacting companies across

different sectors and geographic boundaries (like

demographic, technological and policy change).

Those businesses able to capitalise on these

cross-border trends, in part through their own

operational excellence, should see significant

revenue and earnings growth.

Hunting for dividend growth

A long-term view is particularly essential for

equity income investing. Successful equity

income investors need to uncover not only those

companies currently able to pay a dividend

today, but also those with the potential to offer a

consistent or – preferably – rising dividend in the

future.

So, where should investors look to find

consistent and rising dividends?

We specifically seek out high long-term quality

over high short-term income. Companies able

to initiate and grow dividends should produce

‘Identifying high quality income equities requires a robust and clearly defined investment approach’

What makes a strong global equity income investment?

April 201419

www.citywire.co.uk/wm/aa360 ASSET ALLOCATION 360˚

GLOBAL INTEREST RATE EXPECTATIONS

1 year1 week

20-Mar-14 20-Jan-14

3 months 6 months1 month

DOLLAR LIBOR

0.1%

0.2%

0.3%

0.4%

0.5%

0.6%

STOP YELLEN AT ME Got the message yet? Investors sceptical about the

Fed’s timetable for tighter policy (most, according

to the market price) had a sharp wake-up call in

late March. Regardless of the weather, incoming Fed

chair Janet Yellen emphasised the course was set

on tightening and not about to change.

THE CONSENSUS‘Considerable time’ –

the length of time rates

will be held near zero

following the end of asset

purchases – turned out to

mean six months. That was

considerably less time than

many had guessed, and

meant a probable deadline

for tighter policy in early

Q2 2015, excluding an

economic meltdown.

Both US equity and bonds

have held up well (so far)

with volatility remaining

relatively restrained.

CANADIANS BEARING GIFTSMark Carney made few bones about abandoning his

employment guidance target at the end of January but

there was an undeniable cost: nobody now believes his

schedule for future rate rises. Officially, rates will not

rise until 2017: the market is pricing in 0.4% tightening

in the next year.

THE CONSENSUSConsider it the carrying

cost of the long-awaited

recovery: regardless of the

Bank of England’s timetable,

people expect tighter

policy soon. While it is off

peak optimism, the sterling

index remains 7% up over

12 months and remains at

a level not previously seen

since 2008. With generous

capacity available in the

economy, the Bank may

not feel the need to slam

on the brakes yet, however.

1 year1 week

20-Mar-14 20-Jan-14


STERLING LIBOR

0.4%

0.5%

0.6%

0.7%

0.8%

0.9%

PAYING THE PIPERECB board members continued their ongoing flirtation

with further easing in Q1 but the offer was somewhat

more explicit and delivered by arguably the senior

member, Bundesbank boss Jens Weidmann (described

by Der Spiegel as Mr No) who said further QE was not

‘out of the question’.

THE CONSENSUSWe have been on this road

before of course, but the

rapid euro rate repricing

showed the market

anticipated that this time

(with the ECB’s biggest

financial backer behind it)

the bank was serious

about easing. Recovery

in the eurozone remains

below that needed to

sterilise the risk of deflation

and ensure the peripheral

debt burden remains

sustainable.

1 year1 week

20-Mar-14 20-Jan-14


EURO LIBOR

0.1%

0.2%

0.3%

0.4%

0.5%

0.6%

SAFE HAVEN V FIREHOUSEMonetary policy remains ultra-easy but could get even

easier. Japanese policymakers remain highly sensitive

to safe haven demand driving the yen back up, the

potential impact of the recent consumption tax hike,

and a recent sharp drop in money growth, but is not

expected to act until Q3.

1 year1 week

20-Mar-14 20-Jan-14


YEN LIBOR

0.0%

0.1%

0.2%

0.3%

0.4%

THE CONSENSUS

The already ultra-

accommodative Bank of

Japan is expected to wait

until at least Q3 2014 before

it makes a call on easing

above and beyond the

current massive expansion

of its balance sheet. It will be

conscious that at the long-

end, a disappointing quarter

has already sharply pulled

down 12 month rates over

Q1, with the market banking

on easing from around the

middle of the year.

US JAPAN

UK EUROZONE

FUND FLOWS

April 201420


USD

Mon

ey M

arke

t - S

hort

Ter

m

EUR

Mon

ey M

arke

t

Euro

pe L

arge

-Cap

Ble

nd E

quity

Oth

er A

lloca

tion

EUR

Caut

ious

Allo

catio

n

Hig

h Yi

eld

Bond

- O

ther

Hed

ged

EUR

Flex

ible

Allo

catio

n - G

loba

l

EUR

Hig

h Yi

eld

Bond

EUR

Caut

ious

Allo

catio

n - G

loba

l

Glo

bal E

quity

Inco

me

Oth

er B

ond

Oth

er A

sia-

Paci

fic E

quity

Euro

pe L

arge

-Cap

Val

ue E

quity

EUR

Div

ersi

fied

Bond

- Sh

ort T

erm

Japa

n La

rge-

Cap

Equi

ty

EUR

Ultr

a Sh

ort-T

erm

Bon

d

Alt

- Mul

tistr

ateg

y

Spai

n Eq

uity

EUR

Agg

ress

ive

Allo

catio

n - G

loba

l

Euro

pe F

lex-

Cap

Equi

ty

Euro

pe S

mal

l-Cap

Equ

ity

USD

Mod

erat

e A

lloca

tion

Euro

zone

Lar

ge-C

ap E

quity

Targ

et D

ate

2016

- 20

20

Alt

- Lon

g/Sh

ort E

quity

- Eu

rope

GBP

Agg

ress

ive

Allo

catio

n

USD

Cor

pora

te B

ond

Conv

ertib

le B

ond

- Eur

ope

Glo

bal L

arge

-Cap

Val

ue E

quity

Alt

- Mar

ket N

eutr

al -

Equi

ty

USD

Hig

h Yi

eld

Bond

Alt

- Glo

bal M

acro

Alt

- Lon

g/Sh

ort E

quity

- U

S

Oth

er E

urop

e Eq

uity

EUR

Flex

ible

Allo

catio

n

Conv

ertib

le B

ond

- Glo

bal,

EUR

Hed

ged

US

Larg

e-Ca

p Va

lue

Equi

ty

EUR

Corp

orat

e Bo

nd

US

Larg

e-Ca

p G

row

th E

quity

Euro

pe H

igh

Yiel

d Bo

nd

US

Flex

-Cap

Equ

ity

GBP

Mon

ey M

arke

t - S

hort

Ter

m

Glo

bal H

igh

Yiel

d Bo

nd -

EUR

Hed

ged

Sum of all other categories: £13,223m

£ m

illio

n

-6,000

-5,000

-4,000

-3,000

-2,000

-1,000

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

ESTIMATED NET FLOW (NOVEMBER 2013 TO JANUARY 2014)

Hedges up but no retreat from risk

USD MONEY MARKET – SHORT TERMInvestors seem to have felt a sudden desire to hedge in Q1, with

money market funds making a surprise appearance at the top of

the charts. The highest ranking money market fund stood at 13th

on the flow table in Q4 2013, with Money Market – Other taking

just £1.4 billion. Large-Cap Euro equity in third position alongside

relatively high-risk yield showed risk appetite has not reversed.

SPAIN EQUITYInvestors continued their slow-burn love affair

with Spanish equity, which has been quietly

raking in supportive amounts of new capital,

enough to drive the IBEX 35 Index to a price-

to-earnings ratio of 19.4 – unimaginable 18

months ago. While that might look a bit peaky,

investors will have their eyes on a dividend

yield of 4.03% and the prospect of easier

monetary policy easing the peripheral load.

FUND FLOWS

April 2014 21


Glo

bal E

mer

ging

Mar

kets

Bon

d

Sect

or E

quity

Util

ities

Glo

bal H

igh

Yiel

d Bo

nd

Braz

il Eq

uity

Oth

er In

flatio

n-Li

nked

Bon

d

Net

herla

nds

Equi

ty

GBP

Div

ersi

fied

Bond

Glo

bal B

ond

- CH

F Bi

ased

Glo

bal E

mer

ging

Mar

kets

Allo

catio

n

Glo

bal B

ond

- USD

Hed

ged

Fran

ce L

arge

-Cap

Equ

ity

Euro

pe L

arge

-Cap

Gro

wth

Equ

ity

Glo

bal F

lex-

Cap

Equi

ty

ASE

AN

Equ

ity

Sect

or E

quity

Ene

rgy

BRIC

Equ

ity

Conv

ertib

le B

ond

- Glo

bal

Sect

or E

quity

Nat

ural

Res

ourc

es

Indi

a Eq

uity

Asi

a A

lloca

tion

EUR

Div

ersi

fied

Bond

USD

Gov

ernm

ent B

ond

Com

mod

ities

- Br

oad

Bask

et

Alt

- Vol

atili

ty

Emer

ging

Eur

ope

Equi

ty

CHF

Mon

ey M

arke

t

Glo

bal L

arge

-Cap

Gro

wth

Equ

ity

Glo

bal I

nfla

tion-

Link

ed B

ond

- EU

R H

edge

d

Latin

Am

eric

a Eq

uity

GBP

Cor

pora

te B

ond

Asi

a Bo

nd

EUR

Bond

- Lo

ng T

erm

UK

Equi

ty In

com

e

USD

Div

ersi

fied

Bond

Asi

a ex

Jap

an E

quity

NO

K Bo

nd

USD

Fle

xibl

e Bo

nd

Asi

a-Pa

cific

ex-

Japa

n Eq

uity

Glo

bal B

ond

Glo

bal E

mer

ging

Mar

kets

Equ

ity

Glo

bal B

ond

- EU

R H

edge

d

Mon

ey M

arke

t - O

ther

Gua

rant

eed

Fund

s

Glo

bal E

mer

ging

Mar

kets

Bon

d ¨C

Loc

al C

urre

ncy

EUR

Mon

ey M

arke

t - S

hort

Ter

m

SOURCE: Morningstar

GLOBAL EMERGING MARKETS EQUITYNo signs of value hunting in emerging equity yet, with

outflows more than doubling quarter-on-quarter over

renewed fears about sovereign balance sheets’ resilience

in the face of a stronger dollar, and the bubbling noise

of toxic debt emanating from Beijing.

April 2014 22


22

SOURCE: CBOE

Nov-13

SP

X P

ut/

Cal

l Rat

io

Jan-14 Mar-14Mar-13 May-13 Jul-13 Sep-13

S&P 500 PUT TO CALL RATIO

0.6%

0.9%

1.2%

1.5%

Ind

ex

VIX INDEX

10

15

20

25

Nov-13 Jan-14 Mar-14Mar-13 May-13 Jul-13 Sep-13

SOURCE: CBOE SOURCE: Federal Reserve Bank

SOURCE: Reuters

Ind

ex

TED SPREAD

15

20

25

30


Ind

ex

ST LOUIS FED FINANCIAL STRESS INDEX

-1.2

-1.0

-0.8

-0.6

-0.4


STRESS TESTSMEASURING CURRENT STRESS IN THE FINANCIAL SYSTEM

SMEASURING CURRENT STRESS IN THE FINANCIAL SYSTEM

Coolness or complacency? Following 2013’s Great Moderation, volatility has ticked up, but much more slowly and incrementally than the circumstances of Q1 might have seemed to justify.

The Vix stood at an average of 14.6 in Q1 – the highest figure since Q4 2012. But despite an unclear outlook, geopolitical shocks and a major emerging market sell-off, it remained distantly short its historical average.

Around the world, equity indices told a similar story. The 30-day moving average of the MSCI World Index’s volatility ticked up fractionally from 7.39 to 8.21 over Q1, while the MSCI Asia Index’s volatility moved from 10.39 to 12.33.

The direction of travel was clear, but the pace remained meandering, with all of those measures well contained beneath their historical averages.

So long as there remained a supportive consensus on the underlying economy, equity volatility would be capped by arbitrage trading, suggested HSBC Private Bank head of strategy William Sels.

‘We expect hedge funds to continue to benefit from falling correlations, diverging emerging market performance and rising M&A activity, while helping to reduce portfolio volatility,’ he said. ‘We like equity long-short strategies as a result.

‘Volatility in EM portfolios can be limited by focusing on countries exposed to the developed market recovery and by avoiding countries where government or current account balances pose challenges.’

Société Générale’s hedge fund team noted at the end of March the sector had turned net long volatility – extremely

unusual positioning and suggesting further gains.Cross-asset volatility was more pronounced but also not at

extremes. Gold and benchmark German, French and British sovereigns all beat their respective domestic equity indices over Q1.

The one unpriceable risk at the end of the period was that posed by Beijing, with domestic lending rates rising sharply at the end of the quarter as the People’s Bank of China drained liquidity.

‘China has the resources to continue to intervene in its economy, but we wonder how long this can continue,’ said Deutsche Bank strategist Jim Reid.

‘Watch the policy response to the slowdown in Q2 and watch for any contagion from what now seems to be an inevitable pick up in onshore corporate defaults.’

Volatility: The dog that didn’t bark in Q1

April 20142323

www.citywire.co.uk/wm/aa360 ASSET ALLOCATION 360˚

LEADING INDICATORS: PMIS

EUROZONE COMPOSITE PMI (50 = no change)

Feb-14Feb-11 Feb-12 Feb-13

45

50

55

60

Europe remains on a much less emphatic growthtrajectory than the other western nations but has remained consistently expansionary since June, following 18 months of sub-50 index readings.

The relative laggards among the major eurozone economies have helped underpin growth.

