By Graham Bishop, Investment Director at Heartwood Investment Management
The growth backdrop remains supportive, although at the margin there appears to be some softening in momentum in the US and UK. This is resulting in the synchronicity of global growth appearing to be less pronounced than was the case earlier this year. What is notable, however, is that this slight slowing in momentum has done little to shift central banks from their willingness to exit emergency levels of stimulus. In their view, deflation risks have been largely defeated and this has been evidenced by the hardening tone of more hawkish iterations in recent weeks, albeit nuanced and modest. In short, the direction of travel is clearly in favour of policy normalisation.
In consequence, we believe that central bank policy risk is rising. Risks may come from less liquidity being added to financial markets as the Fed starts to unwind its balance sheet; the fact that central banks may not necessarily be the backstop they once were should global growth falter; and finally, the potential adverse impact of any further hawkish communications or policy actions on investor sentiment. Given greater interest rate policy uncertainty and recognising that valuation levels in some parts of financial markets are elevated, we believe it is appropriate to begin to reduce equity risk in portfolios, with a view to further reducing exposure in coming weeks. This begins a phased and incremental programme of risk reduction, though flexible enough to be re-calibrated in either direction to adapt to changing economic conditions. We also consider that by starting to reduce risk levels now, we expect to be in a better position to take advantage of market opportunities were we to see higher levels of volatility.
Equities: While our central case of reasonable economic growth, supportive central bank policy and only modest upward pressure on inflation remains intact, we are more concerned about the possible impact of less predictable central bank rhetoric and actions, which may potentially lead to increased volatility across markets. Therefore, we are beginning a modest reduction in equities, although continuing our policy of targeting specific themes. We are viewing the US as a source of funds given valuations, but maintaining exposures in healthcare and smaller companies. We are retaining overweight positions in European and Japanese equities, as economic momentum continues to improve. In Japan, we have increased exposure to smaller companies in our higher risk strategies. UK equity remains an underweight position and we believe it is still too soon to repatriate overseas assets, given domestic political uncertainties. We are maintaining a bias to UK larger companies, which have performed well as sterling has weakened over the last year. We have trimmed some of our EM equity exposure following a strong run this year. We are comfortable at current levels and consider that the longer-term structural case remains intact, given improving growth prospects, expectations of policy easing in several economies as inflation trends ease and ongoing liquidity flows.
Bonds: The hawkish tone of recent central bank communications has caused some re-evaluation across sovereign bond curves, pushing global yields higher especially in the intermediate-dated sector. These moves have been supportive of our long-running stance that the market is too dovish relative to central banks and we may expect further re-pricing in the second half of the year. Credit spreads have remained firm against a solid global backdrop. We believe that a short duration stance remains appropriate.
Property: We retain our underweight position, believing this to be a prudent stance in light of UK political uncertainties, as well as acknowledging the maturity of the current economic cycle. While activity has slowed and there are questions about rent sustainability, our regional bias and reasonable discounts on certain instruments will provide some protection in the event that market yields move higher. At this stage, there is no appetite to add overseas exposure.
Commodities: Factors weighing on the oil price continue to be concerns around the effectiveness of OPEC production cuts to counter rising US production; scepticism that Qatar and Iran will cooperate with Saudi cuts; and Nigeria and Libya ramping up production. Industrial metals have been performing better, especially copper, implying better news on China. We are maintaining our position in gold as we continue to see it as an important diversifier for portfolios.
Hedge funds: While we have held a limited allocation to hedge funds in recent years on concerns around performance, we believe that increasing monetary policy divergence should create more opportunities in this sector going forward. Our preference remains for macro/CTA strategies, but we are also taking a more positive view on equity hedge strategies given the greater likelihood of increased stock dispersion (i.e. between winners and losers).
Cash: We have reasonable levels of liquidity across our portfolios both in cash and short-dated bonds, which we will invest as and when we see specific opportunities. Market volatility remains low – a situation that we believe is unlikely to persist as we move into the second half of the year.
