Market Outlook 2017

Messages on February 15th, 2017 No Comments
In this section we look at the House view of one of the leading Fund Managers operating in Ireland and importantly, what’s their current view on the markets.

January 2017

The following portfolio is based upon a global investor with access to all the major asset classes.

 

Government bonds
US Treasuries While market stress and safe-haven flows support Treasuries, tighter labour markets and the upward trend in wages give the Federal Reserve the rationale to raise interest rates steadily into 2017. LIGHT
European Bonds An environment of low inflation, modest economic growth, further QE and negative rates supports European bonds. Political pressures could periodically affect peripheral bond markets, requiring a quick ECB response. NEUTRAL
UK Gilts The Bank of England delivered significant easing measures as uncertainty related to the EU referendum outcome will cause the economy to slow. However, valuations are expensive. NEUTRAL
Japanese Bonds The introduction of yield curve control alongside negative interest rates and QE is the central bank’s latest attempt to reflate the economy. An absence of yield makes this asset class relatively unattractive. Moved to LIGHT
Global Inflation-Linked Debt Inflationary conditions are globally subdued but markets may react to a rise in headline inflation because of expansionary US fiscal policy. Meanwhile, commodity prices are starting to move higher once again. NEUTRAL
Global Emerging Market Debt We prefer dollar-denominated to local currency debt, both on valuation grounds and on expected dollar movement. On a selective basis, higher yields are attractive in an environment of easier monetary policy. HEAVY
Corporate bonds
Investment Grade Debt QE supports UK bonds, but has driven European yields to unattractive levels. US credit spreads are less attractive as Treasury yields increase and we prefer riskier assets. Moved to NEUTRAL
High Yield Debt The hunt for yield is driving more investors to this asset class, although overcrowding remains a risk in some sectors, especially in the US when monetary policy is being tightened. HEAVY
Equities
US Equities Equities are buoyant on the back of promised fiscal easing from President Elect Trump; while valuations are not historically attractive, dividends and share buybacks plus tax cuts are still supportive. Moved to VERY HEAVY
European Equities Corporate earnings may be adversely affected by the uncertainty shock resulting from the Brexit process and other political events. Concerns remain over some banking systems and a lack of strong credit growth. NEUTRAL
Japanese Equities Markets have priced in high expectations for monetary loosening and fiscal stimulus, so yen moves remain a primary driver of corporate earnings and business investment. NEUTRAL
UK Equities The UK economy has remained resilient post-EU referendum but uncertainty remains surrounding its future relationship with the EU. Sterling remains the primary driver of the relative attractiveness of UK companies with overseas exposure. NEUTRAL
Developed Asian Equities The macroeconomic improvement in emerging markets will have a positive feed through due to trade linkages, but expected US interest rate rises may offset this effect. NEUTRAL
Emerging Market Equities The outlook for Asia is dependent on US trade policy and the degree of monetary tightening. Those emerging markets that can benefit from higher oil prices are attractive after the change of policy by OPEC. Moved to NEUTRAL
Real estate
UK The referendum fallout continues to affect liquidity and cause capital depreciation. Income remains attractive versus other asset classes although risks are elevated should conditions turn recessionary or political uncertainty persists. LIGHT
European Core markets continue to offer attractive relative value in light of the low interest rate environment supported by QE, while recovery plays are showing consistent capital value growth. VERY HEAVY
North American The US market should benefit from an improvement in economic growth, although some Canadian property faces headwinds from an interest-rate sensitive consumer and significant office construction. Moved to HEAVY
Asia Pacific An attractive yield margin remains, but markets are divergent. Returns are driven by rental and capital value growth in Japan and Australia, but weakening elsewhere. Emerging Asia markets are risky. NEUTRAL
Other assets
Foreign Exchange The US dollar has rallied following the US election but will benefit from a steady tightening of monetary policy; Europe looks less well placed than Japan to cope with the next phase of currency pressures; sterling acts as a shock absorber after the EU referendum. HEAVY $, NEUTRAL ¥, £. LIGHT €
Global Commodities Different drivers, such as US dollar appreciation, Chinese demand, Middle East tensions and climatic conditions, influence the outlook for different commodities. NEUTRAL
Cash
The US election result may mean a faster pace of interest rate rises is necessary should fiscal policy expansion lead to inflationary pressures. Easier policy is expected in Europe, Japan and the UK to revive economic activity. Moved to LIGHT

Key Issues

Looking into 2017, global economic and profits cycles are turning up, helped by a more supportive monetary and fiscal landscape. Authorities finally appear to understand that continued, sustained expansion is required to get the world out of the stop-and-go cycle it has been in since the Great Recession.

