Adviser > Investment for Advisers > Advisory Committee > Meeting Summaries > Investment Governance Meeting Summary - 29 November 2011
Investment Governance Meeting Summary - 29 November 2011
The Governed Portfolios, Managed Funds and Managed Strategies remain comfortably within their benchmark risk targets.
In summary
Current benchmarks
No change
Current tactical position
Overweight
Equities
Corporate bonds
Underweight
Index linked bonds
Property
Funds under review
11
Review of benchmarks - no changes
No changes were recommended to the Governed Portfolios benchmark allocations. There was some discussion in the meeting around a number of points that led to this decision. Please view the full minutes for details.
Market commentary Q3 2011
"The third quarter of 2011 was dominated by market participants views on the actions or probably more pertinently the inaction of policy makers in both the US and Europe. Focus early in the period centred around the ability of the US administration to agree a deal to raise the ceiling on US debt and hence prevent a shutdown of government and potentially a default on US debt. The decision ultimately went right up to the wire exposing the very deep differences between the political parties which encouraged the view that the ability for the US to bring forward any additional measures to assist the economy were very unlikely at least until the Presidential elections at the end of 2012. The belief in policy paralysis contributed to the rating agencies reducing the USs rating below AAA. In financial markets that understood the importance of full engagement from policy makers and with investor confidence shaken by the perceived lack of safe havens these events led to sharp falls in risk asset markets to the benefit of certain government bonds which were considered low risk (perhaps perversely this included the US).
For the remainder of the quarter the epicentre for the belief in insufficient and/or poorly thought through responses shifted to Europe. Through the period we saw a series of events ranging from governments struggling to devise restructuring measures, to fiscal deficits not falling as quickly as planned and open disagreement between policymakers as to the best way to address the unfolding events. The net result of all of this was a leeching away in confidence in European policy makers ability to provide a lasting solution to their sovereign debt crisis which was manifested in higher borrowing costs for an increasing number of peripheral countries. Ultimately investors questioned the sustainability of the current situation with Greece very much in the eye of the storm.
The increasingly problematic situation in Europe led through the quarter to market moves which reflected investors complete focus upon buying any asset which they considered to be safe while scaling back exposure to anything they considered risky. Hence we saw the 10-year bonds of safe governments at around or below 2%, we saw the virtual elimination of any real yield on UK index-linked securities while certain countries were having to pay 9%+ on their bonds. The period also saw weakness in corporate bonds and equities even though company finances remain extremely strong and trading in most instances is also resilient.
Our view remained that the stresses within the European system would have brought about a more marked policy shift. While we understand the arguments in favour of restructuring within a number of European economies we take the view that this had to be accompanied by far more assistance from the ECB through buying government bonds and therefore lower borrowing costs so creating the conditions more likely to create a sustainable situation. Clearly through Q3 this change in policy was not forthcoming and our portfolio positioning was not correct given the rising degree of risk aversion. However we retain the view that such a change will occur but judging when is still very uncertain. All we can say is that the pressure from both within Europe and from outside is growing almost daily. In addition we would question whether government bonds in the supposed safe haven actually do provide the degree of insulation from risk that is reflected in their pricing given the difficulty of reducing fiscal deficits. The reality of lending money to the UK government for almost any time frame for a guaranteed real loss which would occur if we purchased IL gilts does not represent sound investment to us and would seem inconsistent with the objectives of the Governed Portfolios. Clearly there are risks that the uncertainties perpetuate and that investors continue to seek refuge in government bonds, but any change in policy would make these assets poor value especially given that company finances appear far superior to those of governments.
In light of the uncertainty of timing, the tactical position was moderated in September, but overall continues to remain positioned overweight risk assets and underweight index-linked gilts and property."
Support for you
For more in-depth material you can access the following information:
Funds under Review
Matrix Funds
- Emerging Markets Core Plus (First State Global Emerging Markets Leaders)
- Emerging Markets Core Plus (Henderson Emerging Markets Opportunities)
Non-matrix Funds
- Far East (ex Japan)
- SL/Fidelity Special Situations Blended
- SL/GLG Stockmarket Managed
- Index Linked Life
- European Life
- FTSE 350 Tracker
- FTSE 350 Managed
- Japan Specialist Pension fund (Invesco Perpetual Japan)
Next Meeting
The next IAC quarterly meeting will be held on 6 March 2012.
Further information
For more details about how these changes may impact you or your clients, please speak to your usual Scottish Life contact or call us on 0845 60 40 800.
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