A practical guide to the UCITS KIIDs annual update
By Ulf Herbig at Kneip
We take a practical look at the UCITS KIID
What is a UCITS KIID and what is it used for?
The Key Investor Information Document (KIID) is a 2- or 3-page summary document detailing a fund’s charges, risk & reward profile, past performance and the overall objectives and investment policy.
What does the regulation say about the annual update?
In terms of annual updates, according to EU Regulation 583/2010, Fund Managers have 35 business days (excluding weekends) from December 31 to issue a revised version of the KIIDs including the performance of the calendar year that just ended.
The Regulation says that the documents must not only be produced but also made available to investors before the 35-business-day-delay is elapsed. This means that Fund Managers must compute the past performances for the year 2020, update the documents that are currently made public, in all applicable languages, proceed with filing to regulators and ensure that these documents are published on websites.
When is the deadline this year?
In the absence of any legal holiday in January and February, the deadline is set to 35 business days from January 1st, which leads to Friday 19 February 2021.
If there is a legal holiday between January 1st and February 19th, then the deadline can be extended accordingly to the next business day. However, we always recommend sticking to the deadline without taking any legal holiday in January or February into account.
What can be challenging with the annual update?
The annual update production cycle can be challenging in many areas:
Scope management. Overall, the scope of the annual update must be the first and foremost task to be done, early in January. The annual update must be done on all share classes for which performances for at least on full calendar year (real or simulated) can be shown. This means that share classes launched in 2020, where the Fund Manager does not want to show simulated performances, may be excluded from the scope of the annual update of 2021. The monitoring of the KIIDs for these share classes launched in 2020 shall continue its normal life but will not be affected by an update of performance as long as there is not a full calendar year of performances to be shown.
Computation of 2020 past performance. this is the main task to be done in relation to the annual update and is a mechanical computation of the net performance of the share class or the fund from 31 Dec 2019 to 31 Dec 2020, with an assumption of the dividends paid during the year being reinvested into the fund.
Consideration of inactivity periods during 2020. When the share class of the fund had one or more periods of inactivity during the year, then the following question is to be considered: Do we, as a manufacturer, show either a) no performance for 2020 in the KIID and provide a written explanation instead, or b) show the 2020 performance in the KIID and simulate the performance during the dormancy period based on a benchmark?
Material changes other than past performance to be incorporated in the KIID. Very often the annual update is also a time where other changes may be incorporated, being driven by changes in the regulation or changes triggered by a modification of the prospectus. We would tend to consider the implementation of these changes at the same time as the KIID annual update production, to make sure the filing to home and host regulators is being done once and for all.
Is this year’s annual update any different?
In terms of document production, the processing remains the same as the previous years, even though the year that just ended may have been tough for many organizations and might have impacted the net performance of the funds.
Should you already start to think about the move from KIID to KID?
As of today, the grandfathering for Asset Managers allowing them to produce and issue a UCITS KIID in lieu of a PRIIPs KID will come to an end on Dec 31, 2021. This means that this year should be the last year of having to handle an annual update of the KIIDs and that a PRIIPs KID will have to be produced from Jan 1, 2022. Therefore, the time to start thinking about the move to the PRIIPs is now.
However, there is currently no approved regulatory technical standards (RTS) available at the level of European Supervisory Authorities, which means that product manufacturers do not have any guidelines as to how to produce the PRIIPs KIDs by Jan 1, 2022. We expect to have draft RTS issued by the ESAs by end of January, with a final version to be ratified by the EU Commission one of two months later, as the earliest.
This means that the implementation timeframe, if the deadline is maintained, will be very limited and will put significant pressure on product manufacturers to get this implementation over the line within deadline.