Sustainable yield remains a key investment theme, with an emphasis on sustainability in those markets, credit or equity, where payout ratios are stretched. The House View remains underweight cash and overweight income-producing assets such as high yield bonds and emerging market debt. We expect only modest returns from government bonds in 2017, but they are no longer as overvalued as they were immediately following the UK’s EU referendum.

At the same time, we are looking for selected growth opportunities, as the profits outlook appears better in 2017. Within equity markets, the US looks the most dependable but also commands the highest valuation. Europe and Japan have suffered disappointments in 2016, due to weak domestic profits, European banking issues, and currency swings. Here we expect support from stable-to-slightly weaker exchange rates, plus the higher operating leverage of these markets to global growth. In foreign exchange, we remain positive on the US dollar given the underpinnings of relative growth and therefore tighter monetary policy versus the rest of the world.

In real estate, we find more attractive opportunities outside the UK. In the US and Europe, yields are attractive, rental growth is positive, and commercial development remains constrained, while there are some decent prospects in Asia. Property combines yield with some growth, a ‘sweet spot’ in terms of investment preferences.

This outlook of potential investment market developments in 2017 (and beyond)  does not constitute an offer and should not be taken as a recommendation. This is  only the view and outlook of one of the Fund Managers operating in Ireland.

 

Warning: These funds may be affected by changes in currency exchange rates.
Warning: Past performance is not a reliable guide to future performance.  
Warning: The value of your investment may go down as well as up. 
Warning: If you invest in these funds you may lose some or all the money you invest.
Warning: A deferral period may apply to withdrawals and/or switches from certain funds. Please refer to your product documentation for further details.   

 

Market Outlook 2016

Messages on February 9th, 2016 No Comments
In this section we look at the House view of one of the leading Fund Managers operating in Ireland and importantly, what’s their current view on the markets.

January 2016

 

Government bonds
US Treasuries Continued economic growth, especially tighter labour markets and rising wages, should enable the Federal Reserve to raise interest rates further throughout the year. VERY LIGHT
European Bonds An environment of low inflation, modest economic growth, further QE and more negative official rates support European bonds. Political pressures may affect peripheral bond markets on occasion. HEAVY
UK Gilts Domestic economic strength should give the Bank of England leeway to raise rates in the aftermath of the US. Inflation pressures remain manageable. LIGHT
Japanese Bonds The Bank of Japan’s sizeable bond-buying programme has driven valuations into expensive territory, as authorities continue to try to reflate the economy. NEUTRAL
Global Inflation-Linked Debt While inflationary conditions are globally subdued, markets may react to a rise in headline inflation as the impact of previous commodity price weakness becomes less marked over time. NEUTRAL
Global Emerging Market Debt Dollar-denominated bonds are Heavy as spreads show better value, while local currency bonds are Neutral as careful examination is required of individual currency and spread factors. HEAVY/NEUTRAL

 

Corporate bonds
Investment Grade Debt Our preference is to be higher up the corporate capital structure. Widening US credit spreads create an attractive opportunity over low-yielding Treasuries; improving cash flows benefit euro debt. HEAVY
High Yield Debt Recent sell-offs have improved valuations modestly, but overcrowding remains a risk in the US market when monetary policy is tightened; European debt remains supported by yield-seeking investors. NEUTRAL

 

Equities
US Equities Valuations are expensive on some metrics and margins likely to compress with higher wages and stiffer import competition. However, stock buybacks and dividend payouts are still supportive. NEUTRAL
European Equities Corporate competitiveness is improving, and earnings should receive a lift from further euro depreciation, an improvement in domestic demand and lower energy costs. HEAVY
Japanese Equities Earnings upgrades from a weaker yen, improving corporate governance, lower corporate taxes and the central bank’s QQE programme support the asset class. Abenomics’ structural reform components must be implemented. NEUTRAL
UK Equities The domestic economic backdrop is supportive but certain companies have large exposure to overseas earnings, which are under pressure from stronger sterling and commodity price pressures. NEUTRAL
Developed Asian Equities Trade flows are increasingly a headwind, with a strong Australian dollar affecting its terms of trade. China’s economic slowdown is harming commodity producers. NEUTRAL
Emerging Market Equities There are pockets of deterioration within emerging markets, with the commodity price slump badly affecting Brazil, political uncertainty in Eastern Europe and large behavioural shifts affecting the Chinese market. NEUTRAL
Real estate
UK The robust growth environment continues to bolster prices in the near term and yields remain attractive compared to other assets, suggesting reasonable returns over a three-year holding period. HEAVY
European Core markets continue to offer attractive relative value in light of the low interest rate environment supported by QE, while recovery plays are showing consistent capital value growth. NEUTRAL
North American Canadian property faces headwinds from significant office construction and consumers that are sensitive to interest rates. The US should benefit from continued economic growth but pricing is quite aggressive. NEUTRAL
Asia Pacific An attractive yield margin remains but markets are divergent. Returns are driven by rental and capital value growth in Japan, but limited to capital growth in Australia, Hong Kong and China. Emerging Asia markets are risky. NEUTRAL

