Market Commentary
Q3 2022
Our market review and commentary on the IP model portfolios performance and fund composition
During the Quarter, the key themes of the year were reflected once again in economies and markets across the globe. The rising tide of inflationary fears continued to lead the way, as investors felt both positive and negative at different points in the quarter. July for example saw a recovery in markets as investors felt that inflation may have peaked, but August saw this optimism dissipate as inflation data remained steadfastly high.
The main players in the drama were once again the Central banks around the globe, led by the US Federal Reserve, the political uncertainty caused by the war in Ukraine and the slowing of China’s economy. The slightest inkling of a change in strategy or fragility in data caused risk assets to move quite sharply, as we saw in September when the smallest rise in US inflation data, (against a fall that was predicted) caused a sharp fall in equity markets and a rise in bond yields. The conflict for investors has been that data is pointing in different directions.
Most economists in this quarter understood that raising rates was only the first part of the process of curbing demand and it would take time for this to come through into the habits of the global consumer. The most immediate effect is traditionally felt in the housing market as mortgage rates rise and there was evidence that this was beginning to have an effect in the US where rates touched 6% which started to bite for new borrowers.
The US economy continued to be the most influential across the globe, and its currency is the world’s safe haven in uncertain times
This caused the dollar to strengthen against most other currencies which was negative for those countries that have high dollar debt exposure, with the Japanese yen and UK sterling suffering more than most. It seems likely that with high levels of uncertainty and sensitivity, further US interest rate rises will exacerbate this situation causing more problems for net importers of goods as they become relatively more expensive, creating another inflationary pressure.
The fallout from the conflict in Ukraine continued to hit the European energy market and many European countries faced recession pressures. This was especially true in the UK where the short lived Truss government’s mini Budget at the end of September promised to protect households and businesses from steep rises in costs by capping prices that could end up costing £100bn. However, the major worry for the UK economy was the sharp drop in sterling against all currencies and in particular the dollar (where it reached its lowest level ever), driven by the announcement of a series of unfunded tax cuts, with Gilt yields consequently hitting unprecedented heights. The Bank of England had to step in with additional Gilt purchases to reassure overseas investors and stabilise sterling.
IP Model Portfolios – Performance commentary and fund changes
In terms of the performance of the IP model portfolios, the reconstruction of the accumulation model portfolios completed last quarter pleasingly led to relative out-performance when compared to their benchmarks.
During this quarter we have made changes to the Balanced Accumulation model to re-position it in a way that we believe will give it a more robust performance in volatile markets and where we expect the US dollar to remain strong.
We reduced the core holding of Russell MAG III fund from 20% to 5% and replaced the L&G Multi Index 4 with L&G Multi-Index 5 whilst increasing the weighting to 20% to make it a core holding.
We also removed the Vanguard FTSE UK Equity Income Index fund to reduce our exposure to the UK market as we believe that the UK economy has significant challenges ahead after the mini-Budget proposed under the Truss government and tax raising measures to be implemented by the Sunak government. In its place we introduced the BNY Mellon Multi-Asset Balanced fund which has superior performance across multiple time frames and risk metrics relative to peers and has a more diversified global mandate.
The performance of our income models was again positive in relation to their respective benchmarks however we believed that increased market volatility and the need to improve income yield made it important to adjust their fund composition and to bring them in line with the core/satellite approach of the accumulation models in this quarter. We therefore adjusted them by changing fund weightings and including additional funds to further diversify the portfolios, whilst reducing the overall cost and enhancing the income yield.
Our focus was to obtain a higher income yield whilst mitigating investment risk by blending funds that had a more conservative approach and an objective to preserve capital. The cost of each model was targeted at below the workplace pension pricing cap of 75bps.
The performance of our passive models was positive against their benchmarks in the quarter due to the globally diversified approach of the funds we blended. In the next quarter, we will be looking to analyse their composition with the aim of adding further funds to mitigate risk and to have a portfolio that reflects our core/satellite approach.
Martin Nelmes
Investment Director and Chairman of the Network Investment Committee
This document is aimed at Investment Professionals only and should not be relied upon by Private Investors. Our comments and opinion are intended as general information only and do not constitute advice or recommendation. Information is sourced directly from fund managers and websites. Therefore, this information is as current as is available at the time of production.
On-Line Partnership Group Limited (reg. no. 03936920) and its subsidiaries, The On-Line Partnership Limited (reg. no. 03926063) and the Whitechurch Network Limited (reg. no. 03663042) trade collectively as In Partnership. All three companies are registered in England and Wales. The On-Line Partnership Limited and the Whitechurch Network Limited are authorised and regulated by the Financial Conduct Authority. Registered Office: 50-56 North Street, Horsham, West Sussex, RH12 1RD.