As German output slipped from 56.5 to 55 in March, France rose from 47.8 to 51.6. Italy and Spain had not atthe time of writing issued March numbers, but both grew steadily in January and February. However, the recovery nonetheless remains painfully slow. PMI growth pointed toward quarterly GDP numbers of 0.4%, only just up from 0.3% in Q4 2013.

That remains too weak to put a dent in the continent’s significant amount of spare capacity and put a line under continued disinflationary weakness across the eurozone.

The output pricing PMI remained below 50, at 48.6 in March, indicating the lack of price pressure across the single currency area.

US activity since Q3 2013 has come back from a one-two punch inflicted by government shutdown and an unusually bitter winter, but remains solidly expansionary and consistent with rapid growth.

Much of the weather-deferred activity is also likely tobe added to Q2 output. Bank of America Merrill Lynch estimated the trade-off would mean 2% growth in Q1 rising to 3% in Q2.

Of the 52 snow storms since 1950 classified as ‘high impact’ – a measure of the number of people affected in addition to their severity – five occurred between December 2013 and March 2014.

‘Following similarly severe winters over the past 50years the median difference between Q2 and Q1 GDP growth was 4.5%,’ said BoAML rates analyst David Woo.

Home sales have recovered fairly rapidly afterapproaching stall speed in early-2014 and less weather-dependent indicators, such as credit demand and supply,suggest solid fundamentals.

WEATHERING THE STORM STILL AT STALL SPEEDSPRING SPRUNG

The annualised UK composite PMI has begun to be subject to the rebasing effect, but even coming offits peak of maximum relative optimism, all signscontinue to point toward solid, sustained gains.

If Q4 2013 was characterised by encouraging signs that activity was spreading from constructioninto manufacturing, Q1 2014 has suggested that it isnow prompting renewed industrial investment.

A historically long-overdue uptick in businessinvestment at the end of last year could, if sustained,add as much as 1% a year to UK GDP over the nextthree years, estimated Capital Economics.

The Office for Budgetary Responsibility haslowered its estimate of the output gap and nowforecasts it will fall to below 1% by 2016 ratherthan 2017. While that brought forward some of its estimated growth over the years to 2018, it was at the expense of growth at the further end ofthe period.

UK COMPOSITE PMI (50 = no change)

FebFeb-11 Feb-12 Feb-13

48

50

52

54

56

58

60

62

US COMPOSITE PMI (50 = no change)

Feb-1Feb-11 Feb-12 Feb-13

48

50

52

54

56

58

60

SO

UR

CE

: Mar

kit

April 20142424


Is emerging markets’ long struggle nearly over?There has been a long and painful period ofemerging market (EM) underperformance measured by the falling metric of comparative and relative strength. Yet EM bulls will have beenexcited by the small double bounces of relative strength in recent weeks. More interesting isthe level from which those bounces have takenplace: close to the lows that EM relative strength reached in 2008. Then, they outperformed World markets and the FTSE for two years. Maybe it’stoo early for some; but for others, the evidence for an EM revival is growing.

Dr Copper’s verdict on taperingThe Fed is now well into its tapering programme andthe S&P is wearing it well. The same cannot be saidfor the global equity index: global growth is on a slower path than we’re used to.

Commodities have got the message, and the chartmakes clear the divergent fortunes of these two former global growth plays clear.

Tapering will continue at a pace that’s appropriatefor a recovering US economy, and not the struggling others. Investors shouldn’t confuse ‘value’ foropportunity, recent market volatility is likely tocontinue and divergent market fortunes represent the scale of economic adjustment yet to play out.

Convertibles go fasterDespite positive returns in 2013, convertible bonds remain an attractive option for investors looking to maintain credit exposure and increase equity exposure.

The chart below shows the convertible delta index still offers significant upside in both European and US convertibles. This simply means that for every penny of movement in the US and EU stock priceslinked to a convertible, bonds will have 45% and 67% sensitivity respectively.

As businesses consider the optimal capital structure available, they are more likely to offer option conversion after a rally in stocks. This means convertibles offer attractive funding versus bonds.

Copper (% annual change)

2000 2002 20062004 2008 2010 2012 2014

MSCI World (% annual change)

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

Average Delta US

2009 2010 2012 20132011 20

Average Delta EU

10

20

30

40

50

60

70

80

SOURCE: UBSSOURCE: Canaccord GenuitySOURCE: Metastock

ROBERT JUKES, GLOBAL STRATEGIST, CANACCORD GENUITY

DAWN KENDALL, SENIOR BOND STRATEGIST, INVESTEC W&I

MARK STURDY, PRINCIPAL, RAYMOND JAMES – MARLBOROUGH & CITY

iShares Emerging Markets ETF (index price)

iShares World ETF (index price)

Mar-09 Mar-10 Mar-11 Mar-12 Mar-14Mar-13

iShares FTSE 100 ETF (Index price)

900

1100

1300

1500

1700

1900

2100

2300

2500

2700

2900

3100

3300

3500

3700

UNMISSABLE CHARTSTHREE READERS PICK THE CHARTS THAT POINT TO UNDERLYING TRENDS IN THE GLOBAL ECONOMY

1 2 3

April 20142525


TOP GLOBAL ASSET ALLOCATORS

After a relatively smooth ride forrisk assets in 2013, things gotdecidedly bumpier for allocators in

the first quarter. A volatile January was followed by a fitful

rebound in February and March. Marketsflirted with fresh highs before falling back toleave them stranded in no man’s land as thequarter drew to a close.

The S&P 500 managed to eke out a small gain in this seesawing, while the Dow and most UK equity indices suffered losses.European equities fared relatively well as the ECB upgraded its growth forecasts, while the stunning rise in Japan sharply reversed and emerging markets were once again subject to widespread profit taking.

This all spelt good news for bonds, which confounded the bears by rallying as investors sought shelter in safe havens. The Barclays Global Aggregate index rose 2.5% in the quarter, outperforming the 0.5% gain in the S&P. Gold bulls were also happierafter a torrid 2013 for the precious metal.

Previously, our four asset allocation gurus had anticipated an existential crisis for risk assets this year following the equityrush in 2013. The teams had struggled to compute reckless buying when there was

plenty to fret about, including the twinthreat of quantitative easing tapering and aslowdown in China.

The Russian invasion of Crimea in February added to the angst.

‘The tussle between Europe and Russiaover this strategically critical regionwill be exceptionally difficult given theconcentration of gas and oil pipelines thatcourse through the country, linking Russia’senergy resources to western Europe,’ said Jupiter Merlin boss John Chatfeild-Robertsas the crisis threatened to blow out ofcontrol. ‘Anything that clogs these arterieswill have knock-on impacts well beyond theUkrainian borders.’

Against this troubled backdrop the four teams fine-tuned their asset allocationstrategies.

Slashing UK exposureIain Stewart’s Newton Real Return teamwas among the most active as it slashed UKequity exposure from around 15% to 11.5% in a cull of risk exposure. ‘Since the turn of the year, we have reduced the fund’s exposureto risk assets through both an outrightreduction in the weighting of equities andwith regards to the level of direct protection

implemented (which we increased tactically in January),’ Stewart explained.

‘This is in keeping with our relatively cautious outlook [for] an equity market that we consider stymied by a substantial debtburden, with stretched valuation relative to company fundamentals, and underpinned

by ultra-loose and unprecedented monetary policy.

‘We continued to employ contracts held on the S&P 500 and FTSE 100 indicesduring the month (February), but with both indices reaching new highs, thisdirect protection carried an associatedcost, although it remains an importantcomponent of fund construction.’

The ultra-cautious team at Trojan also conducted some equity housekeeping as

Faith in ‘stymied’ equities begins to failSteve Russell, Ruffer ‘We have already moved out of the “expensive defensives”, which performed verywell for us, and into relatively cheaper butmore cyclical equities

John Chatfeild-Roberts, Jupiter ‘The tussle between Europeand Russia will be difficult given the concentration of gaand oil pipelines thcourse through the country.’

Iain Stewart, Newton ‘Since the turn ofthe year, we havereduced the fundexposure to risk assets.’

Sebastian Lyon, Troy ‘The current valuation (of AGBarr) represents a microcosm of thewider stock marketas investors havebid up the price ofgrowth.’

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ashat

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CITYWIRE’S FAVOURITE ALLOCATORS Citywire’s research team has used rigorous quantitative analysis to find the asset allocators with the best record of risk-adjusted returns

‘Earnings need to increase sharply to provide rational justification for current valuations of most stocks and markets’Sebastian Lyon, Trojan

April 201426



microcosm of the wider stock market as investors have bid up the price of growth. Illiquid small and midcap stocks, like Barr, have benefited disproportionately. Future returns are likely to be considerably lower when shares are priced for perfection.’

valuation worries continued to engulf its investment thinking.

Trojan head Sebastian Lyon, who has the lowest equity exposure of the four teams, used the disposal of long-term soft drinks favourite AG Barr to demonstrate his valuation fears for the wider market.

‘Why have we decided to sell such a successful investment when we have no qualms about the business and believe the chief executive is one of the best creators of value we have come across?’ Lyon asked.

‘The answer is simply valuation. A decade ago the shares were valued on a P/E ratio of 14x and offered a secure dividend yield of almost 5%. Today the shares are valued on an eye-watering 24x earnings and carry a yield of less than 2%.

‘The current valuation represents a

‘Japanese equities suffered from the dash to safety of the yen as a bolt-hole currency and a strong currency hurt exports’Steve Russell, Ruffer 0%

5%

10%

15%

20%

25%

30%

UK EQUITIES

Average

JupiterMerlin

Balanced

NewtonReal

Return

Trojan RufferInvestment

0%

5%

10%

15%

20%

GOVERNMENT BONDS (GILTS AND NON UK)

AverageJupiterMerlin

Balanced

NewtonReal

Return

TrojanRuffer

Investment

0%

5%

10%

15%

20%

Jupiter MerlinBalanced

Average

TrojanRuffer

Investment

Newton Real Return

UK INDEX LINKEDUK Equities

Cash

UK Index Linked

Gold/Commodities

Corporate Bond (UK & Non-UK)

Government Bonds (UK & Non-UK)

17%

10%

7%

5%4%

7%

8%

39%

GLOBAL ASSET ALLOCATORS (%)

International Equities

Non-UK Index Linked

April 201427



Ruffer’s Hamish Baillie and Steve Russell, who have 50% of their portfolio in equities, were also concerned about valuations. While they are far from comfortable with their exposure to risk assets, they felt in the short term that it would be a mistake to dramatically cut the weighting and have recycled some profits into cheaper areas of the market.

‘If assets prices continue to be pumped up by central bank largesse then earnings will have to follow or inflated valuations

will mean revert,’ Baillie and Russell said. ‘In the company’s portfolio we have

already moved out of the “expensive defensives”, which performed very well for us, and into relatively cheaper but more cyclical equities.

‘We remain cognisant of the fact that monetary policy remains supportive in the short term, hence our overall equity weighting has not been reduced. This in no way means we are immune from stock specific disappointments but cheaper valuations may provide some insulation; earnings can still fall but multiples are less likely to contract to the same extent as

the highly rated defensives.’Before the Crimean conflict, emerging

markets were already in a desperate state as tapering and structural issues within a number of the region’s key economies hit sentiment.

This was reflected by further heavy outflows, with some $35 billion withdrawn from GEM equity funds in the first three months of the year, according to fund tracking firm EPFR Global, versus $14.05 billion at the same period last year. Asia

was hit particularly hard as investors withdrew $13 billion in the first three months of 2014 versus just $400 million in the corresponding period of 2013.

For Chatfeild-Roberts, who has marginal exposures to GEMs in his 74% equity position, which includes a holding in the Prusik Asian Income fund, the fresh pressure in the region is no surprise as the Fed’s quantitative easing programme winds down.

‘The recent actions by the Fed have had the result of draining liquidity from the global financial system, which is akin to withdrawing oxygen from a flame. As

‘The gold mining businesses we own should become more attractive as the gold price rises, and their business models become less pressured’Ian Stewart, Newton

0%

2%

4%

6%

8%

10%

12%

GOLD/COMMODITIES

Jupiter Merlin

Balanced

Average

Trojan

RufferInvestment

Newton Real Return

0%

10%

20%

30%

50%

60%

40%

INTERNATIONAL EQUITIES

JupiterMerlin

Balanced Average

Trojan

RufferInvestment

NewtonReal

Return

0%

2%

4%

6%

8%

10%

CORPORATE BOND (UK & NON-UK)

JupiterMerlin

Balanced Average

TrojanRuffer

Investment

Newton Real

Return

April 201428



soon as liquidity begins to reduce, it is those markets that have attracted short-term speculative investors that are most vulnerable,‘ Chatfeild-Roberts said.

‘The duration of these flows is anyone’s guess, but bargain prices will emerge from the assets cast aside by investors late to join the bandwagon. However, in our opinion this drama is likely to have a number of further scenes to play out.’

When it comes to drama no one has put

on quite a show like Japan. After a meteoric rise in 2013 the Nikkei lost 9% in the first quarter as the appreciation of the yen dampened enthusiasm for ‘Abenomics’.

While Baillie and Russell reduced their exposure to Japanese equities from 22% in the middle of 2013 to 15% and unhedged part of their yen exposure, their fund was hit by the downturn. ‘Japanese equities suffered from the dash to safety of the yen as a bolt-hole currency and a strong

currency hurt exports,’ the pair explained. Chatfeild-Roberts needed more

evidence Abenomics is working. ‘We await the fundamental confirmation that Shinzo Abe’s policies are having lasting, constructive impacts on the economy and upon businesses... Demand-driven inflation is the Holy Grail that Japan is aiming to create. Should it appear, it will likely be the result of increased economic activity, but evidence of this is yet to come through the data.’

