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Income Portfolio 5 1st Half, 2014
Bi-Annual Income Portfolio Review
Emery Little Core Income Portfolio 5
First Half, 2014 Page 2
Contents
Portfolio Outline ..................................................................... 3
Market Review ....................................................................... 4
Market Performance .............................................................. 5
Core Portfolio Performance Summary ................................... 6
Asset Allocation ...................................................................... 7
IMA Sector Performance ........................................................ 8
Notable Contributors ............................................................. 9
Notable Detractors ............................................................... 10
Portfolio Breakdown ............................................................ 11
Asset Allocation Changes ..................................................... 12
Activity ................................................................................. 13
Notes .................................................................................... 14
Emery Little Core Income Portfolio 5
First Half, 2014 Page 3
Emery Little Income Portfolio 5 – Outline
Your Broader Portfolio Profile Income Portfolio Profile Portfolio Benchmark
As we have discussed at length, Emery Little help
you to consider your portfolio in the context of
your broader financial situation. We refer you to
your Investment Map that Emery Little update for
you annually.
The suitability of your core portfolio has been
carefully selected when considering your risk
outcomes in the context of your broader asset
base (excluding your prime residence) when
combined with your immediate needs and future
goals and aspirations.
This portfolio is suitable for investors requiring income
either immediately or in the short term, from the
whole of, or a proportion of their portfolio.
Investors can expect most of their portfolio to be
invested in growth assets, such as UK and global
equities and a reasonable allocation to defensive
assets, such as fixed interest and property.
The portfolio is likely to exhibit short-term volatility
due to the equity content and so is suitable for
investors who can take a long term time horizon and
will not need access to these funds for up to 5 years.
Suitable for investors requiring income either
immediately or in the short term, from the whole of,
or a proportion of their portfolio.
The portfolio benchmark is made up of a
combination of the sector average returns of the
funds in the portfolio, with the same weightings as
funds in each portfolio. The portfolio benchmark is
dynamic and its composition may change with any
changes in the asset allocation or fund selection of
the portfolio.
Portfolio Aim
The portfolio aims to achieve a higher level of
income (target yield 3.5% after charges) than is
typically available from cash. The target income
yield is not guaranteed and may vary.
Emery Little Core Income Portfolio 5
First Half, 2014 Page 4
Market Review
Market Commentary 6 months to 30 June 2014
After a euphoric run at the end of last year, the start of
2014 was a sobering reminder for market bulls that
volatility has not gone anywhere. Equities worldwide
plunged in January as currency troubles in emerging
markets sent twitchy investors into a selling frenzy.
Nonetheless, sentiment bounced back strongly and as the
Northern Hemisphere welcomed the start of spring, major
markets were once again threatening record highs.
Global equities continued on a positive trajectory in the
second quarter, with the world's major central banks
having a key influence on market sentiment. Optimism over
economic trends in the US, UK trumped geo-political
concerns in Eastern Europe (Russia-Ukraine) and the Middle
East (especially Iraq) to keep major indices on a broadly
upward trajectory in the three months to June.
However, market drivers remain in conflict: broad optimism
of an accelerating US-led global economic recovery cannot
completely displace fears of a sudden slowdown or banking
crisis in China or stagnation in Europe.
Though the US spent much of the first quarter shivering
through the coldest winter in decades, most economic
indicators still point to an improving growth outlook. US
investors looked beyond the alarming 2.9% slump in GDP in
Q1 – influenced heavily by the extreme winter weather –
and celebrated positive industrial, housing, and jobs data.
Inflation crept up to an 18-month high in May, but Federal
Reserve is being cautious not to spook markets by
accelerating the gradual withdrawal from its quantitative
easing programme (the monthly stimulus is now down to
US$55bn from a peak of $85bn).
Having navigated the worst of the storm the European
Central Bank (ECB) finally acted boldly in June to put some
wind back in the sails of the Eurozone economy and ward
off the spectre of a Japan-like era of deflation.
