”MARKETS NOW”
15th JUNE 2015
1. How is «Trusts In Focus» Doing?
2. How Do Investors Play Bonds In a Rising
Yield World?
David Fuller, David Brown, Iain Little
Q22015
1
Important Notice
THIS IS AN IMPORTANT PERSONAL ANNOUNCEMENT
MADE BY IAIN LITTLE. THE OPINIONS, DATA AND
INFORMATION
IN
THIS
DOCUMENT
AND
PRESENTATION ARE MINE AND MINE ALONE.
EUROPEAN WEALTH GROUP PLC AND P&C GLOBAL
WEALTH MANAGERS SA IN SWITZERLAND, MY
EMPLOYERS, HAVE NOTHING TO DO WITH THE
PERSONAL IDEAS EXPRESSED.
Q22015
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The Trusts In Focus («TIF») Service
 Universe c300 closed end (mainly UK) investment trusts monitored
 Approx 12 equally-weighted trusts in Trusts In Focus (TIF)
 If we sell an investment trust, we must replace it, so fully invested
 Changes to 12 MP trusts recorded (1.25% trading costs B/S)
 Research available to «Markets Now» attendees
3rd party adviser research
FullerTreacy Money one of 20+ 3rd party advisers
In-House Cooking/ P&C research
 Performance review / indecent striptease every «Markets Now»
Q22015
3
How Is Trusts In Focus Doing?
Beat bogey by +10% over one year
Q22015
4
Most recent action (Jan 12th) we…..
 …..Added European Assets Trust
•
•
•
•
Draghi «Printathon»
Undervalued Europe versus outperforming USA
Geared performance through «small cap effect»
5.1% yield (bought on 23/2/15 on a 5.8% yield)
Q22015
5
How Are We Doing: Trusts In Focus?
Performance So Far (since 7/3/14)
Name
Ticker
Sector
Core/
Satellite
Date
Core
Core
Core
Core
09.05.2014
09.05.2014
09.05.2014
09.05.2014
Core
Price Price Pr/(Disc)
then Now
NAV
Yield
(% )
GBP
Performance
-1.0%
-5.0%
-10.0%
2.0%
3.9%
4.7%
2.0%
1.1%
7.3%
-2.0%
8.9%
39.1%
General equities
Scottish American Inv Trust
BlackRock Income Strategies Tr
British Empire Securities
Scottish Mortgage Inv Trust
SCAM:LN
BIST:LN
BTEM:LN
SMT:LN
General, global
UK + Rest of Wld
General, global
General, global
2.49
1.40
4.95
1.93
2.67
1.37
5.39
2.68
European Assets Trust
EAT:LN Europe (mid/small)
23.02.2015 10.25 11.36
1.0%
5.1%
10.8%
Baillie Gifford Shin Nippon Tr
BGS:LN
Japanese Small equ
Satellite
10.11.2014
3.11
3.78
-1.0%
0.0%
21.5%
JMG:LN
NII:LN
AAS:LN
Developing markets
India
Asian smaller cos
Satellite
Satellite
Satellite
07.03.2014
07.03.2014
07.03.2014
5.05
2.00
8.02
6.16
3.21
8.70
-11.0%
-11.0%
-11.0%
0.9%
0.0%
1.2%
22.0%
60.7%
8.5%
Satellite 07.03.2014
4.92
3.14
-11.2%
6.7%
-36.1%
Core
Satellite
Satellite
332
5.85
1.50
354
5.86
1.62
1.3%
-3.3%
-12.0%
1.6%
0.0%
0.9%
6.6%
0.2%
7.7%
Emerging, Frontier, Growth
JP Morgan Emerging Mkts Tr
New India Investment Trust
Aberdeen Asian Smaller Cos Tr
Mines, Gold, Res, Hard Assets
Blackrock World Mining Trust
BRWM:LN Mining companies
Alternative/ sectoral
Personal Assets Trust
Polar Capital Technology
Impax Environmental Mkts
PNL:LN
PCT:LN
IEM:LN
General, gold bias
Global technology
Water and Ecology
TRUSTS IN FOCUS
Q22015
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09.05.2014
08.01.2015
07.03.2014
Average Yield (not inc in perf):
2.2%
% Performance (before dividends):
% Estimated performance (after dividends):
12.0%
14.1%
% FTSE 100 (7/3/14 to now):
4.4%
«How Do Investors Play Bonds In
a Rising Yield World?»