Back to the golden daysWith friction in markets growing, interest in gold increased, illustrated by a rise in its value in the first quarter following the sharp falls of 2013.

Sebastian Lyon remains the biggest fan of the four teams, with a 15% weighting to the precious metal. Stewart, who owns around 3%, also showed appreciation for the ‘insulation’ qualities of gold and has hopes miners well have a better year in 2014. ‘The gold mining businesses we own should become more attractive as the gold price rises, and their business models become less pressured,’ Stewart said.

While fixed income had a decent start to the year there was little meaningful change in bond exposure among the four teams.

Newton continued to favour government and corporate bonds running positions of 15.4% and 9.8% respectively, while Jupiter holds a 4.9% exposure to each of those fixed income sub-sectors. Meanwhile,

CASH (Jan-11 to Jan-14)

Jan-12Jan-11 Jan-13 Jan-14

Trojan

Ruffer Investment

Newton Real Return

Jupiter Merlin Balanced

Average cash allocated (%)

Jan-14Jan-11 Jan-12 Jan-136

9

12

15

SOURCE (ALL GRAPHS): Citywire Selection. All data to end of February 2014

the inflation hawks at Ruffer and Trojan remained heavily exposure to index linkers.

At the start of the year Baillie and Russell added to their long-dated US index-linked bonds, with their exposure to inflation-protecting assets standing at 29%, matching that of Lyon’s.

Until the market’s attitude to risk becomes more reasonable our asset allocators will follow a cautious path.

‘Prudence will not always be punished. Out experience tells us that reckless behaviour is ultimately penalised by permanent capital loss,’ Lyon said.

‘Earnings need to increase sharply to provide rational justification for current valuations of most stocks and markets. If they do not, and positive market momentum continues, then equity markets are at risk of entering another bubble while the echoes of the last two popping are still in earshot.’

‘The duration of [the EM sell-off] is anyone’s guess, but bargain prices will emerge from the assets cast aside by investors late to join the bandwagon’John Chatfeild-Roberts, Jupiter

April 20142929


EQUITY MARKET TECHNICAL FORECASTS

BY Ian Williams, chief executive of Charteris

FTSE 100 DOW JONES INDUSTRIAL NIKKEI 225

SOURCE: Cleveland Federal ReserveSOURCE: Bank of England SOURCE: Reuters

The FTSE 100 has in the past week failed to test its all-time high and the 10-week moving average is ina horizontal trajectory. The reason why the FTSEhas been relatively weak is the strength in sterling –I suspect if you expressed the FTSE and DJI in euro they would come out looking more or less the same. It’s stuck in a horizontal trading pattern whereI think it will remain until we see some movementin sterling. If the currency weakens I think we willsee a break above its resistance points.

This looks very bullish. The DJI has just broken above its previous high, as you would have expected given the S&P 500 has been making new highs, and the 10-week moving average is still in an upward trajectory. A lot of the stale bulls have been swept out as it has moved above the previous record. That will have got rid of the previous resistance, as people who have been made whole from the previous high will have ceased putting selling pressure on the top resistance line.

This looks almost like the inverse of the yenrecently – it has more or less retraced half its recentmovement, which is as you would expect given thestrength of the run last year. It can’t go up any morethan the currency has gone down. It looks like it willbe in a consolidation range for the foreseeable futurebut based on the yen, when it does break out I thinkit will be on the upside. Any increase in the strengthof the US dollar ought to be able to push it on a bit.

FTSE 100 10-week moving average

6,000

6,200

6,400

6,600

6,800

7,000

Ind

ex p

rice

Apr-13 Jul-13 Apr-14Oct-13 Jan-14

Dow Jones Industrial 10-week moving average

Apr-14 Jul-14 Oct-14 Jan-14 Apr-14

Ind

ex p

rice

14,000

14,500

15,000

15,500

16,000

16,500

17,000

Apr-13 Jul-13 Apr-14Oct-13 Jan-14

Nikkei 225 10-week moving average

Ind

ex p

rice

11,000

12,000

13,000

14,000

15,000

16,000

17,000

April 201430


KEY CURRENCY FORECASTS

USD-EUR USD-JPY

This looks very toppy. Having risen since 2009, sterling approached its long-term resistance line in February, failed to breakthrough and has since confirmed on the downside since. It has taken a rest having moved up from $1.50 to $1.67 and is now sitting bang in the middle of its long term range, recently breaking twice below its 10-week moving average. It seems to have reached some medium term support but the next move will probably be a big one toward the downside.

That is quite a bearish formation, which once again gives quite a positive signal on the direction of the dollar. The euro is back below the level at which it looked like it was recently breaking out, has dropped below the 10-week moving average and is testing the 20. It’s back at where it broke out in 2013, which is bad because a lot of stop-losses will have kicked in and it didn’t manage to break out of that previous trading pattern. You would need to wait for a confirmation, but it looks weak.

That is a very a bullish formation with the 20-week average still steeply sloping up and the yen breaking out toward the top of a triangle pattern. It looks as if it is breaking out of its recent trading range between 101 and 105, which is yet another bullish signal on the direction of the dollar. The yen has been very strong all the way up and after the recent consolidation I think it will keep on going. The recent top looks like it will be taken out at some point soon.

USD-GBP 10-week moving average

Pri

ce U

SD

1.4

1.5

1.6

1.7

Apr-09 Apr-10 Apr-11 Apr-14Apr-12 Apr-13

USD-EUR 10-week moving average20-week moving average

Pri

ce E

UR

Apr-09 Apr-10 Apr-11 Apr-14Apr-12 Apr-131.25

1.30

1.35

1.40

Pri

ce Y

EN

USD-JPY 10-week moving average20-week moving average

70

80

90

100

110

Apr-12 Oct-12 Apr-14Apr-13 Oct-13

USD-GBP

BY Ian Williams, chief executive of Charteris BY Ian Williams, chief executive of Charteris

CITYWIRE ASSET CLASSESDEFINING THE INVESTMENT UNIVERSECitywire’s research team segments the investment universe into 25 key asset classes. Each contains a range of underlying sectors made up of fund managers and ultimately the funds

ASSET CLASS SECTORS FUND MANAGERS FUNDS


April 20143131

Alexandra Hartmann

Feras Al-Chalabi

Ignis European Smaller Companies

Fidelity Euro Blue Chips

Odey Allegra European

Ian Ormiston

European Small & Medium Companies

Eurozone

Europe

Alternative Ucits

Asian Bonds

Convertible Bonds

Corporate Bonds

Emerging Market Bonds

European Bonds

Global Bonds

High Yield Bonds

Sterling Bonds

US Dollar Bonds

Other Bonds

Commodities

Asia Pacific Equities

Emerging Market Country

Equities

Emerging Market Equities

European Country Equities

EUROPEAN EQUITIESGlobal Equities

Latin America Equities

North America Equities

Thematic Equities

UK Equities

Mixed Assets

Property


April 201432

CITYWIRE ASSET CLASS

GLOBAL BONDS CITYWIRE SECTOR

Global

WHAT’S WORKING?

With the end of the bond bull and emergence of a ‘new normal’, it makes sense to focus on the short term: over 12 months Invesco Perpetual Global Financial Capital has dominated, as bank balance sheets have been rehabilitated. The fund was followed by the TwentyFour Dynamic Bond and Jupiter Dynamic Bond funds: the common words in their titles were no coincidence, as more directional competitor funds faltered.

developed markets, but the total return might be very skinny indeed.

‘We can’t discount geo-political risks evolving into something more disruptive in terms of political stability and economic activity. A worsening could push yields a lot lower. However, if not, growth strengthening should lead to modestly higher yields.’

Greater clarity on the direction of US growth, which in March appeared to be recovering from one of the worst winters in living memory, could be a catalyst for more aggressive rebalancing in early Q2.

But policymakers on both sides of the Atlantic and in Japan have gone to some lengths to emphasise that despite policy tightening, they are prepared to go to some lengths to keep rates anchored.

‘The committee’s sizable and still-increasing holdings of longer-term securities should maintain downward pressure on longer-term interest rates,’ said Fed chair Janet Yellen in her maiden statement at the head of the bank.

Investors recover limited appetite for sovereign safetyWealth Management.

After yields consistently fell in

January as ripples of risk aversion spread from emerging markets, US, UK,

European and Japanese bonds have all traded within a narrow range of a few basis points since.

UK 10-year gilts were representative,

moving 3.2% from a yield of 2.68% in early February

to 2.77% in late March, within a maximum range of 2.82% on

the upside and 2.64% on the downside over Q1.

Yields across the board remain effectively where they stood at the end of Q2 2012, after the big repricing which followed the Fed’s original announcement that it was considering an end to quantitative easing. Credit spreads in developed nations remained whisker-thin.

With lead economic indicators muddling along rather than breaking up or down, AXA Framlington head of fixed income Chris Iggo said the short term would be a ‘tug of war as far as bond yields go’.

‘Credit can, and should, deliver better returns than a pure government bond portfolio in the

Have investors rediscovered a taste for fixed income? Developed sovereign bonds have coped better with tapering than many expected – but that is not to say they have done particularly well.

According to BlackRock passive fund data, flows into fixed income exchange traded products (ETPs) during January and February came close to matching inflows for the whole of 2013, at £23.1 billion to £27.1 billion respectively.

A net total of $19.6 billion in new money flowed into fixed income vehicles – $11 billion of that into US treasuries – during February alone, a new monthly record. Assets in short and leveraged fixed income exchange traded funds (ETFs) moved from 98% net short to 76% short during February, reported provider Boost ETP.

That relative exposure suggests the move was more of a structural unwinding from a recent relative underweight, rather than any expectation of outsized returns from fixed income, and equity inflows remained positive over the period.

‘We still view equities as vulnerable, and “renting” bonds and owning some gold will prove ultimately to be a very reasonable proposition from here,’ wrote Stewart Richardson, chief investment officer at RMG

Defensive: Renewed bond appetite fear

not greed

ecover limited appetite forWealth

Aftcon

Jr

EJ

wrp

wemovin

of 2.68%to 2.77%

a maximum ra

d a tasted d

many

e ion to

on in ed income t into US treasuries


April 201433


PROPERTY CITYWIRE SECTOR

Global Equities

London builds up as UK regions play catch-upWhile the majority of asset classes have seen significant repricing since 2008, UK commercial property remains an anomaly, with capital values still around 30% below the 2007 peak.

Relative value, improved credit, receding fears of an approaching wall of non-performing bank inventory and the hunt for yield have recently led to a recovery in investor appetite, however.

Property values rallied in the fourth quarter last year at an increasingly rapid pace. For 2013 as a whole, the IPD UK Monthly Index returned 10.9%, the first year of double-digit returns since 2010.

Prime yields still offer a generous premium to bonds, at a current 6.5%, according to property manager Colliers, with more for those willing to take a risk on secondary sites.

The above factors have coincided with signs a long-term rental depression has bottomed. While few would bet on retailers, demand for high-quality space has at least been backstopped by recovery.

The all-property void rate fell to 9% in 2013, driving a recovery in rents for high-quality prime buildings,

WHAT’S WORKING?

A rising tide has lifted all boats with a range of funds at the top of

the sector, led by the relatively London-averse, yield-focused Schroder UK Property fund. Second placed was the land-rent investment vehicle Freehold Income and the comparatively mainstream Henderson UK Property Trust. Funds weighted outside London are likely to lead over a three-year horizon.

AprAAprAprAprAprprAAprAp ilillillliiiil 201220102201201201200102020012020022222220122220200000000002010112012012222012222222200000000010101010122222222020201020111012222000001201011222222202000000020011111112222202220200010000201111111222222222020000001201000111201112020122201202012010020111122202220000000111111222200202010111222012200000011111222220120120000111122202220000000100000112012202012222000000001120200000111222220000000002201444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444443333333333333333333333333333333333333333333333333333333333333333333333333333333333333333333333333333333333333333333333333333333333333333333333333333333333333333333333333333333333333333333333333333333333333333333333333333333333333333333333333333333333333333333333333333333333333333333333333

Prime yields still offer a generous premium to bonds, at a current 6.5%, according to property manager Colliers, with more for those willing to take a risk on secondary sites.

The above factors have coincidedwith signs a long-term rental depression has bottomed. While few would bet on retailers, demand for high-qualityspace has at least been backstopped byrecovery.

The all-property void rate fell to 9%in 2013, driving a recovery in rents for high-quality prime buildings,

WHW AT’S WORKING?

A rising tide has lifted all boats with a range of funds at the top of

the sector, led by the relatively London-averse, yield-focusedSchroder UK Property fund. Second placed was the land-rent investment vehicle Freehold Income and the comparativelymainstream Henderson UK Property Trust. Funds weighted outside London are likely to lead over a three-year horizon.

explained Rob Martin, director of research at L&G Property. He pointed to a headline 2.7% increase in rents during 2013, the strongest performance since 2007.

‘Even for the broader sample of properties monitored by [IPD], rental growth has turned positive and we expect to see further improvement in the next two to three years,’ Martin explained.

Philip Nell, manager of the £1.5 billion Aviva Property Trust, said: ‘A notable reversal of 2012’s trend is that UK institutions and listed property companies have returned to the market and are now net-buyers of commercial property,’ boosted by high activity from overseas investors.

With that in mind, he believes the office sector offers double-digit returns.

According to IPD, property overall

posted 4.4% returns in the

fourth quarter

of 2013, driven by office and industrial property, which each returned 13.6% and 13.1% respectively over the same period.

The greatest surprise came from retail, which rose 8.1% over the same period, after generating just 4.9% over the 12 months to January.

London has recovered much of the value lost in the financial crisis and continues to dominate, but L&G’s Martin saw the greatest scope for a broad, cyclical recovery outside the capital.