The bank cut its benchmark financing rate from 0.25% to
0.15% - with the deposit rate falling into negative territory
at -0.1% - while launching a four-year programme of cheap
loans for banks in the hope that this will encourage more
lending and breath some life into the real economy. ECB
leader Mario Draghi hammered home the message for
markets by saying that the bank was “not finished yet”.
The ECB's unprecedented move came soon after the
surprising results of the EU Parliamentary elections in May,
where the fallout of a prolonged economic slump was
clearly evident. In what was described in the media as a
'political earthquake', disenfranchised voters turned their
backs on the establishment and handed nationalist fringe
parties some of their best ever results.
The UK has emerged as a leader in the economic recovery
with the IMF raising its growth forecast for 2014 to 2.9%,
the highest rate for any developed economy.
In spite of this, with inflation falling at the start of the year,
the Bank of England (BoE) has so far not shown any sign
that it is ready to increase its benchmark rate or reduce its
own £375bn QE plan just yet.
That said, the BoE’s Mark Carney surprised many at his
annual Mansion House speech on 12th June by saying that
interest rates could be raised “sooner than markets
currently expect.” The comments had an immediate impact
in the markets as investors adjusted to the possibility of a
rate hike before the end of the year. Carney has since
played down the hawkish tone but is facing some criticism
for sending mixed messages that undermine his 'forward
guidance' approach to monetary policy.
Carney's BoE remains most concerned about potential
overheating in the housing market, especially in London
where the average cost of property has soared above
£400,000 for the first time ever. Against this backdrop, the
Treasury gave the BoE new powers to impose restrictions
on mortgage lending, including a 15% cap on the number of
new housing loans that banks can offer that exceed 4.5
times the borrower's salary.
Emery Little Income Portfolio 5 Page 5
First Half, 2014
Market Performance Performance of indices over six months to 30 June 2014.
0.3
3.3
9.1
5.6
1.9
1.6
1.5
3.5
-1.5
3.2
2.8
7.8
0.5
2.3
17.6
9.2
12.4
13.1
19.1
9.8
-1.2
10.0
1.4
-22.9
-25 -20 -15 -10 -5 0 5 10 15 20 25
Bank Of England Base Rate
UK Gilts
UK Property
Residential Property
UK Large Caps
UK Equities
UK Small Caps
US Equities
Japan Equities
Global Equities
Emerging Markets Equities
Gold
Total Return (%)
1y
6m
Emery Little Income Portfolio 5 Page 6
First Half, 2014
Income Portfolio Performance Summary
Performance summary for six months to 30 June 2014.
Over the six months to 30 June 2014 Income Portfolio 5 returned 2.2%. This compared to a rise of 1.1% in the Retail Price Index (RPI), a 1.9% increase in the FTSE 100 Index, and a return of 3.3% in the FTSE British Government All Stocks Index (all figures total returns in Sterling). This brought the 12-month performance of Income Portfolio 4 to 6.4%.
0
1
2
3
EL Income Portfolio 5 EL Income Portfolio 5 Benchmark
Tota
l Ret
urn
(%
)
0
2
4
6
8
10
12
14
2013 2012
Tota
l Ret
urn
(%
)
EL Income Portfolio 5
EL Income Portfolio 5Benchmark
Emery Little Income Portfolio 5 Page 7
First Half, 2014
Asset Allocation Core Portfolio asset allocation as at 30 June 2014.
Asia Pacific Equities8%
European Equities12%
Global Fixed Interest17%
Japan Equities3%
Money Market5%North America Equities
16%
Others2%
Property7%
UK Equities24%
UK Fixed Interest6%
Emery Little Income Portfolio 5 Page 8
First Half, 2014
IMA Sector Performance IMA Sector performance over six months to 30 June 2014.
