Update on Portfolio Performance from our Fund Management Partners, Cape Berkshire Asset Management.
Managing Director's Quarterly Note
We want to still present the quarter as a positive result but are left with a bit of frustration from the last week of the quarter that somewhat dampened what had looked at times a quarter of both versions of the portfolios adding heavy alpha.
The word 'transitory' is currently actively used in the inflation space and we hope that the same can be said on the alpha we had achieved, in that, we hope it transitions to a quick start for Q4 especially in our V1 portfolios that had a really harsh last trading day of the quarter vs benchmark, partly due to the efficient pricing of ETFs that it holds vs some funds that are next day pricing.
Highlights of the quarter were definitely overweights in India which has been less adversely affected vs other emerging markets from China's bearish pullback. India showed its recovery story and ability to diversify its returns from other equity markets - both important characteristics in a fund position. With oil creeping up to $80, something a year and a half ago I think any analysts would have put it as a Black Swan event, we would get nervous about global growth and Indian specifics if it was much higher.
Negatives were the patience we have shown in clean energy not being rewarded with there seemingly being a short term resistance to moves much higher and the asset being range bound. We feel that a low-interest-rate environment is key for its outperformance so moves higher in US rates in the last week tie in that this is a key economic environment for moves, which still reflect a 50% pull back from its highs before we added it to client portfolios. So over the last few years it's still a contrarian buy but one we are comfortable remaining patient with at this point.
We anticipate a manageable inflationary environment and with that we say 4% being acceptable but 6% not, we still remain hopeful of the continued cyclical recovery. We think it's time that markets are taking a breath but not necessarily leaning risk off. With 20% returns on the year there are going to be periods of pull back as bulls get their appetite back and push equity markets on for larger gains. In the bond space, we will keep revisiting the excellent gains of our high yield bond funds but we are still averse to buying back heavily into UK debt etc at this stage. Have a great quarter and if you have any questions please reach out to us.
Mark Insley - BA, MSc (Int. Securities Investments & Banking) Cert PFS.
Q3 Portfolio Commentary
Coming into the quarter, we were looking to see a continuation of Covid vaccine roll-outs, some tightening of accommodative fiscal and monetary environment and to get a feel of global economic re-open on inflation and unemployment.
Mass vaccine roll out has continued in earnest with the UK increasing the number of fully vaccinated to 67% of the population (an increase of about 17%) and the country has fully re-opened internally. UK equities continue to look attractive from a valuation point of view and have less exposure to tech companies which are more adversely affected by a rise in interest rate. In the UK, supply chain have been disrupted by a myriad of issues from semi-conductors to lack of heavy goods drivers and wages rises as businesses compete to re-hire leading to compressed margins.
Rising energy prices have affected the broader global economy stoking inflationary fear and leading investors to retreat to safety amidst concerns central banks will taper bond purchases and/or hike interest rates sooner than previously expected. This would see brent crude oil trading north of $80/barrel amidst an energy crisis but longer term oil futures contracts indicate expectation this is unlikely to last into the second half of 2022.
Despite forecasts for UK price rises to top 4% by year end, the Bank of England has kept the base rate unchanged at 0.1% and 7 of 9 monetary policy committee members voted to continue its asset purchase program amidst concerns the end of the furlough program may leave unemployment at elevated levels. In the US, the Federal Reserve Bank has indicated that a larger majority of the monetary policy committee expect interest rate hikes in 2022 and the intention to reduce asset purchases towards year end.
On the fixed income front, we have seen a steepening of the yield curve as longer dated bonds experience an increase in yield in response to inflation concerns. We are currently underweight government bonds which typically have longer duration and overweight high yield corporate bonds which tend to have shorter duration and are thus less sensitive to interest rate hikes
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