 

Other assets
Foreign Exchange The US dollar has already sizeably appreciated despite upcoming rate rises; QE in Japan and Europe will keep currencies there under pressure. Sterling is supported by an eventual UK interest rate rise. NEUTRAL $, €, £, ¥
Global Commodities Different drivers, such as US dollar appreciation, Chinese demand, Middle East tensions and climatic conditions, influence the outlook for different commodities. NEUTRAL
Cash
The US and some emerging markets have started to raise interest rates, while the UK waits for the opportune moment. In Europe and Japan, policy should remain easy. NEUTRAL

Key Issues

Divergences in the global economy are becoming more apparent. The main area of weakness is across emerging markets, especially China, which is suffering from poor investment decisions in the past. Conversely, the backdrop for developed economies generally remains upbeat, helped by positive drivers for consumer spending and business services. Falls in oil prices are leading to income and wealth gains and losses for different countries.

While we expect as much financial market volatility in 2016 as in 2015, we remain positive on the outlook for selected stock markets. Within equities, we favour Europe, as the economy is improving and corporate earnings should benefit from currency depreciation. Meanwhile, we are Neutral on Japan, the UK, US, developed Asian equities and emerging markets; the latter generally underperform during periods of US dollar strength and commodity price weakness.

Within fixed income, we continue to look for yield opportunities. We have increased our positions in corporate bonds, although selective purchases are required given balance sheet risks. Expensive valuations mean we are Light in most government bond markets. The exception is a Heavy position in European bonds, which benefit from low inflation and continued ECB QE. Meanwhile, we remain Heavy in real estate, where valuations encourage a rotation towards cheaper markets in order to take advantage of an attractive combination of growth prospects and yield.

 

This outlook of potential investment market developments in 2016 (and beyond)  does not constitute an offer and should not be taken as a recommendation. This is  only the view and outlook of one of the Fund Managers operating in Ireland.

 

Warning: These funds may be affected by changes in currency exchange rates.
Warning: Past performance is not a reliable guide to future performance.  
Warning: The value of your investment may go down as well as up. 
Warning: If you invest in these funds you may lose some or all the money you invest.
Warning: A deferral period may apply to withdrawals and/or switches from certain funds. Please refer to your product documentation for further details.   

 

What the Fund Managers are Saying

Messages on October 16th, 2015 No Comments

 

In this section we look at the House view of one of the leading Fund Managers operating in Ireland and importantly, what’s their current view on the markets.

Read more »

Important Changes ARF AMRF

Messages on February 13th, 2015 No Comments

There were a number of pension related changes, some of which were not previously flagged in Budget 2015 and these are detailed in Section 17 of the Finance Bill 2014.

The following changes take effect from January 2015:

ARF and AMRF Drawdown – Changes to Imputed Distribution Regime

The Background

From 2012, ARFs and Vested-PRSA-ARFs became subject to Imputed Distributions on an aggregate basis. The Imputed Distribution is based on the market value of all ARFs and Vested-PRSA-ARFs beneficially owned by an individual on 30 November in a tax year and takes into account any actual deductions made during that year. An Imputed Distribution applies for a year of assessment where the ARF owner is 60 years of age or over for the whole of that year (and in respect of ARFs created on or after 6 April 2000).

An Imputed Distribution is calculated as follows:

(i) where the value is €2m or less, the Imputed Distribution is equivalent to 5% of that value less the value of any actual distributions in that year.

(ii) where the value of the assets is greater than €2m, the Imputed Distribution is equivalent to 6% of the full value (i.e. not just on that part of the fund that exceeds €2m), less any actual distributions in that year. Actual Distributions include withdrawals from ARFs and Vested-PRSA-ARFs and withdrawals of growth from AMRFs.