‘We see the prospects for office and industrial property as stronger, with some parts of the logistics sector being boosted by demand for space to fulfil online retail. The most successful managers will position to take advantage of these changes.’

Ignis Asset Management has upgraded its City and West End office hotspots rental forecasts

along with ‘micro-locations’ such as Aberdeen. Fund manager George Shaw anticipated retail warehouses, supermarkets and leisure schemes will offer the best prospects.

Over a three-year horizon, he believed central London office and retail property will deliver ‘double-digit total returns’.

Prime stock and good secondary assets will continue to face downward pressure on yields, but L&G said shopping centre rental growth will remain polarised between prime schemes and secondary.

London’s fast recovery has outpaced UK regions


April 201434


ALTERNATIVE UCITS CITYWIRE SECTOR

Volatility Trading

WHAT’S WORKING?

The Events Driven sector has been the best performer among Alternative Ucits over the past three months. Within this space, the table has been topped by the Merrill Lynch York Event-Driven Ucits fund – which is also comfortably ahead of its peers over one and three-year periods. It has recently gained strongly from a holding in the restructured American Airlines as well as from an array of broad market hedges.

swap position allows us to benefit from that asymmetry,’ he explained.

‘It should help with any transition to a period of higher volatility, and there are reasons to expect why we might get that,’ with interest rate hikes, macroeconomics and political risks.

The second of the Gars volatility trades is based on relative value, with a long bet on Chinese equity volatility against a short position on FTSE 100 volatility.

Gars has used the Hang Seng China Enterprises index for this trade; it comprises just 40 companies, with 60% in financials. It is therefore, theoretically and in practice, more volatile than the FTSE 100.

‘If there were to be a dramatic risk-off event or a spike in volatility, we would expect this position to act as a diversifier,’ Rudd said.

He expects the position to generate positive returns as a base case given the indices’ inherent volatility characteristics, with the potential for further upside if a crisis hits markets.

Contrarians eye the ups and downs of volatility trading incrementally over the first quarter, up a total of 5% on Q4 2013 – described by Schaeffer Investment Research trader Adam Warner as ‘a slow train to nowhere’.

The index still stands well short of its 30-year average, at a reading of 14.6 versus 20.2 respectively.

The £20 billion Standard Life Investments Global Absolute Return Strategies (Gars) fund is one Alternative Ucits product that has maintained some exposure to volatility trading via two explicit positions, one directional and the other relative.

The first is simply expressed through equity variance swaps on liquid markets such as the S&P 500 and FTSE 100, which will pay off if volatility rises from present multi-year lows.

According to Amundi, which runs £1.5 billion across two volatility trading Alternative Ucits funds, equity markets’ one-year implied volatility fell to a near five-year low in February.

‘Implied volatility, which has been declining broadly for the past five years, has now fallen to such a level that we feel it’s cheap enough to justify having a long volatility position,’ said Adam Rudd, a Gars investment director who specialises in volatility trading.

Rudd recognises that actual volatility has historically tended to come in lower than implied volatility, so this

trade has had to clear a ‘very high hurdle rate’ and reflects his conviction that it will add value to the

portfolio.So while Rudd accepts volatility could still fall further, he doubted it will do so by much, given

its current trough. On the other hand, there is scope for it to rise.

‘Having a long variance

If past performance is any guide to future returns, investors would be well advised to steer clear of volatility trading. Every fund in this category has lost money over every standard timeframe.

But like other recently out-of-favour sectors, such as commodities, it is attracting some

contrarian interest as valuations become compelling. Unlike

those plays, though, volatility trading also offers the

prospect of some portfolio protection if

markets crash.Average volatility

as measured by the Vix index

has risen

AprAprAprAprAAprAAAApApAprAprAprAprAprpprprppprprprrAAprprApAprAprAAprppprprAprprprAprAprAprAprAprppprprprrAprpprprAppprrrAAAprpprprprrApprprpAApAprrAppprrrAA rAApprprApAprppprApprApAAAAAAAAAApAprAAAAAAAAAAAAApprrprAprAprAApApApAAAApAprAAAppprrrAprApprrprrrrprrrrApAprrppp ililililliliiillililililiiiiiliillill iilllilililliiillliiliill 20120201201220120120201201201020202012012020120120120120120202020120220220120120102012201201020101022220120100020112220201201201222010201201201220201201012011222222022010010001122202020002012220020122200020002220000222220202222222001222222201202222220 4444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444443343434343444434443434333343434333343434444344343433434443434333434434333344444333334444433333334333444443333334433333334434444334444343333444444344434434434344444433

d

acc

The fiswaps on liquid mar100, which will pay off if volatilitymulti-year lows.

According to Amundi, which runs £1.5 billion across two volatility trading Alternative Ucits funds, equity markets’ one-year implied volatility fell to a near five-year low in February.

‘Implied volatility, which has been declining broadly for the past five years, has now fallen to such a level that we feel it’s cheap enough to justify having a long volatility position,’ said Adam Rudd, a Gars investment director who specialises in volatility trading.

Rudd recognises that actual volatility has historically tended to come in lower than implied volatility, so this

trade has had to clear a ‘very high hurdle rate’ andreflects his conviction that it will add value to the

portfolio.So while Rudd accepts volatility could still fallfurther, he doubted it will do so by much, given

its current trough. On the other hand, there is scope for it to rise.

‘Having a long variance

cbecome

those plays, thougtrading also offers the

prospect of some portfolio protection if

markets crash.Average volatility

as measured bythe Vix index

has risen


April 201435


NORTH AMERICA EQUITIES CITYWIRE SECTOR

North America EQUITIES: North America

WHAT’S WORKING?

Legg Mason’s star manager Bill Miller steps down from his Legg Mason Opportunity Trust in April 2014 but bows out in style: the fund tops three year league tables following an explosive 66% return in 2013. The fund is joined on the podium by two other tactical, small-cap heavy mandates, FF&P US All Cap Value and the Wellington US Capital Appreciation funds.

US begins to emerge from deep freeze The Dow Jones Industrials Index (DJI) remains almost 2% off the all-time high it reached at the end of 2013, while leading indicator DJ Transports has consistently set lower lows in March.

While the S&P 500 has made limited headway this year, rising 0.5%, it was also consistently setting lower lows daily into the end of Q1. Returning to the DJI, trade volume this year has continued its long-term trend of steady decline, with participation particularly light on the upside.

But apart from the relatively modest 5.7% DJI slide in January on renewed emerging market jitters – given the previous run-up, closer to 10% might have been expected – there remains a definitively supportive bid prepared to buy into lower pricing, effectively backstopping declines.

‘I do find it strange that every time we look like the stage is set for a decent decline, a bid shows up to quell the downside stampede,’ said Raymond James chief investment strategist Jeffrey Saut.

Following a quarter in which most of the widely watched economic indicators were obscured by a bitter winter and snow disruption, lead data offered scope for both bulls and bears to play with.

After two months of disappointing non-farm payrolls – although the weather ensured that they were widely discounted – job creation broke its losing streak in mid-March, with 175,000 new positions created.

The Citi Economic Surprise Index, which measures economic data versus expectations, appeared to be set for a bounce, having fallen to its most negative since August 2012.

Equity markets may have already discounted a lot of

the good news however, with an aggregate 12-month forward PE valuation multiple of 15.3 above both five and 10 year averages.

Forecast earnings growth for Q1 stood at zero, with 90 companies having reported negative guidance versus 17 issuing positive guidance, according to market data provider Factset.

The S&P 500 earnings yield stood at 5.04%, having fallen from 5.77% over the year, and with long-term US rates shifting sharply upward over the period, some yield stocks could face lower support.

Société Générale head of cross asset research Patrick Legland said that while the immediate outlook remained foggy, he read an end Q1 US manufacturing PMI reading of 57 as a green light for equity.

‘Weather-driven weakness appears to be fading,’ said Legland. ‘[And] economic policy uncertainty has been a strong headwind to capex in the past two years.

‘According to SG’s economists, business investment in 2014 will be supported by reduced policy uncertainty [leading to] improved profit growth and rising capacity utilisation. We believe the US economy has crossed an inflection point and forecast a prolonged period of above-trend growth.’

Bank of America Merrill Lynch strategist Cheryl Rowan said the company could see little point in weighting either growth or value, but that the bank was heavily favouring large over small caps, following an extended period of outperformance for the latter.

The house has maintained its year-end target for the S&P 500 of 2,000, above consensus. Capital Economics, slightly below consensus, has a target of 1,900.

North America is just beginning to thaw after a bitter winter

data

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April 20143737


UK EQUITIES CITYWIRE SECTOR

UK (All Companies)

WHAT’S WORKING?

Having performed a near clean-sweep of the All Companies sector in recent quarters, Julie Dean has been replaced by AA-rated Martin Walker’s Invesco UKAggressive, Barclays UK Lower Cap and AAA-ratedAndrew Jackson’s Ecclesiastical UK Equity Growth.

All three are currently running cyclically high-beta momentum and may find some outperformance givenup after 2013’s strong run.

second half of 2014 before sustained earnings growthfinally moves above inflation, which now sits below theBank of England’s target level.

The ongoing fall in inflation to 1.6% surprised markets,and has led investors to believe the UK could deliver the best equity returns in 2014.

A 2014 sentiment survey, published by FranklinTempleton and released in March, also showed that 29%of respondents believed the best equity returns will comefrom the UK, up from 23% in 2013.

Franklin Templeton’s UK head, Ian Wilkins, explained:‘We are excited by the growing investor optimism for equities and for UK equities in particular.

‘These findings are supported by recent IMA figures which show that by region, UK equity funds were thesecond best-selling in 2013 with net retail sales of £2.9billion – the highest since 2001.’

One such believer, Barclays’s CIO Kevin Gardiner, hasrecently upgraded UK equities from “underweight” to “neutral” in February, favouring domestically focused sectors.

Stars finally align for UK economy

UK manufacturers’ export orders are also poised to benefit from improving global growth, although Howard Archer, UK economist at IHS Global Insight, suggested the upside for orders may well be constrained by still-sluggish domestic demand in the eurozone.

With that in mind, he also claimed UK manufacturerscould face the issue of sterling’s strength. In February, the pound hit a five-year high on its trade-weighted index and traded at a four-year high against the dollar.

While consumers’ purchasing power is poised to improve further in the next quarter, it will likely be the

Spring finally appears to have broken over the UK economy, with a series of factors adding to a relativelyrosy outlook for the UK equity markets.

Wealth managers pointed to pensions liberalisationannounced in the March budget as being particularlysupportive for UK markets.

The changes would be a positive for dividend-payingequities, with government estimates of £11 billion being freed up each year, said Coutts’ chief investment officerAlan Higgins.

He pointed to Legal & General estimates that upto 75% of these funds (£8.25 billion) could be taken out of the annuity market come April 2015, when themandatory requirement ends.

‘That amounts to a potential 3% boost to household discretionary income,’ Higgins added.

From an international comparative valuation perspective, the UK also remains modestly priced,primarily due the strength of sterling and nerves about emerging market exposure.

The FTSE 100 traded at a PE multiple of 13.34 and a dividend yield of 4.06% at end Q1, versus the DJI on 15.98and 2.28% and the Euro Stoxx 50 on 14.27 and 3.88%.

Further good news came in a pick-up in businessinvestment and exports, a telling sign for Heartwood Investment Management’s CIO Noland Carter, who said the UK is experiencing a cyclical recovery and broadening out.

The February purchasing managers index (PMI) survey indicated that while activity may have lost a little momentum compared to the peak of late 2013, it was performing well in the first quarter and was well oncourse for further healthy growth.

Acceleration: Faster UK growth could finally deliver higher real household income


April 201438


EUROPEAN EQUITIES CITYWIRE SECTOR

Europe

WHAT’S WORKING?

In one word, stockpicking. In two words, conviction stockpicking. AAA-rated Oliver Kelton’s 30-stock-portfolio the Waverton European fund began to soar early last year, and has not looked back since.The fund has returned 86% over three years versus the sector average 31.9%. He is followed by two similarly conviction-led funds, Odey Allegra European and Cazenove Pan Europe.

Investors look beyond sluggish economy to earnings Europe remains the consensus developed equity trade of the past three quarters, clocking up its 38th straight week of fund inflows at end Q1, adding up to a total of £69 billion in new cash since 2012.

While that is dwarfed by the $1.29 trillion into (much larger) US markets over the same period, north American inflows have tailed off, while the desire to own euro companies remains as strong as ever.

Given the patchy state of the underlying European recovery, extensive exposure to Russia-related geopolitical sabre rattling and a parsimonious central bank, that desire might be surprising.

The senior Stoxx 50 index has struggled to gain 0.01% year-to-date and since topping out in January has not really threatened to break above that high water mark since, remaining 1.1% down.

The FTSE Eurotop 100 trades at a price to earnings multiple of 14.53, offering a slim discount to the Dow Jones Industrials index on 15.8, alongside a great deal more uncertainty.

That would be to ignore what is

probably the true appeal, however: a European dividend yield of 3.79% versus the DJI’s 2.29% and the S&P 500’s 2.23%.

‘High yielding stocks continue to outperform,’ said Deutsche Bank strategist Gareth Evans, pointing out that since European high yield bottomed in Q2 2013, the sector has beaten the main index by more than 3%.

‘We continue to advocate a preference for this style,’ he added. ‘On forward price-to-earnings, it is at an 11% discount to the broader market versus a long run average of 9%.

‘As the economy turns, dividends at the high yield end of the market start to look sustainable rather than

unsustainable and a window opens up for some rich pickings.’