-4 -3 -2 -1 0 1 2 3 4 5 6 7
IMA Asia Pacific Excluding Japan
IMA Europe Excluding UK
IMA Global
IMA Global Emerging Markets
IMA Global Equity Income
IMA Japan
IMA Money Market
IMA North America
IMA Property
IMA Sterling Corporate Bond
IMA Sterling Strategic Bond
IMA Targeted Absolute Return
IMA UK All Companies
IMA UK Equity Income
Total Return (%)
Asia Pacific
The MSCI Asia Pacific Index reached a six year high during 2014 as a result of improved economic growth in developed markets, particularly the US. This, combined with political developments such as Narendra Modi’s election win in India, led to improved investor sentiment towards an expected upturn in exports. On the negative side, geopolitical risks were raised in China.
Japan
Having delivered stellar returns in 2013, performance of the Japanese market year to date has disappointed. Forward outlook is positive due to the BoJ flooding the market with liquidity, historically cheap valuations and structural reform efforts. Government legislation to lift the ceiling on equity holdings for the Government Pension Investment fund offers the prospect of a major boost for Japanese equities.
Property
Commercial property has led performance of the IMA sectors year to date with the stability of income returns attracting investors. Yields are particularly attractive and the resurgence of commercial property looks set to continue.
Sterling Corporate Bond
As equities have become comparatively more expensive, the incentive to sell bonds has diminished throughout 2014. Increased geopolitical risk at the start of 2014 benefitted bonds as a safe haven defensive asset. The chase for yield has meant that Investment Grade corporate bonds are now more attractive from a risk/return perspective than high yield bonds.
Emery Little Income Portfolio 5 Page 9
First Half, 2014
Notable Contributors Performance of top performing income portfolio funds over six months to 30 June 2014.
0 2 4 6 8 10
First State - Global Listed Infrastructure
Artemis - Global Income
Newton - Asian Income
Ignis - UK Property
Schroder - Global Property IncomeMaximiser
Total Return (%)
Artemis Global Income
Fund manager Jacob de Tusch-Lec has managed to achieve 1st quartile performance by eschewing big name stocks such as Nestle, Shell and Vodafone in favour of less popular mid-cap companies trading relatively cheaply, that are well positioned to benefit as the economic recovery continues, particularly in the US and Europe. Mr de Tusch Lec is keen on Europe as a recovery play, and the fund is overweight Europe, particularly Spain, Italy and Portugal.
Fidelity Strategic Bond
Consistent and conservative fixed income manager Ian Spreadbury benefitted from a low allocation to high yield, with over two thirds of the portfolio allocated to quality bonds and government bonds.
First State Global Listed Infrastructure
The infrastructure sector’s defensive fundamentals and long-term structural drivers proved beneficial in uncertain global equity markets and geopolitical risk. Global road networks inability to keep up with levels of motor vehicle usage over recent years, has benefitted railways and toll roads. Mobile tower companies’ revenue streams are growing in line with increased customer demand for data and video services.
Ignis UK Property
Commercial property has enjoyed an excellent six months as positive sentiment towards the asset class continues to drive the market. Industrials and offices posted the strongest returns, with London continuing to contribute significantly.
Newton Asian Income
The fund has largely escaped recent volatility in Asian emerging markets. Exposure to the Philippines, which has experienced a reasonable rebound and Thailand, whose market has been robust in spite of the political situation, have helped the fund in 2014.
Emery Little Income Portfolio 5 Page 10
First Half, 2014
Notable Detractors Performance of poorest performing core portfolio funds over six months to 30 June 2014.
-4 -3 -2 -1 0 1
Lindsell Train - UK Equity
Schroder - UK Alpha Income
Schroder - Income Maximiser
Jupiter - Japan Income
Total Return (%)
Lindsell Train UK Equity
Following a resolute buy-and-hold policy, with a very concentrated set of holdings, and little regard for the index, renowned co-manager Nick Train was able to steer the fund through the difficult waters of a pullback in investor sentiment towards UK equities during the first half of 2014.
Jupiter Japan Income
Underperformance in the first half of 2014 can be attributed somewhat to a rise in consumption tax, and manager Simon Somerville’s relatively concentrated portfolio of 40-50 holdings. With PM Abe having fired the ‘third’ arrow, in the form of a reduction in corporation tax and reform of the Government Pension Investment Fund (GFID), the fund is well placed to benefit.
