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Equity markets continue to confound the bears.

Calendar 2016 was a vintage year with the FTSE All World index delivering an extraordinarily strong 29% to sterling-based investors, albeit helped along by a sharp devaluation in the pound.  Those who thought that rising share prices were too good to last have been wide of the mark this year as the index has risen a further 10%*.  These would be impressive numbers in any economic environment.  However, they are all the more startling in a post-crisis world of ultra-low interest rates, where economic growth has been subdued and policymakers have struggled to understand why wage growth has been so weak.

This begs the question – why have equities performed so well?  In our view, it is because the environment for companies has been highly supportive.  Low wage growth means little pressure on costs for businesses, while low interest rates and low bond yields make debt financing very cheap.  These two factors help companies to grow profits – boosting earnings and dividends for shareholders, while the absence of attractive alternatives to equities makes them still more appealing to investors.  Additionally, in recent months, economic growth has picked up somewhat – again helping companies increase profits and boosting the case for equities.

Against this backdrop of rising equity markets, our recommended portfolios have further benefited from constructive asset allocation and fund selection decisions.  Our value approach has meant that we have maintained our allocations to equities, which while not cheap in absolute terms, remain much more attractive than the traditionally defensive asset classes – bonds and cash deposits.  Additionally, within our equity allocations we have tilted portfolios towards out-of-favour geographies, such as continental Europe and the emerging markets over the more fully valued United States.  These two tilts have been particularly helpful over the past 12 months and go some way to explaining the strong relative risk-adjusted performance of our portfolios, as shown in the chart below.

Performance of Saunderson House Wealth Accumulation Balanced Model Vs ARC PCI contributors**

A second contributor to our relative outperformance has been active fund selection.  At Saunderson House we have a sizeable research team focused on adding value in fund selection.  In contrast to many investors, who are increasingly shunning active funds for Exchange-Traded Funds (ETFs), we have enjoyed something of a purple patch with our active fund selections.  The resulting combination of value-focused asset allocation and diligent, research-driven active fund selection has delivered strong returns and strengthened our confidence that outstanding performance is within reach of those prepared to commit the necessary effort and expertise.

* In local currency terms the comparable figures are 10% for 2016 and 11.5% for 2017 to the end of August.

** Asset Risk Consultants (ARC) is an independent consultancy specialising in the analysis of private client investment portfolio performance.  The chart plots Saunderson House’s performance against that of the c80 contributors to ARC’s private client indices (PCIs).

As with any investment, capital is at risk.

IMPORTANT INFORMATION
This note is for general guidance only and represents our current understanding of law and HM Revenue and Customs practice as at 20 September 2017. We cannot assume legal liability for any errors or omissions and detailed advice should be taken before entering into any transaction. The value of investments and any income therefrom can go down as well as up and you may not get back the full amount you invested. Levels and bases of, and reliefs from, taxation are those currently applying but are subject to change and their value depends on the individual circumstances of the investor. Saunderson House Limited is authorised and regulated by the Financial Conduct Authority.
ARC Performance: Portfolios for other risk profiles are constructed on the same basis with different weightings to the four asset classes as appropriate. Returns from other models are comparable on a risk adjusted basis. Performance figures are quoted on a total return basis, net of fund management charges. An indicative annual advisory charge of 0.75% has also been deducted. Actual advisory fees may differ. All returns are quoted in sterling unless stated otherwise. ARC produces four sterling Private Client Indices (PCIs). Each PCI is based on the monthly volatility of the MSCI World index less cash. The returns data are provided by participating investment managers. The data supplied by the participating managers are generated from unconstrained portfolios and must have returns dating back at least 12 months. All data submitted are net of all investment manager charges and fees. Additional advisory fees may be applicable. The ARC PCI used here is based on 60-80% of the monthly volatility of the MSCI World index less cash. ARC risk bands are measured by volatility. Volatility is a measure of how much variability there has been in returns from financial assets and is widely used as a measure of risk. It is calculated from historical observations and is simply a measure of how widely spread observed returns have been from their average. The higher the volatility figure, the more the value of the portfolio or index in question has moved in either direction over the period.

About The Author

Chris Sexton
Chris joined Saunderson House as Investment Research Manager in 2004, was promoted to Investment Director in 2007 and joined ...
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