In a steadily if incrementally improving earnings cycle, the bank said it recommended a portfolio of potential dividend surprises built around a core of names such as Swiss Re (current yield 8.5%), Direct Line (8.3%), Société Générale (4.2%), United Utilities (4.7%) and Taylor Wimpey (6%).

European earnings remained 30% below their pre-crash level, pointed out Citywire AAA-rated Cazenove European manager Steve Cordell. He pointed to some signs of life in both credit demand

and supply as being a supportive factor for equities generally, and for banks in particular.

‘Bank equities remain relatively depressed compared to the improvement seen in the credit market, so there is scope for them to play catch up,’ Cordell added. His key picks in the sector included BNP Paribas, Société Générale and the Italian banking group Intesa Sanpaolo.

Others warned that a chase for yield should not tip over into a dash for trash, however, amid signs that rational optimism about the potential for a peripheral bounce was slipping toward exuberance.

In mid-March, peripheral market outperformance over the European core stood at two standard deviations above its 12-month average.

‘Europe’s periphery looks overbought from a tactical standpoint,’ said Morgan Stanley European equity strategist Krupa Patel, adding this level of activity ‘has often coincided with a tactical correction’. Over the longer term she remained supportive, however.

Emerging market bears are out in force

The FTSE Eurotop 100 trades at a price to earnings multiple of 14.53, offering a slim discount to the Dow Jones Industrials index on 15.8, alongside a great deal more uncertainty.

That would be to ignore what is


April 201439


EMERGING MARKET EQUITIES CITYWIRE SECTOR

Global Emerging Markets

WHAT’S WORKING?

First State takes two of the top three GEM slots over three years with its GEM Sustainability fund, managed by AA-rated David Gait leading and its GEM Leaders fund, run by AA-Jonathan Asante, in third. Sandwiched between them is a similarly high conviction, valuation sensitive and benchmark blind mandate, the Somerset EM Dividend fund, run by AA-rated Edward Lam.

Emerging markets bear attack shows no sign of abating Despite global emerging market equities now trading at more than a 30% discount to their developed market peers, investors continue to stampede out of the asset class.

The valuation gap between the two reached its highest level since mid-2005 on a price-to-earnings basis after emerging markets ended the first quarter as they finished the last six calendar years: by underperforming developed markets.

The MSCI Emerging Markets index shed a further 1.77% in Q1 and over three years has now returned -4.71% on an annualised basis. Meanwhile, the MSCI World index was almost flat over the quarter, gaining 0.05%, while over three years annualised it has risen 7.93%.

But rather than attracting bargain hunters, this sustained underperformance has led to an acceleration of capital flows out of emerging market equities. Investors pulled out more than $30 billion (£18 billion) in Q1, more than the $29.2 billion withdrawn over the whole of 2013, according to data from EPFR.

The bear case is a well-worn argument. Concerns remain about slowing Chinese growth and further earnings downgrades abound, while the US Federal Reserve’s tapering of quantitative easing (QE) has had a disproportionate effect on emerging markets as investors become more risk averse.

This prompted Société Générale’s perma-bear strategist Albert Edwards to warn last month that ‘the ongoing emerging market debacle will be less contained than

subprime ultimately proved to be’. He believed the current situation has parallels with the Asian currency crisis of 1997 when the tightening of monetary policy, exacerbated by a weak yen, sparked a sharp currency correction as emerging market current account deficits spiralled.

Add in the potential systemic risks in the Chinese banking sector and political risks in Russia and other key countries facing elections this year, including India, Brazil and Turkey, and it is easy to see why investors are nervy.

The key question is just how much of this has already been priced in?

GaveKal co-founder Anatole Kaletsky believed tapering fears are misguided, saying: ‘The Fed’s balance sheet will not contract any time soon – maybe never. Interest rates remain accommodative. In real terms, short rates have been negative for four straight years and real rates are

only expected to break back into positive territory in 2016.’

Overall, he believed much of the bad news is already priced into emerging market equities, saying: ‘China is now priced for a full blown crisis. In other words, the downside is already protected, but the upside could be very rewarding if the great Chinese blow up never materialises.’

He also backed India as a ‘reasonable value’ turnaround story, especially if a combination of Rajan and Modi are in charge of policy following the general election.

Kaletsky advocated moving back into emerging markets, albeit with the caveat of favouring countries with strong balance sheets.

He recommended combining emerging market equities with Australian government bonds, which he said is one of a few ways historically proven to lower the volatility of an emerging market portfolio ‘without reducing the level of long-term returns’.

Emerging market bears are out in force


April 201440


EMERGING MARKET COUNTRY EQUITIES CITYWIRE SECTOR

China

The top three Equity China funds over three years, led

by Michael Lai’s GAM Star China Equity, all hold internet retailer and messaging service Tencent as their biggest

equity overweight. In a sector up 4.9% over the period, the company is up

184%, despite falling 10% in March. The leader board,

filled out by Threadneedle China Opps and SLI China

Equities, are uniformly overweight consumer stocks, in particular Macau

gambling stocks.

WHAT’S WORKING?

Blackstone, pointed to polls of regional economists suggesting ‘it might even drop to a level of 4%’.

‘The question is whether the new leaders have the will to push through this rebalancing, which is clearly in China’s long-term interest, but is likely to create some short-term unrest,’ he added.

Barclays Wealth’s head of investment Kevin Gardiner said inexpensive equity markets remained a buy for those able to look beyond the period of uncertainty however, and for those focusing on the ‘likely fruits’ of ongoing economic

liberalisation.

China’s growth story may be losing some of its puff This view was shared by Didier Saint-George,

member of the investment committee at Carmignac Gestion, who pointed to the country’s large reserves.

‘We should not forget the importance of long-term trends, or the businesses able to take advantages of them, for example, tackling air pollution [or] massive wage growth.’

When investing, he looks for stocks exposed to Chinese consumers, including Las Vegas Sands, Wynn Macau and Yum Brands.

While a majority of investors agree the country is not about to crash, Emiel van den Heiligenberg, head of asset allocation at L&G, believed China remains the biggest macro risk faced by investors.

‘A gradual migration towards more balanced growth, economic liberalisation and slower credit growth seems difficult to achieve without severe setbacks along the road,’ he said in a recent note.

Deutsche Bank’s chief China economist Jun Ma expects the Chinese economy to grow 8.6% this year but Byron Wien, vice-chair of

If disappointing news from Chinese exports were one of the big topics of the first quarter – off 18% in February – some might also reflect on one word that unsettled the markets.

During a news briefing, Chinese finance minister Lou Jiwei said it was all right for China to slightly miss the government’s 7.5% GDP growth target in 2014, as long as enough jobs are created. To that, he added, the growth target was ‘almost’ 7.5%.

This came less than two months after the country announced its economy grew by 7.7% in 2013, slightly above target. Some of the gloss was rapidly taken off by the steep fall in exports, versus expectations of a 6.8% rise, however.

Gregor MacIntosh, head of global sovereign debt and FX at Lombard Odier, said this meant slowdown risks are materialising, and a 7.5% target ‘looks optimistic’.

This suggested policymakers were emphasising reform over growth. ‘This trade-off between growth and reforms appears to be appreciated by the authorities as well,’ he explained.

As reforms go, the politburo is trying to manage pressures in the property sector, as much as it is attempting to rebalance its shadow banking sector. The government’s objective is to reduce spending on capital-intensive projects, including infrastructure and state-owned companies, from 45% of GDP to 35%, and increase the consumer component from 35% to 45%.

MacIntosh added that a Lehman-style shock emanating from China is ‘unlikely’, given the capacity of the authorities to manage a financial sector crisis.

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April 201441


ASIA PACIFIC EQUITIES CITYWIRE SECTOR

Asia Pacific Excluding Japan

WHAT’S WORKING?

Prusik Asian Income, managed by AAA-rated Tom Naughton, entered the top of the three year ranking in spectacular style in early 2014 with a return of 64.6% nearly 10 times the sector average 6.7%. The fund has already passed its $800 million cap and has now soft-closed however. Following were First State Asia pacific and Baillie Gifford Pacific, both fairly prudent valuation-sensitive mandates.

surprised many in 2013, coming in at 1.4% of GDP, lower than the 2% consensus expectations, despite extreme currency fluctuations.

Despite suffering more from the ebbing of global liquidity and a depreciating currency in 2013, Didier Saint-Georges, member of Carmignac’s investment committee, valued India’s ‘promising economic fundamentals’, and favours Indian capital goods firm Larsen & Toubro.

The country’s deficit narrowed to a four-year low of 0.9% of GDP in the last three months of 2013, boosted by an exports revival. ‘As a result, currency depreciation – if contained – is more of a boost to competitiveness than a curse,’ Saint-Georges said.

The potential for unexpected Chinese weakness to restrain the rest of the region remained evident, however. Taiwanese export data contracted by 8.3% month-on-month in March, after adjusting for seasonality and distortions, due to weaker mainland demand. The island’s trade surplus declined to $1.6 billion the same month, from $3 billion the month before.

Only the brave timing a turn in Asia

analysts highlighting underlying positives, while remaining unprepared to commit to fragile markets.

Aggregate foreign direct investment into the five largest Southeast Asian countries rose 7% in 2013 to $128.4 billion (£77.81 billion), overtaking the $117.6 billion into China.

Demographics, labour costs and robust domestic demand have sustained favourable investment cycles in Southeast Asia, primarily Indonesia and Philippines, while Taiwan and India have been the strongest performers so far this year.

Frank Holmes, CEO and CIO of US Global Investors, said investors should recognise the Philippines as one of Asia’s ‘strengths’ in 2014. Its budget deficit

Few doubt huge potential remains in developing Asia, but equally few are willing to gamble on the region as its dominant member, China, struggles to unwind its overextended lending boom.

The MSCI Asia Ex-Japan Index has effectively traded sideways for nine months, in contrast to the region’s bond markets which have bounced back sharply from their 2013 lows (see page 43).

Barclays Wealth’s chief investment officer Kevin Gardiner reiterated an underweight view on Asia, on the back of the commodities cycle and valuations.

This view was shared by JP Morgan’s global multi-asset group strategist Patrik Schöwitz, who remained negative, saying lower valuations ‘do not yet look compelling’.

CIO and global head of investment strategy at Seb Group Ann Grevelius disagreed, saying historically and on a long-term investment horizon, a ‘P/E ratio of 10.5 and earnings growth of 12.5%’ was worth paying attention to, but unstable forecasts meant she was tactically reducing weightings.

‘Choose less developed countries in Asia with continued high growth potential,’ Grevelius added, saying that despite her caution she believed regional growth would stabilise and recover this year.

This was ‘partly because of exports to the US and Europe, but intra-regional trade is also taking off’.

While she believed this export-led growth would mainly benefit small, open economies such as Singapore and Taiwan, she was more reserved on the situation of ‘commodity-exporting nations’ such as Indonesia and Malaysia.

This apparent but probably understandable contradiction was far from unusual, with many

Market timing the bottom in Asia is a headache


April 201442


ASIA PACIFIC EQUITIES CITYWIRE SECTOR

Japan

It has been a tough quarter for Japan funds, and only two in the 75-strong sector have posted positive returns: Coupland Cardiff Japan Income & Growth and Lindsell Train Japanese Equity.

The pair are also top decile over the past year, and have benefited from running extremely concentrated portfolios – of 36 and a maximum of 35 stocks respectively – so have weathered the weaker market better than their peers.

Bulls trim bets as Abenomics doubts set in On 1 April, Japan increased its consumption tax from 5% to 8%, the first increase in the rate in 17 years. The last time it rose, from 3% in 1997, it was blamed for pushing the country into recession and the Japanese stock market into a second lost decade.

Could history repeat itself? Bruce Stout, senior investment manager in Aberdeen’s global equities team, feared so.

He worried about the tax hit on consumers’ wallets in combination with higher food and energy costs caused by the yen’s depreciation and still below-inflation wage growth. His advice: ‘The safest place to observe evolving economic events in Japan is from the sidelines.’

Judging by the sell-off in Japanese equities – the Nikkei is 10% down so far this year in yen terms – the consensus is now distinctly bearish. While the yen has not significantly appreciated, some safe-haven demand has meant it has not been the one-way bet it was for much of 2013, effectively flat versus the dollar over the quarter.

Scepticism has also set in about the ability of policymakers to effect change. A survey of Japanese businesses at the beginning of Q2 showed they believed inflation would hit 1.5% in 2015 and 1.7% in 2019 – well beneath the 2% target.

Mark Tinker, head of AXA Framlington Asia, observed that buyers haven’t gone

anywhere but are ‘embracing the short Japan trade with the same enthusiasm they went long a year and a half ago’.

Is the pessimism really warranted? Tony Roberts, the Citywire + rated manager of the Invesco Perpetual Japan fund, said that tax increases are what Japan sceptics have long demanded as a way to deal with the country’s debts. And given Japan’s ageing population, the fiscal burden had to fall on spending rather than income.

Roberts nevertheless believed the hike will prompt ‘a sharp contraction in GDP growth in the second quarter of the calendar year’. Sarah Whitley, the AAA-rated manager of the Baillie Gifford Japanese fund, agreed, saying it was ‘universally expected to lead to economic weakness in Q2’.

But Whitley added that the impact ‘has long been anticipated and is well discounted’, with the Topix trading around

13 times earnings for the year to March 2015. ‘We believe the risks are largely already in the price,’ Roberts added.

Even if the impact is worse than predicted, Roberts remained confident that both the Bank of Japan and the government will act emphatically through monetary policy to support the economy.

On the perennially sticky issue of wages there was some optimism too. Nicholas Weindling, the A-rated manager of the JPM Japan fund, pointed out that Japan’s biggest banks have just boosted wages for the first time in 19 years and Mitsubishi Motors in 18 years.