There is also a possibility that a further extension of the grandfathering period is granted, which would extend the use of the UCITS KIID for a longer period. This, if applied, would be a welcomed relief for market participants in the fund managers who are already under huge regulatory pressure.
How to Take Control of Retirement Planning in 2021 and Beyond
What does your dream retirement look like? What kind of lifestyle do you imagine? Maybe you’re planning to travel more, or perhaps you’re thinking of going back to school. Maybe that passion for photography could become a new business, or perhaps you’re simply looking forward to taking a break and enjoy spending more precious time with those you love.
Whether retirement will see you bungee jumping in South Africa, or trampoline jumping with the grandkids, Steve Pennington, Head of Wealth Planning at Private and Commercial Bank Arbuthnot Latham discusses how planning your retirement now will help bring those dreams the chance of becoming reality.
There are so many “what if’s” and unknowns to take into consideration that retirement planning can feel daunting. What kind of retirement lifestyle can you actually expect? What if I want to (or need) retire early? What if I or my partner needs care in older age? What if my children or grandchildren need financial support? What if I want to buy a Jaguar E Type? What if my investments fall?
2020 has only added to these concerns, so what can you do to feel more in control?
Understanding what you want to achieve is the first step. Is the key goal to maintain your lifestyle in retirement, or do you have different priorities? By looking at your cash flow today and modelling a range of anticipated cash flow scenarios in retirement, you can immediately visualise your future financial position. Through building in key personal milestones such as a change in lifestyle, travel, downsizing, buying that car, or selling a business, you can build a clearer of picture of what you’ll need and when.
More than 10 years until retirement
Look at your current later life provisions. How do you intend to use your non pension assets in retirement? How and when do you actually intend to use your pensions? Are you planning to stop working before you’re eligible to access your formal pensions? Do you have a personal or company pension? If you’ve worked for a number of companies, you may have several. Have you considered consolidating your pension arrangements? Have you checked how your retirement funds are performing, and if your circumstances and ambitions have changed since you last reviewed them?
If you are earning more than you spend, it’s also worth thinking about what you’re doing with your excess income. Inflation erodes the value of savings over time, meaning your purchasing power in the future is reduced. Of course, everyone needs cash reserves, but could you invest more now, using tax advantages, so that your retirement ambition has a more certain outcome?
Less than 10 years until retirement
If you’re approaching retirement, you probably already have a rough idea of your retirement plan. It’s also likely that you’ve experienced some investment turmoil over the years which may have caused unease and uncertainty. When you have financial plans in place it can be tempting to just stick with your current investment arrangements, whether they are performing or not, or perhaps you have been thinking about making some changes but need guidance and advice. Professional advice at this time can help you feel in control of your finances and your future.
If you’re feeling unsure about the state of your investments, or how your finances are arranged, it’s important to find an adviser who can review your circumstances and discuss suitable options in order to address your objectives. As you near retirement, it’s even more important to review your appetite for risk, capacity for loss and complete a financial health check to assess whether you are on track. Often Investors are happier to take fewer risks as retirement approaches, but this is not always the best course of action. Consider that pensions may need to provide you with income for the rest of your life.
If you’re already retired, you’ll already be using your assets to fund your lifestyle. It’s certainly worth reviewing how you are using your assets to provide income. At this stage of life, many people’s financial goals change from investing for growth to investing for income. However, as people live longer, retirement is often broken into different stages, allowing you more control over how you structure your finances and access your wealth at a future date to deliver different benefits at different times.
To find out if your retirement dream is achievable take this short quiz here: https://www.arbuthnotlatham.co.uk/insights/retirement-quiz
Not company earnings, not data but vaccines now steering investor sentiment
By Marc Jones and Dhara Ranasinghe
LONDON (Reuters) – Forget economic data releases and corporate trading statements — vaccine rollout progress is what fund managers and analysts are watching to gauge which markets may recover quickest from the COVID-19 devastation and to guide their investment decisions.