Finance Bill 2014 – Reduction from 5% to 4%

The Finance Bill 2014 introduces a reduction from 5% to 4% in the rate of the annual Imputed Distribution of the assets of ARFs and Vested-PRSA-ARFs. This reduced rate applies in cases where the owner of the ARF or Vested-PRSA is aged between 60 and 70 years and the aggregate value of assets in the ARFs or Vested-PRSA-ARF in the ownership of such individuals is €2 million or less. The purpose of the change is to reduce the risk that the ARF owners will outlive their retirement funds (by reducing the possibility of the fund running out).

Change to Drawdown Facility for AMRFs

Also, for the first time, the new provisions will allow a maximum annual withdrawal of 4% (subject to taxation) from an AMRF (but not, it appears, from Vested-PRSA-AMRFs). At present the initial capital transferred into an AMRF cannot be withdrawn other than to purchase an annuity. However, any income or gains made by an AMRF may be withdrawn and such withdrawals are taxable in the same manner as distributions in respect of assets held in ARFs. These AMRF withdrawals can be deducted / offset from the ARF Imputed Distribution amounts.

 Important Note – after 1 January 2015, it will NO LONGER be possible to withdraw income or gains made by an AMRF in excess of 4%.

Contact Your Local Independent Financial Adviser

Lucas Financial Consulting Ltd is based in Carrickmacross Co Monaghan. As we straddle four counties – Louth, Monaghan, Cavan and Meath we are ideally placed to become your new Local Independent Financial Adviser.

Market Outlook 2015

Messages on February 13th, 2015 No Comments
In this section we look at the House view of one of the leading Fund Managers operating in Ireland and importantly, what’s their current view on the markets.

 

Market Outlook
There is a ring of familiarity to many of our 2015 forecasts. As with last year, we expect global growth to keep ticking along, led by the US. We are also broadly positive on global equity markets.The divergence between countries, sectors and stocks will remain in place. Central Banks around the world will continue to tread a different path, with the US and UK set to tighten, while the Bank of Japan and European Central Bank will remain expansionary.
In China, the assumption is that the economic deceleration will be modest as the country continues to rebalance. The oil situation looks here to stay (at least for now), while geopolitics will also play a part. Investors have continued to focus on the divergent policies of the world’s major central banks but it is essential to put these into economic context.
The US and UK economies have performed steadily and we expect this to continue into 2015. The timing of rate hikes in these two countries will not be coordinated but we expect them to be the first core central banks to move higher.
In contrast, we expect further monetary easing from both the Bank of Japan and the European Central Bank. Most major government bond markets look vulnerable at current valuations but it is unclear what will trigger a reassessment.
Corporate bonds continue to offer some value on a relative basis but volatility is likely to continue due to political and economic uncertainty.
We expect compelling positive total returns for UK real estate investors over a three-year period,with reasonable yield and strong capital appreciation. With improving economic drivers and a constrained pipeline of future new developments, real estate remains attractive.
Rising interest rates are an emerging risk, however, there is a reasonable buffer in pricing to compensate if investors price in any further acceleration of rate rises. We still believe that poorer quality secondary and tertiary assets are generally unattractive. However, there will be opportunities to reposition assets or generate reasonably good returns on a comparable basis from some poorer quality secondary assets.
This outlook of potential investment market developments in 2015 (and beyond)  does not constitute an offer and should not be taken as a recommendation. This is  only the view and outlook of one of the Fund Managers operating in Ireland.

Contact Your Local Independent Financial Adviser

Lucas Financial Consulting Ltd is based in Carrickmacross Co Monaghan. As we straddle four counties – Louth, Monaghan, Cavan and Meath we are ideally placed to become your new Local Independent Financial Adviser.

 

Warning: These funds may be affected by changes in currency exchange rates.
Warning: Past performance is not a reliable guide to future performance. 
Warning: The value of your investment may go down as well as up.
Warning: If you invest in these funds you may lose some or all the money you invest.
Warning: A deferral period may apply to withdrawals and/or switches from certain funds. Please refer to your product documentation for further details.   

 

 

Budget Summary 2015

Messages on October 14th, 2014 No Comments

Budget 2015 – a summary

Corporation Tax Reform

The Minister has confirmed that the 12.5% Corporation Tax rate will not change.

 Pensions Levy

The Minister went on to confirm that the 0.6% p.a. Pension Levy introduced to fund the Jobs Initiative in 2011 will be abolished from the 31st of December 2014. He went on to confirm that the additional levy on pension funds at 0.15% p.a. will also expire at the end of 2015. This means that the levy will be 0.15% for 2015 and will not apply thereafter.

DIRT Tax and Insurance Levy

To support first time buyers saving for their first home, the Minister introduced a refund for Deposit Interest Retention Tax or DIRT on savings used to purchase their home. This refund will apply from Budget night and will run until the end of 2017 in respect of savings up to a maximum of 20% of the purchase price.