‘The numbers are quite small, but the key is that it is actually changing and actually happening,’ Weindling said. Roberts takes additional cheer from the fact that unemployment in Japan is now at its lowest level for more than five years.

‘Patience may be required but should be rewarded,’ Whitley concluded.

WHAT’S WORKING?

Springtime in Tokyo: is it too soon to call the thaw?


April 201443


EMERGING MARKET BONDS CITYWIRE SECTOR

Emerging Markets Global Hard Currency

Leaving three-year performance aside due to the 2013 reversal, the top performing mandates over the last year have been corporate debt-centric, led by the BNY Mellon EM Corp Debt fund.

Prudent investors may decide this is not the time to commit: the largest overweight, double the benchmark, is to Russia. Following in second and third positions were the F&C High Income and GS GEM Corp funds respectively

Following the January sell-off of anything emerging market related, few would have predicted how rapidly debt would bounce back. In stark contrast to equities, some US dollar-denominated indices, such as the one-to-five year maturity ML GEM Sovereign Plus, have actually passed their 2013 highs.

While investors have remained sceptical about buying emerging markets for growth, which may or may not turn up in the immediate future, they appear happy to buy them for yield.

‘EM assets have switched from priced for perfection to value or even deep value,’ said Société Générale head of global asset allocation Alain Bokobza. ‘We recommend some exposure to EM bonds. We find the current carry on EM bonds provides a buffer to rising US yields.’

Investors have drawn a very clear distinction between local and US dollar denominated debt, however. The latter has recovered more rapidly, while investors continue to be cautious about the policy and FX risks embedded in the former.

‘Most investors want to wait for a classic EM crisis [and] a cathartic, correlated collapse, before committing capital,’ noted bank of America Merrill Lynch chief strategist Michael Hartnett.

That has proved elusive, despite the ongoing rumbles about non-performing debt at state-owned enterprises emanating from China, and the first default by a (small, politically unimportant) state-affiliated firm, Shanghai Chaori Solar Energy, in mid-March.

While Chinese premier Li Keqiang prepared the ground for further defaults, describing them as ‘unavoidable’, the government is unlikely to risk anything that carries serious contagion risk.

‘China probably constitutes the biggest risk to a decent Q2 and it does seem the cracks that many of us have felt have been present for a while are starting to widen,’ said Deutsche Bank strategist Jim Reid.

‘For now, China has the resources to continue to intervene in its economy but we wonder how long this can continue. Watch the policy response to the slowdown in Q2 and watch for any contagion.’

While a major credit event in Beijing would no doubt provide a ‘cathartic, correlated’ collapse, most fixed income investors emphasised the broad dispersion of EM market outlooks, and the importance of distinguishing between the leaders and laggards.

Bokobza, who recommended taking broad mid-duration beta exposure via the JPM GBI-EM Global Diversified benchmark, was in the minority.

‘We believe the current environment warrants the maintenance of an overall defensive duration stance, with a preference for select opportunities,’ said Franklin Templeton global bond head John Beck. ‘We also stress the need to diversify country exposures where possible.’

Alongside short duration positions in Poland and South Korea, Beck’s largest single active position is short-dated Mexican debt, a key pick for many sector managers.

In contrast to deteriorating fundamentals elsewhere in central and Latin America, the country has reported an improving inflationary outlook and solid fundamentals, with its trade balance strengthening to $1.2 billion (£724 million) in March versus a $3.19 billion deficit in the month before.

Investors back dollar but shun local currency risk

WHAT’S WORKING?

For a few dollars more:

Mexico is a popular

destination


April 201444


ALTERNATIVE UCITS CITYWIRE SECTOR

Currency

WHAT’S WORKING?

Goldman Sachs Global Currency Plus, Absolute Insight Currency and Neuberger Berman Diversified Currency funds lead the league table following a challenging few years for currency strategies. While FX is obviously enormously fluid and current trades offer little insight into historical positioning, all three feature long positions in the US$ and shorts in selected commodity currencies and weaker emerging currencies.

Select currencies have made good much of their previous losses versus the dollar however, in particular the Indian rupee, as investors betted on policy changes following the early Q2 national election.

While some of that had been baked in, JP Morgan Private Bank head of FX strategy Sara Yates said the currency remained the banks top pick for yield.

‘We believe India’s credible macro-economic framework, hugely improved external position and the potential for longer reform and rate cuts will allow the currency to make further gains against the USD,’ said Yates.

The yuan remained trickier, following February’s biggest one-day falls versus the US$ in a decade, widely believed to have been at least nudged lower by the PBoC, as it moved toward rate liberalisation and attempted to ease out speculative flows.

Dollar bulls’ charge fails to materialise

struggle to maintain the dizzy levels it hit against the dollar at the beginning of March. Our target for GBP/USD at the end of Q2 remains $1.63, lower than its current level of $1.65.’

Following the flushing out of emerging currency carry trades at the beginning of Q1, and with the People’s Bank of China (PBoC) widely perceived to be signalling that yuan appreciation is not a one-way bet, there has been at best a tentative return to the region.

‘In the short term, investor sentiment towards emerging market currencies is likely to be driven by geopolitical risks, policy responses in emerging markets and the prospect of further weakness in activity,’ said Schroder multi-asset manager Patrick Brenner.

‘As a result, we believe it is sensible to stay on the sidelines for now, but we expect to turn more positive on high yielding currencies once there is greater clarity.’

Both US data and policy have remained shrouded in fog during Q1, frustrating the consensus currency call at the start of 2014 that the dollar would be the only show in town.

While a number of fiscally over-extended developing countries spectacularly de-rated versus the US$ in the first quarter, developed majors have remained surprisingly resilient to a tighter Fed.

In addition to the unavoidable lack of economic clarity caused by a bitterly cold US winter, currency traders also suffered from self-inflicted miscalculation: after falling for almost two months, the US$ index shot up 1% in a single day after Janet Yellen reminded them that yes, tapering would continue.

‘Bad weather in North America had an adverse impact on the economy and investors thought there might be a tapering of the taper, which meant the expected dollar strength never materialised,’ said Angus Campbell, senior analyst at trading platform FxPro.

‘Since then, however, the new Federal Reserve chair Janet Yellen has made it perfectly clear that tapering is here to stay and this should support the dollar going forward into Q2.’

While sterling had already slid during March it continued to trade at a level not previously seen since 2008 he added, and looked particularly vulnerable in Q2.

‘We’ve already seen this happening to some extent at the end of Q1 and this would mean sterling could

Passive resistance: The rupee has held its own versus the dollar


COMMODITIES CITYWIRE SECTOR

Gold & Precious Metals

BULL BEAR B

April 2014454545


Gold has enjoyed a strong year so far, rising 9% from the point of maximum revulsion at the end of 2013 – when

at $1,212 it touched the lowest price since mid-2010 – to reach a current $1,329.That of course remains almost a third lower than the heady days of late 2011, when

it briefly topped out above $1,900 an ounce. While gold bulls are easier to find than three months ago, their forecasts are much more modest than they were, and theirassessment of its appeal more grounded in reality.

After 16 weeks of steady selling, investors began to return to commodities, primarilygold, in mid-February, according to data provider EPFR, driving the strongest demandin 15 months. This coincided with a large amount of managed money moving net long in the gold futures market according to the Commitment of Traders report, drivingopen interest to a year-high.

With momentum money gone from exchange traded funds, which sold 880 tonnes in 2013, and Asian physical investors still buying, prices are likely to respond positivelyto any deterioration in risk.

Capital Economics forecasts 8.3% upside from the current price. ‘There may be little chance of revisiting the 2011 high of $1,900, but we are happy to reiterate our end-2014forecast of $1,450,’ said the company’s senior economist Julian Jessop. ‘The collapse in the gold price in 2013 prompted some to conclude it had lost its safe-haven status. Safe-haven status is confirmed in bad times, not good, and gold has again passed that test.’

Despite the bounce from the bottom this year and some recovery in desire to own risk hedges, most of

Wall Street remains implacably hostile to precious metals and in particular to gold.The reasons are not hard to divine: in a period of dollar strength and slow and

choppy but ultimately inexorable rate rises, a non-yielding asset with very real carrying costs is not where the action is.

Sceptic-in-chief has been Goldman Sachs: ‘We see potential for a meaningfuldecline in gold prices’, the bank noted in March, reiterating its 2014 year-endtarget of $1,050.

In contrast to 2013’s bearish call, which was caused by a historical investor overweight in the face of improving US growth, the bank added 2014 would be the period of reckoning for gold versus yield.

This has been borne out even as the broader trend was increased buying, with a positive mid-March US jobs report, the first in months largely unaffected byweather, sending gold down more than 1%.

While less emphatic, Morgan Stanley seconded Goldman’s view in mid-March while lowering its 2014 target more than 11% to $1,160 and its 2015 target more than12% to $1,138. ‘We also expect further moderate weakening in the following twoyears as the global economic recovery continues to gain traction, increasing the risk of higher interest rates, especially,’ it wrote.



Natural Resources (Oil)

BULL BEAR B

April 20144646


Oil prices fell back through March after hitting a five month high at the start of the month.

Rising tensions in Ukraine stoked concerns about supply disruption, pushing WestTexas Intermediate (WTI) over $105 a barrel, while Brent Crude topped $111 on 3 March.

‘Russia is one of the largest exporters of gas, diesel and jet fuel, mainly to Europe,’ said Alison Ciaccio, oil futures editor at Platt’s. ‘Any geopolitical tension raises concerns about supplies.’

Indeed, Russia accounts for around 8% of total global oil output, but despite this,after the early March price jump, both crude and WTI prices fell back.

Amrita Sen, an analyst at consultancy Energy Aspects, attributed this to ‘a tug of war’ between the opposing pressures of a deteriorating geopolitical backdrop and concerns about slowing Chinese growth, which effectively cancelled each other out, ‘keeping prices broadly stable’.

That was until the US imposed sanctions against Russia on 21 March, pushing theprice of both Brent and WTI up more than a dollar to $107.77 and $100.25 a barrel, respectively.

While the economic backdrop for oil remains undeniably bearish, amid concerns about a slowing China, the reaction of the markets to the sanctions served to remindinvestors that geopolitical tensions can override this, creating short and sharp spikes in the oil price, even if only in the short term.

Concerns about slowing Chinese growth have broadly kept a lid on oil prices throughout the Ukrainian

political crisis. Although the imposition of sanctions by the US on Russia caused a minor spike after the Crimean independence vote, America’s vast oil reserves provide Washington with the means to dampen prices should they start to rise.

The US Strategic Petroleum Reserve (SPR) programme was introduced in 1977 to cushion the country against oil shocks, but with the US moving ever closer to energy self-sufficiency on the back of rampant shale production, it is increasingly seen as surplus rather than strategic stock.

The SPR now holds 694 million barrels of crude and it is estimated that the US authorities could release 500,000-750,000 barrels a day for two years, while still meeting its International Energy Program obligation to hold reserves equivalent to 90 days of imports.

Capital Economics’ chief global economist Julian Jessop believes this is unlikely, given it would also hurt ‘friendly’ oil producing countries and he does not expect Russia to take on the US in a game of oil market brinkmanship as ‘it would almost certainly come off worse’.

Jessop’s base case is for oil prices to drift down over the course of the year.‘Overall, despite the possibility of further volatility in the coming weeks, we continue

to expect the price of a barrel of Brent crude to end the year below $100,’ he said.

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BULL BEAR B



Industrial Metals

April 20144848


Macquarie $6,509

BNP Paribas $6,550

Barclays $6,675

Goldman Sachs $7,000

BoAML $6,200

The price of palladium surged to its highest level in two and a half years as mining strikes in South Africa

continued and concerns about disruption to supply from Russia mounted.Russia and South Africa between them produce close to 80% of the world palladium

supply. The palladium price touched $800 in intra-day trading on 21 March, before closing up 2.4% at $789.85 an ounce.

Miners have now been on strike at three key South African producers – Anglo American Platinum, Impala Platinum and Lonmin – since late January and are the biggest to have hit the sector since the end of apartheid in 1994.

The onset of US sanctions against Russia has only served to exacerbate supply concerns. The price of the metal also benefited from the announcements thatboth Standard Bank and Absa Capital are to launch palladium-backed ETFs on the Johannesburg stock exchange this month, which are expected to result in extrademand for the metal. The palladium for both ETFs is to be sourced locally, whichCommerzbank said will ‘make the global palladium market even more dependent on Russia, which accounts for 42% of the world’s mining supply’.

Commerzbank noted that global palladium ETFs already hold 2.1 million ounces, equivalent to four months’ global production.

With the launch of new products, it warned ‘a great deal of supply could be strippedfrom the market, contributing to a noticeable increase in the price of palladium’.

Copper and iron ore have taken a beating since the start of the year, driven by concerns about slowing Chinese

growth. The downward pressure on prices is expected to continue. Copper futures haveslumped by 14%, shattering the industrial metal’s reputation as an accurate predictor of the direction of the global economy, while the iron ore spot price is down 22%.

On 11 March, iron ore, a key ingredient in steel-making, fell 8.3% to $104.7 a tonne, its largest one day fall in four and a half years, on the news that Chinese exports contracted by 18% in February. Chinese demand for iron ore has been muted in 2014 as the slowing economy has been reflected by sluggishness in its domestic construction sector. This was exacerbated by the authorities closing a number ofolder steel mills in a bid to curb pollution levels.

