True Potential Portfolios & Global Markets 2018 Review

Chris Leyland, Investment Director, provides analysis on 2018. The first in a three part series, with a look at Brexit and 2019 outlook coming later this week.

Hello, ladies and gentlemen, my name is Chris Leyland and I am the Investment Director who heads up the True Potential Portfolio proposition and I am here today to review 2018 and look out towards 2019 for both the Portfolios and Markets.

Before we start let’s restate what our long term objective if for the True Potential Portfolio proposition.

Overall, the goal of the True Potential Portfolios is to maximise return for a level of risk in a lower cost highly diversified investment product.

Let’s start by talking through what has happened recently?

Overall 2018 was a very challenging year with the figures on the screen illustrating how it compares with previous years.

Looking at 2018 on its own, the slide on screen illustrates the performance of each asset class.

What happened?

Up until October, the US equity market had clocked up a new record; the longest lived “bull market”, where share prices are rising, in history. As we moved forward, despite delivering three outstanding quarters of corporate earnings growth, the US market began to falter with more aggressive rhetoric coming from the Federal Reserve and nervousness from the continuing US/Sino trade war triggering a global equity market sell off.

Starting with the Federal Reserve, it may seem odd that a group of some of the most respected central bankers discussing how well the US economy is doing and why interest rates need to keep rising steadily would not support equity markets. With the “discount rate”, i.e. the risk-free rate of return, rising, it meant that companies with high price to earnings ratios struggle to maintain their valuations and therefore these were the stocks that first sold off.

With trade tensions and the ever growing doubt that US tech giants such as Apple and Amazon could struggle to live up to their newly-acquired $1trn valuations, the news brought major indices in the US down with a bump, with US equities one of the worst performers during the last three months of 2018, although this is on the back on stellar returns in 2017 and early 2018.

The UK did not fare very well with political risk continuing to dominate the UK investment horizon all year. “Deal or no deal” varied on an almost daily basis, but very much specific to the UK markets, not really moving markets globally.

Within bond markets, you are seeing a dichotomy of returns. Higher quality government paper such as UK gilts have performed well as investors look to more perceived “safe” areas to invest. On the flipside to this, high yield bonds struggled as investors rotated into lower risk paper and a number of high profile corporate mishaps made market participants nervous.

Alternative assets came to the fore with investors looking outside the traditional areas of equities and bonds to try and find returns that were uncorrelated to stock market returns. Gold fared particularly well as investors looked to derisk their positions.

Moving onto the True Potential Portfolios, let’s look at the performance figures

It is never comfortable to say one has performed well when client values have been pared back, but the if we compare the annual performance to a reference point, say the FTSE 100, this is down nearly 8%. Diversification within the True Potential Portfolio has helped clients not experience such a large fall.

Moving on, here we can see a graph of the TP Balanced Portfolio over 2018 compared to FTSE 100, illustrating lower volatility and higher returns.

As for advanced diversification this has genuinely worked. Within the Portfolios we have assets that actually provided a positive return in the more negative months such December, illustrating diversification working. Assets such as gold, various hedge funds and currency funds all provided more than 4% returns over the month of December. Remember the Portfolios contain assets that can actually make money in falling equity markets.

If we look at the managers over the year as you know we have added in the True Potential Growth Aligned Fund range to the Portfolios which is one of our best performing fund ranage since its launched in May, offering ever increasing levels of style diversification.

Looking at our other partners, Close Brothers showed their stock picking skills producing a strong set of numbers and is also the manager with the heaviest weighting within the Portfolios. This illustrates the TPP investment process working.

On the more negative side, the True Potential Goldman Sachs Balanced Fund struggled with its conviction position towards Emerging Markets detracting from performance against a backdrop of US interest rates rises.

The True Potential Allianz range also detracted from performance with its momentum style struggling, particularly during the down months of February and March and December.

This is the first part of a series. Watch part 2 Brexit and part 3 2019 outlook