As a result, first time buyers will be able to save for their first home and retain 100% of the interest that they earn on their savings. Specific savings products are likely to be introduced to support this new initiative. With regards to Savings generally, unfortunately the Minister did not make any changes to 41% DIRT and Exit Taxes on Life Assurance Policies and Investment Funds and the Insurance Levy remains unaltered.

Pensions – changes

There was only one real issue confirmed for pensions, as follows:

Pension Levy

The four year pension levy announced as part of the Jobs initiative will not be extended beyond the original end date of 2014 and the new Pensions levy of 0.15% that was introduced from 2014 will only apply for 2 years for 2014 and 2015.

In effect this means that the Pensions Fund Levy of 0.15% will apply for 2015 and then cease to apply from 2016 thereafter.

Life & Taxation – No changes

Savings: DIRT and Exit Taxes on Life Assurance Policies and Investment Funds

In Budget 2015, unfortunately the Minister did not make any changes to Deposit Interest Retention Tax and Exit Taxes on Life Assurance Policies and Investment Funds and the Insurance Levy remains unaltered.

Savings: Corporate Deposits

The current corporate exit tax rate remains at 25%.

Capital Acquisitions Tax (CAT)

The CAT rate will remain at 33%.

The Group Thresholds will remain unchanged. For example, Group A Threshold (gifted to or inherited by son/daughter) will remain at €225,000.

Capital Gains Tax (CGT)

The CGT rate will remain at 33%

Contact Your Local Independent Financial Adviser

Lucas Financial Consulting Ltd is based near Carrickmacross Co Monaghan. As we straddle four counties – Louth, Monaghan, Cavan and Meath we are ideally placed to become your new Local Independent Financial Adviser.

Warning: The value of your investment may go down as well as up

Warning: Past performance is not a reliable guide to future performance

Warning: Funds may be affected by changes in currency exchange rates

 

Dual Income Tax Briefing – A Reminder

Messages on October 14th, 2014 No Comments

Tax Briefing 74: Crunch Time

Do not contribute to the wrong pension arrangement.

In September 2009, The Revenue Commissioners issued Tax Briefing Note 74: Tax Relief for Pension Contributions: Application of Earnings Limit. This briefing detailed how the earnings limit for pension contributions operates where an individual has two sources of income i.e. income from employment and income from self-employment and is making contributions to both an occupational pension scheme and a Personal Pension plan. The most obvious example of this would be a Medical Doctor / GP who has GMS income as well as earnings from his/her Private Practice.

If an individual has more than one source of income, they need to look very carefully at how their pension contributions qualify for tax relief. Having two sources of income (e.g. HSE and Private Practice) now means an individual can no longer contribute to a Personal Pension until their maximum capacity for AVC’s from their pensionable income has been used up.

In short, if income from pensionable employment is over €115,000 per annum an individual can no longer fund a Personal Pension or PRSA. This is because the earnings limit €115,000 has been used up through income earned through, for example, the HSE and therefore there is no more room to invest in a Personal Pension. ( This limit has been reduced from €150,000).

The result is that some contributions being made to Personal Pension plans and PRSAs are no longer eligible for tax relief from 7th September 2009 (subject to certain criteria).

So, it is crunch time.

Individuals will have to decide which contract they should be contributing to. If they are still contributing to a Personal Pension plan or PRSA they may not be able to get tax relief when they submit their tax return.

It is not all bad news. Individuals affected by this change can contribute to AVC PRSAs to get many of the same tax relief benefits which are associated with Personal Pensions or PRSAs. AVC PRSAs can be used for several purposes including the following:

•Reduce tax and increase Pension Pot

* Increase tax-free lump sum where full service is not expected.

• Increase tax-free lump sum where there is scope to increase due to difference between maximum pension entitlement and actual pension entitlements.*

* For example all recent public sector recruits are now paying PRSI rates giving entitlement to the old age contributory pension. This benefit is integrated with the public sector superannuation scheme benefit, resulting in a reduction in “Pensionable Salary”. This reduction in “pensionable salary” provides significant further scope for AVC PRSAs as the state contributory old age pension may be ignored for the purposes of  calculating the Revenue Maximum Allowance Pension Benefits.

Contact Your Local Independent Financial Adviser

Lucas Financial Consulting Ltd is based near Carrickmacross Co Monaghan. As we straddle four counties – Louth, Monaghan, Cavan and Meath we are ideally placed to become your new Local Independent Financial Adviser.