Iron ore was one of the strongest performing commodities last year, with pricesaveraging $135 a tonne on the back of Chinese restocking. However, analysts believethis has run its course and concerns are now centring on whether supply will outstripdemand in 2014, pushing down prices further. Citigroup said it expects prices to fall to $90 in 2015 and $80 in 2016, citing ‘inescapable market surpluses’.

Goldman Sachs said surpluses could rise to 260 million tonnes by 2017 as producerscontinue to overestimate Chinese demand. The investment bank added that 80 million tonnes of capacity will not be needed this year, with UBS putting the figure at 94 million, shaking higher cost producers out of the market.


MIXED ASSETS CITYWIRE SECTOR

Mixed Assets - Balanced

April 201449


If 2013 was a year of known unknowns – primarily exactly how fast the US Federal Reserve would move to normalise rates – 2014, year-to-date, might

be characterised as a period of unknown unknowns.Briefly, these have so far included: how much toxic

debt remains to bubble over in China, whether US growth would continue its previous trajectory once the snows melted, would US earnings growth take some of the strain of multiple expansion and who would lose most from a round of sanctions against Russia.

Taking tally at the end of Q1, the responses to those questions would be: unknown, probably, possibly and unknown. So it was unsurprising that while few private client and multi-asset managers were hitting the panic buttons, they were taking some prudent steps to hedge equity risk.

Marco Pabst, chief investment officer at ACPI, pointed to the recent deflation of bubbling biotech valuations and several high-profile tech IPO cancellations as a sign that a liquidity-driven bull market was breaking down into increased volatility.

‘2013 was a banner year for momentum stocks and the place to be was not only biotech in this regard,’ he said. ‘This trade is now beginning to unravel. The valuation argument is becoming more challenging and, as an investor, one has to be very selective at this stage in the market cycle.’

Volatility expected Haig Bathgate, chief investment officer at Turcan Connell, has increased equity long-short exposure across the multi-asset portfolios his company runs.

This decision was driven by an expectation that having entered a period of interest rate normalisation, markets will prove more volatile and experience sideways spells.

Ultimately, though, higher dispersion and lower correlation would create valuation opportunities. In his view, the biggest risk facing equities would be a mismanagement of the interest rate tightening cycle.

‘We know from history that the investment community bases far too much faith in central bankers acting in a consistent way and they tend to act irrationally when the markets least expect it. Late 1993 to early 1994 is a case in point, but Ben Bernanke’s tapering blunder last May – which he then had to do a U-turn on – is a much more recent reminder,’ Bathgate explained.

The investment manager hedges from time to time on a tactical basis using derivatives, although the majority of this exposure is gained through the use of hedge funds or explicit derivative trades through products, such as structured notes.

Barbell approach Schroders’ multi-manager team has responded to the uncertainty by taking a barbell approach.

Its balanced fund currently has around 35% in cash, up substantially from the early teens last year. This sits alongside a 51% equity allocation, concentrated in cyclical recovery stocks and cheap defensives. The team favours areas that are relatively unloved, such as European telecoms and energy stocks.

How are wealth managers hedging equity risk?

‘The investment community bases far too much faith in central bankers acting in a consistent way’Haig Bathgate, Turcan Connell




April 201450


Schroders’ multi-manager Joe Le Jehan explained: ‘I don’t have an argument with the idea that the macro-economy is improving, but [what] I would tend to disagree with is the idea that valuations look attractive. Our bearishness is on valuations in the market rather than anything broader, and our cash levels tell you that.’

In his view, attractive valuations are hard to find, with the US starting to look fully priced. While Europe appeared to offer relative value, he noted it has come a long way over the past 18 months.

Outside of cash and equities, a balanced mandate has around 2-3% in fixed interest and 11% in alternatives.

Here, the team tries to identify uncorrelated ideas to provide some portfolio protection, although Le Jehan acknowledged one of the biggest challenges was the correlation that hedge funds and other asset classes have shown to equity markets.

Key positions include relative value strategy play Majedie Tortoise and the Morgan Stanley Diversified Alpha Plus fund.

Earnings growth expectations Threadneedle’s multi-asset team actively hedges market weakness in selective equity markets through futures and some equity index options. They are making only limited use of these strategies because they are confident earnings growth will come through, providing support for their overweight in equities. At present, the team favours stocks that offer a good mix of income and growth.

‘Valuations are becoming a little more full, but our expectations of earnings growth are such that we believe investors can expect decent returns from equities this year,’ said team head Toby Nangle.

‘Investors have paid on trust for earnings that have

‘Our bearishness is on valuations in the market rather than anything broader’ Joe Le Jehan, Schroders

yet to materialise and so delivery of these will be vital. On balance, we believe earnings growth will offset valuation pressures and that equities will perform reasonably in total return terms this year, but risk-adjusted returns are unlikely to be particularly strong.’

Nangle sees monetary policy normalisation, earnings and China as the three big risks facing equities.

‘We expect continued steps to be taken along the path of monetary policy normalisation, but with rates heading towards a lower final destination than the last cycle as trend growth has declined.

‘With equity valuations having come a long way over the past few years, rising bond yields could, however, undermine the attraction of equities, especially given this lower overall growth outlook.’

‘Participate but protect’The Threadneedle Dynamic Asset Allocation fund has 42% in developed market equities, around a quarter of which is in Japanese stocks.

Outside of this equity allocation, it has 5% in emerging market stocks. Nangle describes this as part of a ‘participate but protect’ strategy, designed to capture the high risk premia attached to emerging market-related assets.

‘Also, as part of this strategy, a further 6% is invested in emerging market bonds, which have suffered notably, alongside circa 4% in commodities,’ Nangle added.

‘In China, the valuations on offer are compelling but the risk of a sharp slowdown is real, and so paired with this allocation to assets that are sensitive to emerging markets is one of around 13% to Australian government bonds, which is currency hedged.’

In the event of a China slowdown, he expects




April 201451


‘Buying cheap assets is the best way we know of making money, while owning excess positions in expensive assets is the quickest way to the poor house’ Andrew Wilson, Towry

Australian government bonds to rally hard and help offset emerging market losses.

The remaining 30% of the portfolio targets assets with the potential for what Nangle describes as stable risk-adjusted returns without too much volatility. ‘There had been a 10% allocation to high yield bonds, which is almost completely now absent as valuations moved away from the levels we like, but the short-dated less loved portion of investment grade bond market makes sense for the portfolio,’ Nangle said.

Earnings cycle fears Others, though, were far less confident in the stability and predictability of the earnings cycle. ‘The biggest risk facing equities right now is the corporate earnings outlook,’ Andrew Milligan, head of global strategy at Standard Life Investments, warned.

‘After a year when stock markets performed rather well, a valuation gap has opened up. Company profits are growing, but need to remain on a positive uptrend into 2014/15 to reassure investors. Corporate statements about order books, the use of cash for capital spending or mergers and acquisitions activity, would all bolster investor sentiment.’

Although Standard Life is overweight equity and broadly light fixed income, the team seeks to counter these calls through what Milligan described as ‘a heavy position in European bonds’ intended to reduce the overall volatility of portfolios.

While he expects the world economy to expand moderately over the next two years, as recovery in the US and Europe offsets a Chinese slowdown, he cautioned on the outlook for asset valuations. ‘The expansion in top line sales needs to combine with cost control to provide the profits growth which investors need to see.’

Diversifying asset allocationAndrew Wilson, head of investment at Towry, also preferred to hedge equity risk by diversifying asset allocation, which he described as ‘less expensive and less reliant on improbable success with market timing’.

As the team takes a relative value contrarian approach, it aims to add to cheap asset classes and take profits on those that appear more expensive.

‘Buying cheap assets is the best way we know of making money, while owning excess positions in expensive assets is the quickest way to the poor house. Hence, over the last year, we have been continually taking profits from equity exposure, to maintain risk exposure at target weights, while adding to lagging strategies.’

Wilson said he is likely to become more concerned about equity allocations if the market accelerates and moves much further away from its 200-day moving average.

Likewise, if valuations re-rate much higher, which he suggests is already happening in small cap, he suggested he might begin to worry. ‘If that is aligned with signs of instability in the distribution of market returns then we could get quite concerned.

‘However, in the meantime it is entirely likely that the market will experience a common or garden correction – that is, a decline of 10% or more. This can be entirely healthy and often not worth trying to second guess,’ he concluded.

Towry’s intermediate risk profile has 55.4% in long-only equities, with fluctuating exposure at the manager level through exposure to long-short equity and macro strategies.

The profile has 9.4% in fixed interest, 11% in real estate, and 25% in what the company describes as non-traditional strategies.

April 20145252

MIXED ASSETS BALANCED

Andrew Jackson has returned 81.4%Martin Walker has returned 74.3%

Richard Colwell has returned 54.7%

Julie Dean has returned 77.6% Chris Wright has returned 70.3% Graham Kitchen has returned 53.2%

Andrew JacksonCitywire-Rating

Martin WalkerCitywire-Rating

Richard ColwellCitywire-Rating

Julie DeanCitywire-Rating

ChrisWrightCitywire-Rating

Graham KitchenCitywire-Rating

FUND: Ecclesiastical UK Equity Growth FUNDS: Invesco Perpetual Children’s, Invesco Perpetual UK Aggressive, Invesco Perpetual UK Growth, Invesco UK Equity A Annual Dist

FUNDS: Cazenove UK Equity, Cazenove UKOpportunities FUND: Premier Ethical

FUNDS: Henderson High Alpha UK Equity, Henderson Mainstream UK Equity

Jackson’s UK Citywire ratings historyWalker’s UK Citywire ratings history

Colwell’s UK Citywire ratings history

FEB-11 MAR-14

UK ALL COMPANIES

CITYWIRE FUND MANAGER RATINGS

Dean’s UK Citywire ratings history Wright’s UK Citywire ratings history Kitchen’s UK Citywire ratings history

FEB-11 MAR-14

FEB-11 MAR-14 FEB-11 MAR-14 FEB-11 MAR-14

FEB-11 MAR-14

Average managerAndrew Jackson

Tota

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)

Mar-14Mar-12 Mar-13Mar-11-20

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-20

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Average managerJulie Dean

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Mar-14Mar-12 Mar-13Mar-11

Average managerMartin Walker

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Average managerChris Wright

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Average managerRichard Colwell

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Average managerGraham Kitchen

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FUND: Threadneedle UK Growth & Income

April 201453

Michael Fox has returned 56.2% Field’s UK Citywire ratings history

Seaton’s UK Citywire ratings history

Smith’s UK Citywire ratings history

Steiner’s UK Citywire ratings history

James de Uphaugh has returned 53.4%

Michael FoxCitywire-Rating

Christopher FieldCitywire-Rating

Jamie SeatonCitywire-Rating

James de UphaughCitywire-Rating

Matthew SmithCitywire-Rating

Adam SteinerCitywire-Rating

FUND: CIS Sustainable Leaders Trust FUNDS: Majedie UK Equity B, Majedie UK Focus A, St James’s Place UK Growth

FUND: GVO UK Focus

FUNDS: Majedie UK Equity, Majedie UK Focus, St James’s Place UK & General Progressive, St James’s Place UK Growth

Fox’s UK Citywire ratings history

Christopher Field and Matthew Smith have returned 56.2%

Jamie Seaton and Adam Steiner have returned 56.2%

De Uphaugh’s UK Citywire ratings history

FEB-11 MAR-14

FEB-11 MAR-14

FEB-11 MAR-14

FEB-11 MAR-14

FEB-11 MAR-14

FEB-11 MAR-14

Average managerMichael Fox

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Average managerJames de Uphaugh

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Average managerJamie Seaton & Adam Steiner

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http://www.citywire.co.uk/manager/andrew-jackson/d10182?section=wealth-manager

http://www.citywire.co.uk/manager/julie-dean/d373?section=wealth-manager

http://www.citywire.co.uk/manager/martin-walker/d3123?section=wealth-manager

http://www.citywire.co.uk/manager/chris-wright/d13825?section=wealth-manager

http://www.citywire.co.uk/manager/richard-colwell/d3050?section=wealth-manager

http://www.citywire.co.uk/manager/graham-kitchen/d1037?section=wealth-manager

http://www.citywire.co.uk/manager/michael-fox/d4696?section=wealth-manager

http://www.citywire.co.uk/manager/james-de-uphaugh/d14996?section=wealth-manager

http://www.citywire.co.uk/manager/christopher-field/d1197?section=wealth-manager

http://www.citywire.co.uk/manager/matthew-smith/d15078?section=wealth-manager

http://www.citywire.co.uk/manager/jamie-seaton/d17088?section=wealth-manager

http://www.citywire.co.uk/manager/adam-steiner/d19680?section=wealth-manager


April 201454

ASSET PRICES

WORLD EQUITY PERFORMANCE

EQUITIES 3 MONTHS TO 24-MAR-14

9 MONTHS TO 24-MAR-14

1 YEAR TO 24-MAR-14

3 YEARS TO 24-MAR-14EQUITIES 3 MONTHS

TO 24-MAR-149 MONTHS

TO 24-MAR-141 YEAR

TO 24-MAR-143 YEARS

TO 24-MAR-14

UK % GROWTH TR GBP

FTSE 350 Higher Yield TR 0.24 2.57 10.45 30.93

FTSE 250 Mid (X It) TR 4.58 15.26 22.39 55.37

FTSE Small Cap TR 3.52 14.75 22.36 49.18

Numis Smaller Companies (-InvTrust) 5.11 20.23 26.82 62.42

FTSE 100 TR -0.95 1.87 6.74 21.97

FTSE All-Share TR -0.09 3.79 8.94 26.16

FTSE 100 TOP SECTOR (OVER 1 YEAR) BOTTOM SECTOR (OVER 1 YEAR)

