Wednesday, July 27, 2016
Insights from our quarterly investment review
FPC's investment committee meets each quarter to review all aspects of our investment process in the context of prevailing economic and market conditions, and changes in legislation. We’d now like to share some insights from our most recent review, looking in particular at the impact of ‘Brexit’.
This chart shows the performance of sample portfolios over 12 months (to 30 June):
- Sample portfolios are made up of indices representing each asset class
- Returns are before tax and costs, and do not represent any individual's investment experience
- Past performance is no guarantee of future returns
All three portfolios have gone up in value by about 10% and a lot of the gains came immediately after the Brexit result. This is because bonds, and shares priced in currencies other than Sterling have done well.
But the Pound in your pocket is worth less. On the day of the referendum (23 June) £1 bought about $1.50. Today you’d get just over $1.30.
This means higher inflation, because it costs more to buy goods and services from outside the UK. It does however make our exports more competitive. And it increases the value of overseas earnings, which benefits several large UK companies – GlaxoSmithKline for example.
The FTSE 100 is an index of the 100 largest companies listed on the London Stock Exchange. The FTSE 250 is an index of the next-largest 250 companies, and a better indication of the strength of the UK economy. Over the same 12 month period (to 30 June) the FTSE 100 is up by about 4% and the FTSE 250 is down nearly 5%.
Another consequence of the Leave vote was that government bond yields fell further, to new record lows. The markets now seem to be pricing in a cut in interest rates this year, and it could be as late as 2021 before the base rate reaches 1%.
This shows markets believe the prospects for the UK economy have significantly worsened.
And when you consider that just two years ago it was thought interest rates would already be at 2% you can see how dramatic a shift this is.
Independent investment economist Peter Stanyer comments:
‘Lower gilt yields are a major concern. Investment strategy needs to recognise that rates are likely to remain extraordinarily low for the indefinite future. Those who say this is sure to reverse should remember the words of Keynes that “the market can remain irrational longer than you can stay solvent”.
‘Ultra-low interest rates mean that the ‘squeezed middle’ now have to save much more, for much longer, to fund the same lifestyle in retirement. This shows the corrosive cost on savings of negligible interest rates, and the importance of professional management of retirement savings.’
Over the summer we’ll be revisiting some of the assumptions we use when building investment strategies. We’ll also be thinking again about our asset allocation policy and the funds we use in portfolios.