Consensus is for world economic growth to rebound this year above 5%, while Refinitiv I/B/E/S forecasts that 2021 earnings will expand 38% and 21% in Europe and the United States respectively.
Yet those projections and investment themes hinge almost entirely on how quickly inoculation campaigns progress; new COVID-19 strains and fresh lockdown extensions make official data releases and company profit-loss statements hopelessly out of date for anyone who uses them to guide investment decisions.
“The vaccine race remains the major wild card here. It will shape the outlook and perceptions of global growth leadership in 2021,” said Mark McCormick, head of currency strategy at TD Securities.
“While vaccines could reinforce a more synchronized recovery in the second half (2021), the early numbers reinforce the shifting fundamental between the United States, euro zone and others.”
The question is which country will be first to vaccinate 60%-70% of its population — the threshold generally seen as conferring herd immunity, where factories, bars and hotels can safely reopen. Delays could necessitate more stimulus from governments and central banks.
Patchy vaccine progress has forced some to push back initial estimates of when herd immunity could be reached. Deutsche Bank says late autumn is now more realistic than summer, though it expects the northern hemisphere spring to be a turning point, with 20%-25% of people vaccinated and restrictions slowly being lifted.
But race winners are already becoming evident, above all Israel, where a speedy immunisation campaign has brought a torrent of investment into its markets and pushed the shekel to quarter-century highs.
(Graphic: Vaccinations per 100 people by country, https://fingfx.thomsonreuters.com/gfx/mkt/azgvolalapd/Pasted%20image%201611247476583.png)
SHOT IN THE ARM
Others such as South Africa and Brazil, slower to get off the ground, have been punished by markets.
Britain’s pound meanwhile is at eight-month highs versus the euro which analysts attribute partly to better vaccination prospects; about 5 million people have had their first shot with numbers doubling in the past week.
Shamik Dhar, chief economist at BNY Mellon Investment Management expects double-digit GDP bouncebacks in Britain and the United States but noted sluggish euro zone progress.
“It is harder in the euro zone, the outlook is a bit more cloudy there as it looks like it will take longer to get herd immunity (due to slower vaccine programmes),” he added.
The euro bloc currently lags the likes of Britain and Israel in terms of per capita coverage, leading Germany to extend a hard lockdown until Feb. 14, while France and Netherlands are moving to impose night-time curfews.
Jack Allen-Reynolds, senior European economist at Capital Economics, said the slow vaccine progress and lockdowns had led him to revise down his euro zone 2021 GDP forecasts by a whole percentage point to 4%.
“We assume GDP gets back to pre-pandemic levels around 2022…the general story is that we think the euro zone will recover more slowly than US and UK.”
The United States, which started vaccinating its population last month, is also ahead of most other major economies with its vaccination rollout running at a rate of about 5 per 100.
Deutsche said at current rates 70 million Americans would have been immunised around April, the threshold for protecting the most vulnerable.
Some such as Eric Baurmeister, head of emerging markets fixed income at Morgan Stanley Investment Management, highlight risks to the vaccine trade, noting that markets appear to have more or less priced normality being restored, leaving room for disappointment.
Broadly though the view is that eventually consumers will channel pent-up savings into travel, shopping and entertainment, against a backdrop of abundant stimulus. In the meantime, investors are just trying to capture market moves when lockdowns are eased, said Hans Peterson global head of asset allocation at SEB Investment Management.
“All (market) moves depend now on the lower pace of infections,” Peterson said. “If that reverts, we have to go back to investing in the FAANGS (U.S. tech stocks) for good or for bad.”
(GRAPHIC: Renewed surge in COVID-19 across Europe – https://fingfx.thomsonreuters.com/gfx/mkt/xegvbejqwpq/COVID2101.PNG)
(Reporting by Dhara Ranasinghe and Marc Jones; Additional reporting by Karin Strohecker; Writing by Sujata Rao; Editing by Hugh Lawson)
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