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.
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