PERSONAL THOUGHTS
FROM A NON SPECIALIST…
Q22015
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Bonds in a rising yield world
The Problem…
Q22015
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Bonds in a rising yield world
The Problem…
Why Hold Bonds At All?
• Portfolio income (future liabilities)
• Portfolio insurance. Largest fall last 30 years:
• 100% UK bond portfolio -6.27% 1994
• 100% UK equity portfolio -29.93% 2008
• Portfolio diversification (co-variance matrix)
But….. “Bonds promoted as offering risk-free returns
are now priced to deliver return-free risk.”
Q22015
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Bonds in a rising yield world
The Problem…
Bonds have 6 major types of risk:
RISK
1) Interest rate
TYPE OF
RISK
Capital
YIELD RISE?
Capital Loss
2) Reinvestment (Call) Income
Income Gain (no calls)
3) Inflation
Capital, Income Capital, Income Loss
4) Credit/default
Capital, Income Increased Risk
5) Rating downgrade
Capital
Increased Risk
6) Liquidity
Capital
Increased Risk
Holding bonds to maturity reduces most risks
Q22015
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Bonds in a rising yield world
The Problem…
Most fixed income investments lose out….
FIXED INCOME TYPE
Short term sovereign bonds
Long term sovereign bonds
Corporate and EM bonds
YIELD RISE?
Small capital loss
Large capital loss
Small capital loss (high yield) but large credit risk
Bond Funds
Cash
Duration fixed; no safe harbour, forced sales bad
Index-linked bonds
OK if inflation rises or cheap v theoretical price
Low returns or none (but «$ Averaging» pick up)
No easy solutions
Q22015
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Bonds in a rising yield world
3 Solutions…Defined Maturity Bd Fund
1. Bonds In Drag
•
•
•
•
•
•
•
Bonds dressed in fund «drag»!
Future maturity date fixed (pref <5 years)
6.2% p.a. for 3 year corporate high yield debt
Pick up yield (eg +4-5%) via corporate bonds
Yet…reduced credit risk via 70-100 holdings
Some small reinvestment risk exists, but…..
…«Laddering»: investors can plan redemptions
Q22015
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Bonds in a rising yield world
3 Solutions…Defined Maturity Bd Fund
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Bonds in a rising yield world
3 Solutions…Defined Maturity Bd Fund
Major Risks
• Yields lower for longer => reinvestment risk
• Yield return exceeded by fund costs
• Bad deflation, à la 1930s => corporate defaults
•
•
Q22015
NB if a portfolio of 80 bonds yields 3% > conventionals (6% v
3%), 2 bonds (2-3% of total) must default to reduce yield to
conventional bond yields
Our fund manager: no history of bond defaults at all
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Bonds in a rising yield world
3 Solutions…Defined Maturity Bd Fund
Sensitivity Analysis Bond Funds vs. Indices (30/04/2015)
xxxxxx Bond Opp. L
4.65%
Mod.