Warning: The value of your investment may go down as well as up
Warning: Past performance is not a reliable guide to future performance
Warning: Funds may be affected by changes in currency exchange rates

Investment Outlook -Whats on the Horizon for 2014?

Messages on November 22nd, 2013 No Comments
In this section we look at the House view of one of the leading Fund Managers operating in Ireland and importantly, what’s their current view on the markets.

Read more »

What the Fund Managers Say

Messages on July 26th, 2013 No Comments

In this section we look at the House View of one of the Global Fund Managers operating in Ireland

Government bonds

US Treasuries

NEUTRAL

The slow withdrawal of QE into 2014 allows bond yields to rise, although muted inflation pressures and housing market risks will limit the sell-off.

European Bonds

NEUTRAL

While ongoing fiscal and political problems overshadow the region, the ECB is still required to provide support for peripheral borrowers. Political pressures require careful monitoring.

UK Gilts

LIGHT

Although the weak economic recovery and continued fiscal tightening provide support for the gilt market, valuations are expensive. Inflation risks are perceived to be diminishing, despite worries over QE.

Japanese Bonds

NEUTRAL

Although the Bank of Japan is extending its bond-buying programme, yields are very low and the inflation outlook is deteriorating as the government aims for reflation.

Global Inflation-Linked Debt

NEUTRAL

Valuations in individual countries warrant careful examination; the asset class is underpinned by investor worries about future inflation triggered by easy monetary policies.

Global Emerging Market Debt

HEAVY/NEUTRAL

Dollar-denominated bonds are Heavy as spreads are supportive, while local currency bonds are Neutral as careful examination is required of individual currency and spread factors.

Corporate bonds

Investment Grade Debt

NEUTRAL

Attractions such as positive corporate cashflows are increasingly priced in, while upward pressures from government bond markets will periodically affect total returns.

High Yield Debt

NEUTRAL

Although spreads have come in moderately, the outlook for bond defaults remains supportive. Yields are still relatively attractive although the market is more vulnerable to any sizeable asset class rotation.

Equities

US Equities

HEAVY

The underlying fundamentals in terms of consumer spending, housing and business confidence are slowly improving, although there will be a continued headwind from fiscal tightening.

European Equities

LIGHT

Valuations and corporate competitiveness are better but fiscal programmes remain a serious constraint while the ECB has not managed to improve credit availability in many sectors.

Japanese Equities

HEAVY

The government is pushing ahead with major monetary and fiscal policy changes. Corporate earnings should particularly benefit from a more competitive currency.

UK Equities

NEUTRAL

Companies face tough export markets but cashflow is positive and being put to work. A measure of confidence is seen in rising private sector job creation.

Developed Asian Equities

LIGHT

Slower commodity demand from key economies such as China still affects the wider region; currency strength has hampered economic rebalancing in some countries.

Emerging Market Equities

NEUTRAL

Performance is divergent; while some markets benefit from upgrades to sovereign debt ratings, many others face growing inflationary pressures, credit concerns and valuation issues.

Real estate

UK

HEAVY

The weak growth environment is expected to impact prices in the near term but yields remain attractive compared to other assets, suggesting returns above cash over a three-year holding period.

European

NEUTRAL

The market remains polarised with Northern European centres and good quality assets expected to be relatively robust, offsetting weakness in much of Southern Europe.

North American

HEAVY

We see the best prospects in under-developed industrial locations in Canada and the cyclical US office markets where future supply is at 30-year lows.

Asia Pacific

NEUTRAL

Excess supply in several key markets, e.g. China, will hold back growth, but offices in some of the Australian markets, for example, remain supported by a good demand/supply balance.

Other assets

Foreign Exchange

Very Heavy US Dollar, Neutral Sterling, Light Euro and Light Yen

The US dollar will benefit from the slow tightening of monetary policy, while a weaker euro and yen will eventually support their economies.

Global Commodities

NEUTRAL

Different drivers, such as a rise in the US dollar, Chinese demand, Middle East tensions and climatic conditions, influence the outlook for different commodities.

Cash

NEUTRAL

Central banks have pledged to keep interest rates lower for longer.

Key Issues

Within our funds, we are slowly adding to our equity positions, as we do not consider that policy tightening will derail the world economy. While the US authorities have indicated that quantitative easing (QE) will be withdrawn, this will only occur if the US economy is strong enough. Conversely, the Japanese authorities have begun a major QE programme aimed at halting the lengthy period of deflation. The situation in Europe appears more manageable, helped by support from the ECB, while the Chinese authorities clearly want a soft landing for the economy. However, financial markets are increasingly vulnerable to any major central bank decisions, after a period of very easy policy.