Schroder Income Maximiser
The performance of financials was mainly positive, however favoured life assurance holdings Aviva and Legal & General were affected by unexpected changes to the structure of the UK annuity market in Q1. A number of high street retailers underperforming in Q2, combined with the failure of Pfizer’s bid to purchase AstraZeneca were a drag on overall fund performance.
Schroder UK Alpha Income
Fund Manager Matt Hudson follows a business cycle based approach with high turnover depending on where Matt seeks to position the portfolio to take advantage of economic conditions. Hudson was able to reduce the impact of the strength of Sterling hurting cyclical sectors and the wide scale sell off of UK mid caps that followed Mark Carney’s Mansion House speech, by moving the portfolio into more cautious, defensive large-cap holdings.
Emery Little Income Portfolio 5 Page 11
First Half, 2014
Portfolio Breakdown
Fund breakdown by IMA sector as at 30 June 2014.
Asia Pacfic Ex UK4% Europe Ex UK
3%Global
5%
Global Emerging Markets4%
Global Equity Income18%
Japan2%
Money Market2%
North America5%
Property7%
Sterling Corporate Bond16%
Sterling Strategic Bond6%
Targeted Absolute Return6%
UK All Companies4%
UK Equity Income18%
UK Equity Income Artemis Income (5.0%)
Schroder Income Maximiser (10.5%) Schroder UK Alpha Income (2.75%)
Global Equity Income Artemis Global Income (5.75%)
Newton Global Higher Income (5.75%) Threadneedle Global Equity Income (6.50%)
Sterling Corporate Bond Fidelity Moneybuilder Income (8.25%)
M&G Strategic Corporate Bond (8.25%)
Property Ignis UK Property (5.0%)
Schroder Global Property Securities (2.0%)
Targeted Absolute Return Newton Real Return (6.0%)
Sterling Strategic Bond M&G Optimal Income (5.5%)
Global First State Global Listed Infrastructure (1.0%)
M&G Global Dividend (4.25%)
North America Jupiter North American Income (5.0%)
Asia Pacific Ex UK Newton Asian Income (4.0%)
Global Emerging Markets First State Global Emerging Market Leaders (4.0%)
UK All Companies Lindsell Train UK Equity (4.0%)
Europe Ex UK Standard Life European Equity Income (2.75%)
Money Market Fidelity Cash (2.0%)
Japan Jupiter Japan Income (1.75%)
Emery Little Income Portfolio 5 Page 12
First Half, 2014
Fund Allocation Changes
Asset Allocation Previous 6
Months End Latest 6
Months End Change
Artemis - Global Income 0.00 5.75 +5.75
Artemis - Income 5.00 5.00 0.00
Fidelity - Cash 2.00 2.00 0.00
Fidelity - Moneybuilder Income 8.25 8.25 0.00
First State - Global Emerging Markets Leaders 4.00 4.00 0.00
First State - Global Listed Infrastructure 1.00 1.00 0.00
Ignis - UK Property 5.00 5.00 0.00
Jupiter - Japan Income 1.75 1.75 0.00
Jupiter - North American Income 5.00 5.00 0.00
Lindsell Train - UK Equity 4.00 4.00 0.00
M&G - Global Dividend 2.00 4.25 2.25
M&G - Optimal Income 5.50 5.50 0.00
M&G - Strategic Corporate Bond 8.25 8.25 0.00
Newton - Asian Income 4.00 4.00 0.00
Newton - Global Higher Income 8.00 5.75 -2.25
Asset Allocation Previous 6
Months End Latest 6
Months End Change
Newton - Real Return 6.00 6.00 0.00
Schroder - Global Property Income Maximiser 2.00 2.00 0.00
Schroder - Income Maximiser 10.50 10.50 0.00
Schroder - UK Alpha Income 2.75 2.75 0.00
Standard Life - European Equity Income 2.75 2.75 0.00
Threadneedle - Global Equity Income 12.25 6.50 -5.75
Emery Little Income Portfolio 5 Page 13
First Half, 2014
Portfolio Activity Income Assets
The Artemis Global Income fund, managed by Jacob de Tusch-Lec, is introduced to the Emery Little Model Portfolios for Income. The Artemis fund provides additional diversification
in the global equity income sector alongside existing holdings in the Threadneedle Global Equity Income fund and the Newton Global Higher Income fund.