TELECOMS SVCS 38.03% BASIC MATERIALS -11.91%

US % GROWTH TR USD

Dow Jones Industrial Average CR 1.18 7.68 15.81 33.13

Russell 1000 Growth TR 3.65 18.05 27.4 50.27

Russell 1000 Value TR 4.27 15.26 24.76 49.94

S&P 500 TR 3.51 15.85 25.37 49.53

Russell MidCap TR 5.85 18.53 27.84 50.87

Russell 3000 TR 3.92 17.01 26.51 50.16

DOW JONES TOP SECTOR (OVER 1 YEAR) BOTTOM SECTOR (OVER 1 YEAR)

HEALTHCARE 35.28% TELECOMMS SVCS 4.07%

EUROZONE % GROWTH TR EUR

Swiss Market Index CR 0.13 5.26 8.07 30.62

CAC 40 CR -0.44 8.30 14.86 4.04

MSCI Europe TR EUR 0.14 8.85 15.02 25.05

MSCI Europe Small Cap TR EUR 5.15 21.61 28.81 44.30

MSCI Europe Mid Cap TR EUR 3.35 14.35 21.22 28.56

MSCI Europe Small Mid Cap TR EUR 4.11 17.34 24.35 34.92

DAX 30 CR -0.18 10.47 22.76 20.31

MSCI EUROPE TOP SECTOR (OVER 1 YEAR) BOTTOM SECTOR (OVER 1 YEAR)

TELECOMS SVCS 34.03% MATERIALS -0.95%

ASIA PACIFIC EX-JAPAN % GROWTH TR USD

Singapore Straits Times CR -3.39 -6.51 -7.34 3.34

Jakarta SE Composite Index 16.58 -19.84 -16.42 5.44

KOSPI 200 CR -8.10 1.14 -5.42 3.06

MSCI Golden Dragon TR USD -6.68 1.37 -0.05 4.94

FTSE World Asia Pacific TR USD -5.03 2.40 3.48 8.23

FTSE World Asia Pacific ex Japan TR USD -2.16 3.02 -0.89 11.94

FTSE TWSE Taiwan 50 CR -1.13 0.60 3.10 -3.29

EMERGING MARKETS % GROWTH TR USD

BOVESPA (Ibovespa) CR -8.24 -17.73 -28.94 -49.21

S&P BSE 100 9.10 1.69 2.58 -9.09

MSCI EM (Emerging Markets) TR USD -5.85 -3.47 -6.77 -6.01

S&P BSE SENSEX 9.02 3.69 4.63 -7.88

RTS CR -19.34 -15.01 -26.25 -42.56

CHINA % GROWTH TR USD

Shanghai Composite CR -8.38 -10.97 -12.19 -24.47

Hang Seng CR -8.58 -2.38 -5.14 -6.01

Shenzhen Composite CR -1.92 3.88 12.91 -11.05

MSCI Zhong Hua TR USD -8.86 0.56 -2.57 4.10

JAPAN % GROWTH TR JPY

Nikkei 225 CR -7.58 5.09 25.23 36.25

Topix TR -7.44 3.47 21.53 30.71

NIKKEI 225 TOP SECTOR (OVER 1 YEAR) BOTTOM SECTOR (OVER 1 YEAR)

COMMUNICATION 56.49% OIL & COAL PRODUCTS -5%

% G

row

th T

R G

BP

Mar-13 Mar-14Jun-13 Sep-13 Dec-13

MSCI EuropeMSCI Golden DragonTopixMSCI EM (Emerging Markets) FTSE World Asia PacificS&P 500FTSE 100MSCI AC World

-20

-15

-10

-5

0

5

10

15

20


April 2014 55

ASSET PRICES

0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5

SWIP Global Liquidity GBP Advisory

Marlborough Cash Trust

F&C Short Duration Bond

Insight ILF GBP Liquidity Plus 2

Royal London Cash Plus Z Acc

Ignis Sterling Short Duration Cash

HSBC Sterling Liquidity Class A

Insight ILF GBP Liquidity 2

Prime Rate Sterling Liquidity 3

TMI Sterling Liquidity

Aviva Investors Sterling Core Liquidity 3

Invesco Perpetual Money Acc

BlackRock ICS Inst Sterling Ultra Sh Bd Sel Acc

LGT Money Market Fund (GBP) - B

Aviva Investors Sterling Strategic Liquidity 3

F&C Money Markets 4 Inc

Ignis Sterling Liquidity 1

Wesleyan Cash

Schroder SSF Sterling Liquidity Plus C Acc

Amundi Money Market fd Short Term (GBP) - PC (D)

UBP Money Market Fund GBP

Baillie Gifford Cash A Net Inc

Pictet CH Short-Term Money Market GBP P dy

Jupiter Cash Acc

Western Asset GBP Liquidity S

Henderson Money Market

Henderson Institutional Cash Retail Acc

Deutsche Managed Sterling Advisory

Lipper Global Money Market GBP

Legal & General (N) Cash Pension Acc

LGIM Sterling Liquidity 1

SSgA GBP Liquidity Stable I

Fidelity Institutional Liquidity GBP Acc A

CMI (Lux) Sterling Currency Reserve

BlackRock ICS Inst Sterling Liq Core Acc

PROPERTY 3 MONTHS TO 21-MAR-14


1 YEAR TO 09-DEC-13

3 YEARS TO 21-MAR-14


% GROWTH TR GBP

FTSE All UK Property (NAV) TR 6.37 12.78 15.25 20.74 38.87

FTSE UK Retail Property (NAV) TR 6.28 12.15 15.07 17.98 30.83

FTSE UK Office Property (NAV) TR 6.40 12.75 14.78 24.15 48.41

FTSE UK Industrial Property (NAV) TR 5.56 11.75 13.02 15.15 32.38

ALTERNATIVES 3 MONTHS TO 21-MAR-14


1 YEAR TO 21-MAR-14



% GROWTH TR GBP

HFRX Global Hedge Fund USD 0.78 -5.32 -3.21 -1.09 3.98

HFRX Equity Hedge 2.03 -2.77 -0.06 -5.73 3.33

HFRX Relative Value Arbitrage 0.55 -7.44 -6.13 -0.08 29.11

HFRX Macro / CTA -2.44 -10.91 -11.18 -11.34 -30.56

HFRX Equity Market Neutral 1.10 -6.14 -5.40 -6.80 -19.09

HFRX RV: FI-Convertible Arbitrage 1.72 -5.60 0.50 10.88 43.88

HFRX Event Driven 2.31 -1.00 3.67 13.70 19.36

HFRX ED: Distressed Restructuring 2.20 -4.02 -1.10 -2.97 -8.72

HFRX Merger Arbitrage 0.11 -5.93 -4.42 0.11 1.15

HFRX Equal Weighted Strategies USD 0.91 -5.38 -2.93 0.20 3.52

HFRX Global Hedge Fund EUR 1.91 0.43 1.67 -2.03 10.95

HFRX Global Hedge Fund CHF 2.79 2.28 1.54 1.46 31.72

HFRX Global Hedge Fund GBP 1.50 3.11 5.31 0.89 20.90

HFRX Equal Weighted Strategies GBP 1.65 3.06 5.67 2.06 20.29

HFRX Absolute Return 0.78 -5.31 -4.07 -0.10 -15.36

HFRX Market Directional 2.32 -3.58 -0.28 -9.15 12.62

HFRX Equal Weighted Strategies EUR 2.06 0.40 2.05 -0.44 11.47

HFRX Equal Weighted Strategies CHF 2.95 2.25 1.94 2.90 31.65

CASH (ONE YEAR)

TOP PERFORMING LIPPER MONEY MARKET FUNDS (%)


April 201456

ASSET PRICES

FIXED INCOME 3 MONTHS TO 21-MAR-14


1 YEAR TO 21-MAR-14



% GROWTH TR GBP

BofA Merrill Lynch Eur Currency HY Const Hdg GBP

3.60 8.73 12.60 36.87 182.64

BofA Merrill Lynch Euro High Yield 3.98 6.06 8.85 32.40 146.73Markit iBoxx Sterling Corporates 1.63 1.11 4.28 26.17 66.88

Citi EMU GBI TR 3.16 1.50 2.66 19.44 19.86Markit iBoxx Euro Corporates 2.08 0.16 1.13 18.12 38.08

BofA Merrill Lynch US High Yield Cash Pay TR USD

2.54 -2.76 -0.36 26.80 103.32

FTSE Global Government Bonds 0.86 -5.02 -6.85 4.88 7.03

Barclays Baa US Credit TR 2.25 -6.67 -6.89 19.76 47.09

Citi WGBI TR GBP 0.81 -4.71 -7.19 4.48 6.77

JP Morgan EMBI + 1.24 -10.67 -12.38 18.73 47.42

BONDS PRICE 25-MAR-14 03-DEC-13 04-SEP-13 28-JUN-13

LOCAL CURRENCY YIELD (%)

UK Gilt 2-year 102.43 0.66 0.50 0.48 0.37

UK Gilt 10-year 96.37 2.70 2.85 2.86 2.39

UK Gilt 30-year 95.79 3.51 3.64 3.63 3.55

US Treasury 2-year 99.20 0.44 0.28 0.43 0.35

US Treasury 10-year 100.06 2.74 2.79 2.86 2.47

US Treasury 30-year 101.04 3.60 3.85 3.77 3.52

Bund 2-year 100.11 0.19 0.12 0.27 0.18

Bund 10-year 101.59 1.58 1.74 1.92 1.72

Bund 30-year 101.45 2.43 2.64 2.69 2.47

JGB 2-year 100.04 0.07 0.08 0.11 0.14

JGB 10-year 99.90 0.61 0.63 0.77 0.81

JGB 30-year 100.01 1.69 1.68 1.82 1.84

10-YEAR GOVERNMENT BOND YIELDS

GOVERNMENT YIELD CURVES

30 years1 year 2 years 5 years 10 years 20 years

Yie

ld (

%)

US Treasuries UK Gilts German Bund Japan Sovereign

0

1

2

3

4

Yie

ld (

%)

Mar-11 Sep-11 Mar-14Mar-12 Sep-12 Sep-13Mar-13

10 year US Treasuries UK 10 year gilts

1.0

1.5

2.0

2.5

3.0

3.5

4.0

FIXED INCOME PERFORMANCE

% G

row

th T

R G

BP

Citigroup WGBIJP Morgan EMBI+Markit iBoxx Sterling Corporates

Mar-13 Mar-14Jun-13 Sep-13 Dec-13

-20

-15

-10

-5

0

5

10

SOURCE (ALL TABLES AND GRAPHS: Lipper and Reuters


April 2014 57

INDEX TRACKER LISTINGS

PERFORMANCE UNTIL 31/03/2014

LISTINGS

NAME BENCHMARK ASSET TYPE AMC % * OCF % ** 6 MONTHS 1 YEAR 3 YEARS 5 YEARS

Legal & General European Index I Acc FTSE World Europe ex UK TR GBP Equity 0.15 0.20 8.98 16.84 21.72 92.06

Legal & General Global 100 Index I Acc S&P Global 100 TR Equity 0.25 0.26 6.25 7.44 25.04 82.72

Legal & General Global Emerging Markets Indx I Acc FTSE AW Emerging TR GBP Equity 0.25 0.43 -2.54 -11.65 -14.89

Legal & General Global Health & Pharma Index I Acc FTSE World (Health & Pharmaceuticals) TR Equity 0.30 0.31 11.63 14.57 70.58 114.82

Legal & General Global Technology Index I Acc FTSE World (Information Technology) TR Equity 0.30 0.32 12.20 14.60 34.92 108.92

Legal & General International Index I Acc FTSE World ex UK TR GBP Equity 0.25 0.31 5.81 7.31 24.98 96.44

Legal & General Japan Index I Acc FTSE Japan TR GBP Equity 0.15 0.19 -6.84 -2.29 12.27 37.60

Legal & General Pacific Index I Acc FTSE World Asia Pacific ex Japan TR GBP Equity 0.15 0.22 -0.36 -6.27 5.30 97.50

Legal & General UK 100 Index I Acc FTSE 100 TR Equity 0.15 0.18 3.99 6.20 23.11 101.24

Legal & General UK Index I Acc FTSE All-Share TR Equity 0.15 0.17 5.05 8.55 27.41 113.30

Legal & General US Index I Acc FTSE USA TR GBP Equity 0.15 0.18 9.02 10.98 42.98 119.39

Legal & General All Stocks Gilt Index I Acc FTSE A British Govt All Stocks TR Fixed Interest 0.15 0.18 0.17 -3.34

Legal & General All Stocks Index lkd Glt Idx I Acc FTSE A (Index Linked) British Govt All Stocks TR Fixed Interest 0.15 0.18 1.60 -4.05

Legal & General Emer Mkts Govt Bd USD Idx I Acc JPMorgan Emerging Markets Bond Index Plus TR Fixed Interest 0.25 0.30 0.11 -11.90

Legal & General Sterling Corporate Bd Idx I Acc Markit iBoxx GBP Non-Gilts ex-BBB TR Fixed Interest 0.15 0.19 1.14 -0.63

*Annual Management Charge ** Ongoing Charges Figure

April 201458


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This is not a consumer advertisement. It is intended for professional financial advisers and should not be relied upon by private investors or any other persons. The value of investments may fall as well as rise and is not guaranteed. Investors may get back less than they invest. Past performance is not a guide to future performance. Call charges will vary. Ongoing charges for each I class fund will range from 17bps to 52bps. Legal & General (Unit Trust Managers) Limited. Registered in England and Wales No. 1009418. Registered office: One Coleman Street, London EC2R 5AA. Authorised and regulated by the Financial Conduct Authority. H142966

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