We remain positive on the ability of companies to generate profits, as the subdued economic backdrop in many developed nations is more than offset by continued expansion in many emerging economies. Stock selection is key as top-line sales growth, increases in wages and raw material costs, the impact of currency appreciation, and the ability to borrow vary considerably from company to company. Overall, a recovery towards positive earnings growth into 2013-14 would be very supportive.

Given the current environment, we continue to favour sustainable income yield from sources such as high-yielding corporate bonds, commercial real estate and equity income, although valuations are becoming less supportive for selective bonds and equities. We do not favour low-yielding assets, such as many government bonds and cash, especially in an environment where there are longer-term inflation risks.

This outlook of potential investment market developments in 2013 (and beyond)  does not constitute an offer and should not be taken as a recommendation. This is  only the view and outlook of one of the Fund Managers operating in Ireland.

Contact Your Local Independent Financial Adviser

Lucas Financial Consulting Ltd is based in Carrickmacross Co Monaghan. As we straddle four counties – Louth, Monaghan, Cavan and Meath we are ideally placed to become your new Local Independent Financial Adviser.

 

Warning: These funds may be affected by changes in currency exchange rates.

 

Warning: Past performance is not a reliable guide to future performance. 

 

Warning: The value of your investment may go down as well as up.

 

Warning: If you invest in these funds you may lose some or all the money you invest.

 

Warning: A deferral period may apply to withdrawals and/or switches from certain funds. Please refer to your product documentation for further details.   

 

 

 

Managed Funds – Does one size fit all?

Messages on July 26th, 2013 No Comments

 

For the average Irish balanced managed and consensus fund investor the year 2008 was a pretty horrendous. According to the Mercer Managed Fund survey, the average Balanced Managed Fund delivered performance for that year of -34.6% and the average Consensus Managed Fund delivered a very similar and also painful -35%.

Managed funds – A brief history

Managed funds became popular investments during the 1980s as they offered investors diversification over 4 main asset classes, i.e. equities, property, bonds and cash. Equities were invested globally but there was a high exposure to Irish equities as a natural consequence of currency considerations for the Punt at the time and the level of local investment management expertise (or perhaps the lack of global expertise). The property element was mainly invested in Irish commercial property and bonds initially consisted of investments in Irish Government bonds but in later years gained exposure to Euro sovereign bonds following the introduction of the Euro.

These funds would generally have a greater proportion of their funds under management invested in equities as this asset class is generally the leading performer at the head of the risk return spectrum over the long term and offers high liquidity. Property and bonds provided alternative asset classes that could be considered to act somewhat differently to equities during rises and falls in stock markets providing a level of protection to investors.

Reward can’t have a downside… can it?

The balanced managed fund sector was defined as medium risk by consensus of the industry as a whole. However, what does “medium risk” really mean to an investor? What level of return can be considered “medium”? – A return of plus 10% or minus 10% for example? – Or plus 15% or minus 5%?

The mere mention of “minus” in my experience can magically transform a happily enthusiastic and adventurous investor to a “keep my capital intact” investor in an instant. I can recall when one of the now iconic first customer warnings was introduced, it began its life as “Warning: the value of your investment can rise or fall”, which soon was amended to a more cautious, “Warning: the value of your investment can fall or rise” Did you spot the difference? This was on the basis that the original statement might mislead investors to expect an increase in their investment before any subsequent fall (ouch!).

The average investor in a balanced managed fund since 1987 (according to the Mercer surveys of returns) has experienced a variety returns from +34% in 1997, to -34% in 2008. “Now Mr.and Mrs Client, tell me, was that the kind of investment journey you expected from your “medium risk” fund?” A swing in returns of some 68%, somehow, I don’t think so!

So where did it all go wrong?

Over time a number of factors contributed to the dramatic negative fund performance in 2008 and in our view here are four of the central characters in that tragedy:

1. Fund managers monitored each other’s asset allocations and performance very closely through the available industry surveys and began taking additional risk by investing more in equities over time in a bid to outperform their peers. This led to “herding” around the benchmark and to a vicious cycle of ever increasing equity exposures to aggressive levels (of circa 80% in 2007 (source: Mercer) which were amongst the very highest, if not the highest in international pension terms at the time. Ireland may have been extreme in this respect but it was not alone as there were similarly high average equity allocations in the UK balanced managed fund sector during 2007.

2. There were very high allocations to Irish equities and Irish assets in these funds which, while justified by the performance of the Irish economy pre-crash, reduced the overall protective benefits that wider global diversification would have provided. They were also effectively big bets on a very small economy and stock market in global terms.

