As we would not wish him to become too concerned at such an early stage and in response to the deterioration in the global economic outlook, we have reduced the equities within the portfolio, removed property and financials while simultaneously incre
asing defensive fixed-interest investments, particularly index-linked bonds since we believe inflationary pressures may build. The portfolio is now well placed to weather what we anticipate may be a further six months or so of turbulence due to the impact of the credit crunch on the economy which has coincided with an increase in basic material prices.
We have increased the exposure to commodities which may also benefit from inflationary expectations and reduced the exposure to the Far East, increasing North America which is now looking better value. We might even add some Japan, which no-one else in the competition has held so far, as this is a market which may benefit from inflation.
Recently we have been building a position in the "all-weather" fund Blackrock UK Absolute Alpha fund, which is one of our wild-card holdings. The fund is designed to provide positive returns regardless of the UK market environment and has been returning about 4 per cent a quarter recently.
Willie Crockett, Edinburgh Risk Management: A MAJOR aspect of our business is the importance that we place on regular reviews of clients' investment portfolios and there is no doubt the markets which we currently face heighten that key service requirement.
Reconciling the cautious outlook which Angus MacDonald entertains, alongside fairly demanding investment returns to meet his objectives into retirement, was always going to be a challenge. At the outset, our view was that to meet his long-term objectives we should have approximately an equity/bond split of 75/25.
With regard to our equity exposure, there was a belief that overseas markets would serve us better and that we needed to diversify this further by holding positions in infrastructure and commodity funds. There was also a view that commercial property funds should not be included at that time.
Six months on, these views have not fundamentally changed but we have to acknowledge that the short-term global backdrop has deteriorated markedly. Alongside the spread of the Anglo-Saxon inspired credit crunch contagion, we have seen the impact of oil, commodity and food price inflation starting to bear down on the consumer.
Now, however, is not the time to panic. There are pockets of value starting to open up, for example, in investment grade bonds, where we will increase weightings and markets are already starting to discount current consumer concerns.
Mark Houghton, Condies Wealth Management: MY LAST summary in April discussed the volatile markets and the second quarter has certainly seen no improvement.
We have seen increased inflation in the UK, a decrease in house prices and, although interest rates have come down, this has not been passed on to mortgage holders.
The impact on the portfolio has been an overall reduction since the last quarter, with only fixed-interest funds providing positive returns. Under these challenging conditions, I still believe that asset allocation is all-important when forming an investment strategy. By asset allocation I mean the utilisation of different classes, such as fixed-interest, stocks (domestic or foreign) and natural resources.
By spreading the risk across asset classes the portfolio is less likely to suffer overall if there is a downturn in one particular sector.
As I was happy with my initial asset allocation model, I have decided not to make too many changes. Pensions are long term investments and I do not want to make knee-jerk decisions, especially when taking account the costs involved in switching between funds. I also wanted to keep the portfolio within the client's stated attitude to risk, which is naturally cautious.
Having said that, one decision I have made was to come out of property and into Standard Life's Global Index linked bond, which has shown positive dividends.
As stated above, I think there will be further challenges this year and one issue to pay particular attention to is what happens with inflation.
Steve Wilson, Allan Steel Asset Management: WE CONTINUE to believe 2008 will be positive for equities despite the volatility and disappointments so far, so no further changes to the portfolio are recommended.
Sentiment causes short-term moves in either direction but fundamentals, not emotion, ultimately determine long-term values. The fact is there's always something going to derail the capitalist system apparently, yet we're still here alive and kicking.
Study after study over the years shows that average investors earn significantly less returns than had they stuck with the funds they had invested in.
That's because they tend to chop and change, reacting to headlines, see-sawing between fear and greed.
In times like this, it's best to be disciplined.
As Warren Buffett famously said: "The stockmarket is a device for transferring money from the impatient to the patient".
We prefer to be patient.
John Moore, Central Investment Services: INVESTMENT markets continue to exhibit high levels of volatility and negative sentiment and, unlike markets at the beginning of the millennium, all the major asset classes have been affected.
What encourages me is that current valuations look cheap and if some positive sentiment returns to the market then we could see a sustained recovery.
Unfortunately this may not happen in the short term, but investors should be taking a long-term approach and be prepared to sit tight through such periods.