Duration
1.42
xxxxxx Bond Short Duration
3.03%
0.73
xxxxxx Bond Opp. Europe 18
6.18%
2.12
HY EUR
4.34%
4.13
IG EUR
0.96%
5.10
10Y Gov. Bond Europe
0.16%
9.54
xxxxxx Bond Opp. US 17
6.22%
2.25
HY US
5.74%
5.03
IG US
2.94%
6.98
10Y Gov. Bond US
2.00%
8.91
Security
E
U
R
O
P
E
U
S
A
YTM
Rise in Interest Rates
25
-0.36%
0.9
-0.18%
0.6
-0.53%
1.0
-1.03%
2.9
-1.28%
15.9
-2.39%
175.6
-0.56%
1.1
-1.26%
2.6
-1.75%
7.1
-2.23%
13.3
50
-0.71%
1.8
-0.37%
1.2
-1.06%
2.1
-2.07%
5.7
-2.55%
31.9
-4.77%
351.2
-1.13%
2.2
-2.52%
5.3
-3.49%
14.2
-4.45%
26.7
75
-1.07%
2.7
-0.55%
1.8
-1.59%
3.1
-3.10%
8.6
-3.83%
47.8
-7.16%
526.7
-1.69%
3.3
-3.77%
7.9
-5.24%
21.4
-6.68%
40.0
100
-1.42%
3.7
-0.73%
2.4
-2.12%
4.1
-4.13%
11.4
-5.10%
63.8
-9.54%
702.3
-2.25%
4.3
-5.03%
10.5
-6.98%
28.5
-8.91%
53.3
150
-2.13%
5.5
-1.10%
3.6
-3.18%
6.2
-6.20%
17.1
-7.65%
95.6
-14.31%
1053.5
-3.38%
6.5
-7.55%
15.8
-10.47%
42.7
-13.36%
80.0
200
-2.84%
7.3
-1.46%
4.8
-4.24%
8.2
-8.26%
22.8
-10.20%
127.5
-19.08%
1404.7
-4.50%
8.7
-10.06%
21.0
-13.96%
57.0
-17.81%
106.7
Ex: For a rise in rates of 100 bps, Short Duration fund would lose 0.73%, which represents 2.4 months
of "carry" (YTM of 3.03%). For the same rise in rates, the Investment Grade EUR index would lose
5.10% , or the equivalent of 63.8 months of "carry" (YTM of 0.96%.) The German 10 year Bund would
lose 9.54% or the equivalent of 702.3 months of "carry" (YTM of 0.16%)
Q22015
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Bonds in a rising yield world
3 Solutions…Cash
2. Cash
Dollar averaging cash deposits, eg
Year 1: 1% pa
Year 2: 3% pa
Year 3: 5% pa
=>3 Year avg: 3.1% pa
Q22015
1%
16
5%
3%
Bonds in a rising yield world
3 Solutions…Equities
3. Equities
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P&C People
Q22015
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The P&C Investment Team: 75 years global experience
and research expertise
Bruce Albrecht (Investment Manager and Partner P&C)
 40 years experience asset allocating and managing global institutional equity
and bond portfolios. Ex CIO Pictet London and Global CIO Rothschilds,
Senior Manager Abu Dhabi Investment Authority, Group Head of Asset
Management Butterfield Bank Group. Work experience includes London, Abu
Dhabi. Special interest:: quantitative / systematic analysis. Educated: Emory
University, Manchester Business School.
Iain Little (Investment Manager and Partner of P&C).
 35 years experience managing global private client portfolios and ex head Pictet
London UK private clients (asset allocation / fund selection). Recently MD
Butterfield Asset Management (Switzerland). Work experience includes
Tokyo, Geneva, London, Edinburgh, “French-speaking Africa” and Hong
Kong. Special interest: undervalued frontier markets and undiscovered
managers. Educated: Cambridge University (MA)
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P&C and Contact Details:
For further information, please contact:
P&C
P&C
Iain Little
Partner
Bruce Albrecht
Partner
P&C Global Wealth Managers S.A.
Tel: +41-44-390-1561
Fax: +41-44-390-1562
Email: iain.little@pandc.ch
Q22015
P&C Global Wealth Managers S.A.
Tel: +41-44-390-1561
Fax: +41-44-390-1562
Email: Bruce@brucealbrecht.com
20