3. Fund managers were also constrained by investment mandates set for them by their life companies which required them always to have a certain percentage allocation to equities, say 55%-75%. This was irrespective of the actual market conditions. For example, in this instance, if equity markets were in free fall the fund managers were still mandated to hold at 55% of the fund in equities.

4. Also a “one size fits all” approach to finding a suitable investment solution for an “average” investor led to these being most popular fund recommendations for clients.

The story for Consensus Funds is different though, right?

 Wrong! Consensus funds are designed to deliver the average balanced managed fund return from the Irish fund manager market. They effectively remove the risk of the fund underperforming the average fund manager’s performance…by… yes you’ve guessed it, delivering approximately the average performance of the Balanced Managed fund sector. All of the above mentioned flaws were immediately also inherent in Consensus funds as they evolved, and this led to a very similar looking performance of -35% for the investors in these funds for 2008.

Thus performance in 2008 demonstrates that existing Managed and Consensus funds have fundamental issues which directly impact on investors. It is strikingly apparent that there was and continues to be a real dis-connect between the level of risk being taken in these funds and the client’s comfort level /return expectations.
 So, what’s the solution then?

As Albert Einstein said, “We can’t solve problems by using the same kind of thinking we used when we created them. “Funds in Ireland have been around for the best part of two to three decades. The investment industry has evolved and developed significantly during this period with access to an ever increasing number of asset classes.  A number of developing economies around the globe are also offering increasing investment opportunities. Innovations in modern portfolio modelling and the use of better, together with more technologically advanced methods of risk management are enhancing the risk adjusted outcomes for investors.

A next generation solution…

We believe there is a fresh solution available to the problems exhibited by both managed and consensus funds and to the performance experienced by their investors – Multi Asset Portfolio / Funds. These types of funds are growing in popularity in both Ireland and the UK and are seeing increasing investment flows into them since 2008. They are being welcomed in both markets as a next generation or a “state of the art” solution to the weaknesses of the “old” balanced managed fund model.

These funds are genuinely different from the past, or at least they should be if they truly have access to global capabilities with experts in the field of asset allocation together with a very wide and increasing number of asset classes to invest in. The best of these Multi Asset Funds will usually include:

Robust portfolios built from a much wider choice of asset classes from an increasing number of regions of the world.

The expertise and insight of specialist asset allocation experts who analyse the long-term forecasts for the valuations, correlation and volatility of various assets.

A specialist short-term tactical team who assess the threats and opportunities offered by the economic environment over the next 6-12 months and how the portfolio can be adjusted to take advantage of these.

Utilise different styles of investment e.g. Passive/active, value/growth etc., at times in the economic cycle that are most advantageous for the portfolio

The ability to include an external manager’s fund, as rarely does one asset management house have access to all of the available solutions

Access to a diverse range of the latest developments in asset classes such as commodities, absolute returns, emerging market debt and convertibles.

Targeting investment risk.

One of the critically important lessons arising from the last few years is that clients ‘perspectives have changed from a return to a risk focus.

A lot of investors targeting a return of say 7%-8%, have discovered that they certainly don’t like the experience of a potential fall in their investment by 30%-40% (unsurprisingly) at some stage during their investment term. To address this, what if fund managers could use modern techniques and a greater variety of investment assets to control and target risk within certain levels to deliver a more consistent level of return for investors?

A return that would be consistent with a client’s risk profile? Too futuristic?…too optimistic? Certainly not – a select few Multi Asset funds in the market have now very successfully addressed this by designing funds which manage and control the risk of their funds over the client’s investment horizon thus providing more clarity around return expectations.

It is important to point out that all of this extra fire power for generating a better risk reward outcome for you needn’t come at an extra premium. Global asset managers can generate economies of scale which can nicely translate into an affordable annual management charge.

This modern approach is a welcome and significant development, because now, probably for the first time, the objectives of investors, brokers, fund managers and pension trustees are aligned together in managing or targeting specific risk levels to provide a better return outcome for investors.

Finally, a few words of caution – beware of poor quality and expensive imitations which have more of a resemblance to the old managed funds of yesteryear!

 

 

 

Warning: These funds may be affected by changes in currency exchange rates.

 

Warning: Past performance is not a reliable guide to future performance. 

 

Warning: The value of your investment may go down as well as up.

 

Warning: If you invest in these funds you may lose some or all the money you invest.

 

Warning: A deferral period may apply to withdrawals and/or switches from certain funds. Please refer to your product documentation for further details.