Human nature is to make changes in such periods and when something goes wrong you want to take remedial action. From an investment perspective, however, this is often a mistake. Realising undervalued assets at this time simply crystallises short-term losses.
My philosophy is to maintain a diversified portfolio of non-correlating assets. In my opinion, the fundamentals behind the original investment decisions in January have not changed and therefore I continue to keep faith with the original portfolio. Inflation worries have increased but it is my belief that the best hedge (over the longer term) against rising inflation is to be invested in assets that can keep their value in real terms.
I believe a recovery is a possibility in the short term and some better news from the banking sector could be the catalyst for this. While the effects of the credit crunch on consumers are going to continue to bite throughout 2008 and into 2009, in terms of investment markets we could be nearing the end.
David Rankin, Bell Lawrie: IT HAS been an extremely volatile first half of the year. The banks have written off huge sums and interest rates in the US – and in the UK to a lesser extent – are a lot lower than they were at the start of the year. However, the credit crisis continues and the crunch has become more pernicious than anticipated.
I think interest rates and oil prices need to come down before confidence in equity markets returns. Hopefully the second half of the year will be less volatile with some good news and I am quietly confident that the portfolio will end the year between 5 and 10 per cent higher than the starting point.
I structured Angus MacDonald's portfolio to provide a diversification which I believe is capable of meeting the objectives over the ten-year investment term. There have been no major issues with any of the investment funds chosen therefore I have made no changes to the stock selection.
The current portfolio is made up of 72 per cent equity, 16 per cent fixed-interest and 12 per cent cash. The investment strategy is designed to create a balanced, globally diversified portfolio with a long-term mandate. As we are considering the investment management of pension funds for at least the next ten years, we should not change the investments unless fundamentally something has changed. The value in diversifying a portfolio is clear as although many of the funds chosen are down over the period, the SWIP Absolute Return Bond Fund and the Martin Currie North American Fund have grown.
Adeline Christy, Caledonia Asset Management: SINCE the start of the year, both domestic and commercial property markets have been continually marked down, as loans become somewhat prohibitive; retail sales are dropping off; and unemployment is starting to tick upwards. Inflation has risen in the UK, and much higher in some of the developing markets, mainly as a result of soaring food and fuel costs, and it does appear that the US and the UK may be entering a period of recession.
In light of the above, I have reduced some of the riskier positions within Angus MacDonald's portfolio. Having started the year very bullish on the prospects for Asia and in particular China, I have on three occasions reduced exposure to the Gartmore China Opportunities, instead reinvesting the proceeds into Neptune Russia and Greater Russia.
The largest holding has always been the Insight Diversified Target Return fund since inception, and indeed I have added to it over the first six months.
This has meant an increase in exposure from 16 per cent overall to a current weighting of a little under 28 per cent, mainly at the expense of the Martin Currie Asia Pacific fund and the Artemis European Growth, where performance had been slipping. While this high weighting may be seen by some as high risk, the fund itself has an absolute return mandate and gives exposure to a number of different asset classes, many of which do not correlate with either equity or bond markets.
As a result, in the first six months of the year, it returned -0.1 per cent when compared with the FTSE All Share return over the same period of -11.2 per cent.
Gordon Forbes, Caledonia Assset Management: THE continued volatility in worldwide stock markets has significantly affected the performance of many investment funds.
Consequently, we are encountering a very different period where many traditional asset classes and sectors that should not normally correlate – such as commercial property and gilts – now do. This suggests that historical positive performance within these areas may be harder to achieve in the future and while we still endorse elements of these in our portfolio, we have sought, within the risk mandate, to position more towards asset classes and sectors that show little or no correlation to current market forces.
Additionally, and just as importantly, we have made our alterations at times when the market has been at a low point, which offers a greater opportunity of gaining from potential "bounces" as and when they occur. Timing is one thing but it is the time spent in the market that is the key. A typical example of this was our purchase of Neptune's Russia and Greater Russia Fund, which has proved to be a robust performer from a fund management team that we feel will continue to gain from the opportunities that this sector offers.
This and the other minor alterations made will, we believe, offer the portfolio greater resilience. Further, we have always maintained that Angus MacDonald's income in retirement will also include capital raised from his departure from his legal firm and given the uncertainty that many small legal firms are experiencing at the moment, we would continue to urge him to plan properly how this exit can be best achieved.
The full article contains 1958 words and appears in The Scotsman newspaper.