Notable Fund Events
Schroders have recently brought the management of their Global Property Securities franchise in-house, establishing a London based team with the appointment of fund managers
Tom Walker and Hugo Machin from AMP Capital and a further two fund analysts reporting directly to the team. This strategic move ends the previous JV arrangement with
European Investors Inc (EII Capital Management) and Jim Rehlaender who had previously managed the funds (although EII will continue to manage a number of segregated
mandates for Schroder).
Ignis Fund Managers Ltd have recently announced that they are to convert the Ignis UK Property Fund into a new fund, the Ignis UK Property PAIF. PAIF stands for ‘Property
Authorised Investment Fund’. This is a type of collective investment that must invest in physical property (either commercial or residential), UK Real Estate, Investment Trusts or
foreign equivalents.
Emery Little Income Portfolio 5 Page 14
First Half, 2014
Notes Past performance is no guarantee of future returns. The price of shares and the income from them can fall as well as rise. The value of this investment is not guaranteed and on encashment you may not get back the full amount invested.
Please be aware that there may be occasions when an individual fund or funds may have a higher risk rating than your overall stated attitude to risk. If this is the case, then the overall risk rating applied to all of the combined funds being recommended is still designed to meet the portfolio risk profile and objectives.
The portfolio benchmarks are constructed based on sector average returns* of funds within each portfolio with the same weightings as funds in each portfolio. Portfolio benchmarks are dynamic and their composition may change with any changes in the asset allocation or fund selection of the portfolio. Portfolio benchmark performance data includes Emery Little fees (0.75% per annum) and typical platform charges (0.30% per annum).
Performance data may show backtested performance of the core portfolio from the earliest date where data is available. Performance data is indicative only and actual portfolio performance may vary. Constituent funds of the portfolio may vary depending on your platform provider.
Performance data includes Emery Little fees (0.75% per annum) and typical platform charges (0.30% per annum). It is important to note that performance data before 2013 will generally also include 'bundled' fund charges such as an element of fund commission paid to Emery Little (typically 0.5% per annum for equity funds) and a rebate of fund management charges paid to the platform provider (typically 0.25% per annum for equity funds). The inclusion of 'bundled' fund charges as well as the additional explicit Emery Little fees and platform charges means that performance data before 2013 may be significantly understated due to the effective application of double charges. Once IT systems allow us to provide performance data without this double charging effect, this information will be made available.
*Fund sectors are defined by the Investment Management Association (IMA) for more information see investmentfunds.org.uk.
The following indices are used for market performance (page 5): FTSE British Government All Stocks (UK Gilts), IPD UK All Property (UK Property), Halifax Property Index (UK Residential Property), S&P 500 (US Equities), FTSE World Index (Global Equities), FTSE 100 (UK Large Caps), FTSE All Share (UK Equities), TSE TOPIX (Japan Equities), FTSE Small Cap Index (UK Small Caps), MSCI EM (Emerging Market Equities), S&P GSCI Gold Spot (Gold).
All portfolio data is provided by FE Analytics unless otherwise stated. Figures may be subject to rounding differences.
Performance data is total return cumulative performance to 30 June 2014, on a bid-bid basis, rebased in Pounds Sterling. Volatility is 3 year cumulative annualised volatility to 30 June 2014.
Care has been taken to ensure that the information is correct but Emery Little neither warrants, represents nor guarantees the contents of the information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein.
Emery Little LLP is authorised and regulated by the Financial Conduct Authority and provides advice on investment products. The registered office is Ebenezer Chapel, Bradden Lane, Gaddesden Row, Herts HP2 6JB. Emery Little LLP is registered in England No. OC321024.