It was a torrid final quarter of 2018 for equities amid trade tensions and concerns that rising US interest rates would end the long bull market and choke US economic growth, with stock markets selling off sharply in October and December. Equity markets then rebounded sharply in the opening quarter of 2019, helped by the US Federal Reserve halting its program of interest rate rises. Trade conflict between the US and China was a constant theme over the year, with risk appetite fluctuating with the progress and setbacks in trade talks between the two economic superpowers.

Outside of equity markets, both global government bonds and corporate bonds enjoyed a year of sizeable returns. Global government bond yields fell heavily over the year, into negative territory in cases, amid worries over slowing global growth and a shift to more accommodative monetary policy by central banks, including the Fed and the European Central Bank. Credit spreads narrowed sharply as investors’ search for yield in a low return world persisted, reflected in significant inflows into investment grade and aggregate bond funds. The gold price rallied on lower interest rates, fears over the debasement of the US dollar and as a haven in response to the ongoing US-China trade war.

The portfolio performed strongly versus its peer group, with the US mutual fund vehicle ranking in the seventh percentile (29/450 funds) in the Morningstar World Allocation category for the year to 30 September 2019.

The portfolio’s US and non-US corporate bond holdings (representing just under 40 per cent of the portfolio in aggregate, on a weighted average basis) made a substantial contribution to returns, particularly the US corporate bond holdings. The portfolio’s equities holdings (c. 48 per cent aggregate allocation on average) made a more modest contribution, with both US and international equities adding value. The portfolio’s gold and gold-related holdings (just under four per cent of the portfolio) also boosted returns, as did a cash balance that was just under five per cent of the portfolio on average. Like the team’s gold positions, it serves as a portfolio hedge and a buying reserve to be used opportunistically in times of market stress.

Looking ahead, the team believes the financially repressive policies of central bankers and demographic challenges facing the developed world mean income-focused investors will need nimble, flexible and creative solutions to meet their investment needs. In a world where over US$15 trillion of debt (according to Bloomberg) now carries a negative yield, traditional fixed income products are likely to provide meagre returns in coming years. Investors also need to be acutely aware of valuation risk in the equity markets, where earnings multiples for many quality and growth stocks appear stretched, even after September’s market rotation towards value stocks.

In terms of current positioning, the portfolio’s equity weighting has drifted slightly higher lately following the team’s identification of small pockets of opportunity. However, the team does not believe equities in aggregate present the same attractive risk/reward profile that they saw in the market volatility of December 2018. In fixed income, they continue to see little value in taking interest rate or credit risk, as such the portfolio remains tilted towards higher quality bonds.

Using a bottom-up, cross-capital approach, the team continues to look for pockets of opportunity across global equity and credit markets and deploy capital swiftly when appropriate. They are also prepared to act, should further bouts of market stress provide more broad-based opportunities for them to take advantage of volatility.