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Investment Governance Meeting Summary - 12 March 2012


In summary

Current benchmarks
No change

Current tactical position

Corporate bonds

Index linked bonds

Funds under review

Review of benchmarks - no changes

It was discussed in the meeting that recent analysis had shown three of the Governed Portfolios were noted as being inefficient. Following lengthy discussion in the meeting no changes were recommended to the Governed Portfolios benchmark allocations. Please view the full minutes for full details of the discussions that led to this decision.

Market commentary Q4 2011

"After an extremely difficult third quarter of the year driven by concerns over debt sustainability in the US and Europe as well as relatively poor economic data the fourth quarter was far better. There were a number of factors behind the improved environment for risk assets. Firstly, the economic data out of the US showed signs of improving trends in employment and overall business confidence. Given the fact that analysts were worried about a continual deterioration this helped to reassure. Secondly, we had signs out of some of the emerging economies, and in particular India and China that they were to start upon a path of monetary easing having tightened fairly significantly through 2010 and 2011. Thirdly, markets believed they saw signs that the plans to stabilise the economic and monetary situations throughout Europe were moving into a new phase. While there was still much talk around the need for further austerity measures there was also the start of thoughts turning to how the overall European economy was going to return to some improved growth path. Fourthly, the US central bank projected that interest rates would remain at effectively zero for the next 3 years. And lastly we had the announcement from the Bank of England of their intention to buy more gilts in the marketplace as a way of helping the UK economy. However we believe that the most significant shift occurred when the ECB announced that it was prepared to offer the banking system effectively a limitless amount of 3 year funding at a rate of only 1%. This appeared aimed at the situation where the banks were struggling to find funding in the open markets which was causing an intense retrenchment of balance sheets and a growing 'credit crunch'. Thankfully the ECB recognised the problem and moved to head off the problem that was likely to mushroom in 2012 given the amount of funding that banks were due to rollover.

While this was not the direct funding of governments that we had thought was going to be necessary to try and alleviate the European crisis it did remove quickly the risk of severe problems for the banking system which was at the nexus of the problem and therefore was seen as removing significant 'tail risk' from financial markets. This was bolstered by the encouragement to banks to use some of the funding to buy government bonds (and hence drive down governments funding costs) and the promise that another round of funding was to be made available in February 2012. Lastly there appeared to be further moves towards trying to provide a next stage funding program to Greece which was seen as at the biggest risk of being forced out of the Euro with unknown consequences.

The combination of some improvement in economic data but particularly from a growing sense that the authorities were embarking on further monetary injections into the global economy led to an increased risk appetite and equities started upon a strong upward move through November and December. Corporate credit also started to perform much better and there was a mild sell off in government bonds. It was interesting to see that the size of the sell-off was quite mild given the rising optimism which may be explained by the fact that many investors feel compelled to hold onto government bonds for regulatory and liquidity reasons which will continue to limit any price falls irrespective of 'fundamental' pricing views.

This improved appetite towards risk continued into 2012 helped by another deal regarding Greece finances, some improved economic data and the continued amounts of excess liquidity in the system. Through the fourth quarter we did not alter our asset allocation stance remaining overweight equities and corporate bonds and underweight index-linked and property as this was appropriate given the improved tone to financial markets.

Of course after such a strong move in risk assets the key question is whether this heralds the start of a more sustained rise accompanied by a return to healthy rates of economic growth. Our view is that given the persistence of still very significant imbalances in the global economy and the continual need for deleveraging in many developed economies that the fundamental outlook, despite the continual injections of money into the system, is still one of heightened uncertainty over economic and financial market conditions with the most likely pattern remaining one of periods of strength and optimism followed by relapses and fears over the degree to which the excesses which lead to the credit bust have been adequately addressed."

With this in mind, Robert Talbut took the decision to crystallise some of the profit from his previous overweight position in risk assets, when he made a tactical change on the 1st of March 2012. This had the effect of reducing both the overweight in equities and the underweight in index linked. These changes bring the asset allocation closer to the strategic benchmarks.

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)
  • UK Equity Specialist (Artemis UK Special Situations)
  • Global Managed Equity Specialist (Investec Global Free Enterprise)

Non-matrix Funds

  • Far East (ex Japan) 
  • Property 
  • UK Mid Cap
  • Fidelity Special Situations Blended 
  • GLG Stockmarket Managed 

Next Meeting

The next IAC quarterly meeting will be held on 22 June 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.

Please note that past performance is not a guide to the future. Prices can fall as well as rise. Investment returns may fluctuate and are not guaranteed.


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