Slide 1 Ingenious Asset Management www.ingeniousmedia.co.uk
Economic Overview & Portfolio PositioningPhilip Todd
9th September 2014
Slide 2 Ingenious Asset Management www.ingeniousmedia.co.uk
Economic Outlook - Period of Transition• Economic recovery in the US and UK gaining traction
• High debt levels will continue to restrict growth.
• Central bank policy divergence between UK & US and
Europe & Japan.
• Global downward debt/deflation spiral avoided – for now.
• Short-term rates will rise but remain below inflation.
Slide 3 Ingenious Asset Management www.ingeniousmedia.co.uk
Market Outlook
• Transition from ultra-loose monetary policy could lead to increased market volatility
• Bond yields can be expected to rise.
• Higher bond yields may undermine highly rated equities.
• Focus on a medium term strategy – ignore the short term noise:
− No conventional bonds− Concentrated portfolio of high quality equity− Reduce volatility with non-correlated assets
Slide 4 Ingenious Asset Management www.ingeniousmedia.co.uk
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Germany Spain UK USA France Japan0
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73 69
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2008 2009 2010 2011 2012 2013
DEBT REMAINS A MAJOR ISSUE…
Source: FactSet
Government Debt: General government gross financial liabilities as a percentage of GDP
Economic Outlook Is Still Challenging
Source: FactSet, Ingenious Asset Management
…AND REAL WAGES HAVE CONSISTENTLY FALLEN SINCE THE FINANCIAL CRISIS…
UK General Election
Slide 5 Ingenious Asset Management www.ingeniousmedia.co.uk
…THE COMBINATION OF WHICH CONTINUES TO RESTRICT GROWTH RATES.
Growth Remains Subdued
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
-4
-2
0
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6
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1.3
4.7
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Advanced economies GDP percent change
Emerging market and developing economies GDP percent change
World GDP percent change
( %
)
Source: FactSet, IMF World Economic Outlook Report
WE EXPECT NEGATIVE REAL INTEREST RATES WHILST GROWTH IS SLOW AND UNEMPLOYMENT REMAINS HIGH.
Source: FactSet, IMF World Economic Outlook Database
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Country specific unemployment rate in 2014 (IMF St...
( %
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Slide 6 Ingenious Asset Management www.ingeniousmedia.co.uk
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CPI Target (2.0%) UK CPI (1.89%)Base Rate (Interest 0.5%)
QE AND LOW INTEREST RATES SUGGEST INFLATION IS A “REAL” THREAT…
Source: FactSet
Debt Reduction Will Be Aided By Inflation
Inflation Rate
0 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%
Years
1 100.0 99.0 98.0 97.1 96.2 95.2 94.3 93.5 92.6 91.7 90.9
2 100.0 98.0 96.1 94.3 92.5 90.7 89.0 87.3 85.7 84.2 82.6
3 100.0 97.1 94.2 91.5 88.9 86.4 84.0 81.6 79.4 77.2 75.1
4 100.0 96.1 92.4 88.8 85.5 82.3 79.2 76.3 73.5 70.8 68.3
5 100.0 95.1 90.6 86.3 82.2 78.4 74.7 71.3 68.1 65.0 62.1
6 100.0 94.2 88.8 83.7 79.0 74.6 70.5 66.6 63.0 59.6 56.4
7 100.0 93.3 87.1 81.3 76.0 71.1 66.5 62.3 58.3 54.7 51.3
8 100.0 92.3 85.3 78.9 73.1 67.7 62.7 58.2 54.0 50.2 46.7
9 100.0 91.4 83.7 76.6 70.3 64.5 59.2 54.4 50.0 46.0 42.4
10 100.0 90.5 82.0 74.4 67.6 61.4 55.8 50.8 46.3 42.2 38.6
25 100.0 78.0 61.0 47.8 37.5 29.5 23.3 18.4 14.6 11.6 9.2
50 100.0 60.8 37.2 22.8 14.1 8.7 5.4 3.4 2.1 1.3 0.9
100 100.0 37.0 13.8 5.2 2.0 0.8 0.3 0.1 0.0 0.0 0.0
…EVEN MODEST INFLATION ERODES WEALTH AND DEBT OVER TIME
Source: Ingenious Asset Management
- Loss greater than 25% of original capital
- Loss greater than 50% of original capital
• GROW
• DEFAULT
• DEBASE
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Market Outlook - Bonds
UK 10 Yr Avg Yield (prior 2008): 6.7% US 10 Yr Avg Yield (prior 2008): 5.9%
Source: Bloomberg
YIELDS HAVE BEGUN RISING FROM HISTORICAL LOWS…
…WHICH COULD LEAD TO A REVERSE OF FLOWS FROM BONDS
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UKG10YR (2.74%) USG10YR (2.72%) Se
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Slide 8 Ingenious Asset Management www.ingeniousmedia.co.uk
Equities Have Performed Relatively WellTHE SEARCH FOR RETURN HAS SUPPORTED EQUITY INDICES…
1 year returns 01/08/2013 – 31/07/2014Source: Morningstar Direct, Ingenious Asset Management
US Govt Bonds
European Govt Bonds
UK Govt Bonds
European Equity
Emerging Market Equity
Global Equity
US Equity
UK Equity
UK Corporate Bonds
Asia-Pacific Equity
-10% -5% 0% 5% 10%
-8.0%
-0.2%
2.7%
3.5%
3.6%
4.1%
5.0%
5.6%
5.9%
7.0%
Slide 9 Ingenious Asset Management www.ingeniousmedia.co.uk
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S&P 500 Price Index
Federal Reserve Banks Total Assets
An Increase In Valuation Not Value
…WHICH HAVE RISEN ALONGSIDE INCREASES OF QE…
Source: Bloomberg, St Louis Fed, Ingenious Asset Management
QE
QE
Federal Reserve expands balance sheet
Source: FactSet
… BUT HAVE DISPROPORTIONATELY LAGGED EARNINGS
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S&P 500 Price Index S&P 500 EPS
131.3%
107.7%
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Caution Still Required
VALUATION RATINGS NOW SUGGEST CAUTION IS REQUIRED…
… AND PROFIT MARGINS MAY NOT BE SUSTAINABLE.
Source: Robert Shiller Source: FactSet
6%
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US Corporate Profits % of GDP (12.6%)
Long Term Average (9.5%)
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Shiller CAPE (25.26)Long Term Average (16.52)
• Wages
• Depreciation
• Interest costs
• Taxation
Slide 11 Ingenious Asset Management www.ingeniousmedia.co.uk
Portfolio Construction - Bonds
NO CONVENTIONAL BOND HOLDINGS
• Bond returns were boosted by QE yield compression
• Limited capital protection as yields normalise.
• Limited protection from inflation
• Concerns over credit quality
• Concerns over liquidity
• Low duration index-linked bonds the exception
Slide 12 Ingenious Asset Management www.ingeniousmedia.co.uk
ABSOLUTE RETURN FUNDS PROVIDE AN ALTERNATIVE TO BONDS
• Targeted returns in excess of cash and inflation
• Protection from bond and equity market volatility
• Low correlation with other asset classes
Source: Morningstar Direct
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Ignis Absolute Return Gov Bd (20.6%)
JPM GBI Global Traded (2.3%)
Absolute Return Funds & UK Commercial Property
UK COMMERCIAL PROPERTY
• Returns lag economic recovery
• Pockets of rental increases outside London
• Sound income return
Slide 13 Ingenious Asset Management www.ingeniousmedia.co.uk
• M&G Global Dividend Fund
− Dividend yield = 3.5%− Dividend growth since launch = 9% − Long term return can be expected to be 3.5% +
9% = 12.5%
• No guarantees that dividends will be increased, however manager’s philosophy and track record provide a high degree of comfort.
• Protection from inflation
• Protection from normalisation of bond yield
• Risk of long-term permanent loss of capital low
• Risk of short-term quotational loss high
Source: Morningstar Direct
LONG-TERM RETURN FROM EQUITIES = DIVIDEND YIELD + DIVIDEND GROWTH
Portfolio Construction - Equities
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MSCI World NR USD M&G Global Dividend I Inc
111.0%
70.8%
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Important Information
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No representation is made or warranty given as to the accuracy, completeness or achievability of any projections, views, statements or forecasts, which are illustrative. The projections, views, statements and forecasts herein are based upon various assumptions and estimates which involve elements of subjective judgment and analysis and which are subject to uncertainties and contingencies; actual results could differ materially from those set forth in such projections, views, statements and forecasts.
Past performance is not a guide to future performance and may not be repeated. You may not get back the full amount you invest.
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