Despite a challenging start to the year we have seen five consecutive months of positive returns across the portfolios. However, through this period of heightened volatility in 2016 the benchmarks have outperformed the portfolios, and in this blog I want to explore the reasons for this.

Fixed Interest

We have advocated for some time that rising interest rates would not be good news for fixed interest investments, and that the bull run we have seen over the last 15 years can’t continue. To avoid this, we have used alternative investments to provide bond-like volatility with near equity type returns.

The main component of this strategy is the Standard Life Investments Global Absolute Return Strategies Fund and this has suffered negatively in this hyper-sensitive environment.

Contrasting its decline of 4% this year the benchmark (which is a mix of gilts and corporate bonds) has returned over 11% this year. Clearly a 15% difference will have an impact on overall portfolio performance, so we could say this is the reason and end the blog at this point.

But, as the table below shows all the portfolios are behind the benchmark by about the same amount:

1 January 2016 – 30 June 2016
Portfolio Return Benchmark Difference
Adventurous 3.26% 11.35% -8.09%
Moderately Adventurous 2.91% 11.40% -8.49%
Balanced 1.32% 10.61% -9.29%
Cautious Growth 2.91% 11.40% -8.49%
Cautious Income 3.19% 12.72% -9.53%
Defensive 2.65% 11.39% -8.74%

Clearly this has had an impact on those portfolios with greater exposure to the fund, but equally there are other elements at play. It is worth adding that there will be periods when the benchmark spikes; (we saw this in 2014) but in the long term we still believe we have the right strategy in place for this part of the portfolio.

Rush to safety

In the days running up to the EU Referendum we saw a surge in the share prices of domestic focused companies (housebuilders, financials etc) whereas defensive/blue chip stocks (like Glaxo, Rolls Royce etc) lagged behind. This reflected a view that the UK would vote to remain in the EU.

From the 24th June we saw a complete reversal as investors turned to defensive stocks, which pushed up their share prices and the FTSE over the following week. This created a sense that all was rosy in the financial world and actually the UK would be okay.

When we prepared the first quarter figures there was a gap between the portfolios and benchmark, and we had seen this narrow over the second quarter. However, from the 24th June we saw it spike to extreme levels.

Our aim is always to find managers who can, over the long term, create significant value above the index. This means many things but in essence we have managers who will invest across the market and this may include unloved companies, or companies they believe are being missed by the market and are good value, and also investing across the market cap from small to large cap companies. And it may include some of these defensive companies if they believe they can deliver value from them.

To illustrate why we think this is important, it is worth looking at the FTSE 100 from 3 January 2000 to 12 July 2016 which is up 1%. There would have been periods where if an investor timed it perfectly they would have made money, but if they just sat and held the money they would have effectively made nothing.

If we take the FTSE 100 as a whole, you would question why you would invest in the index but clearly there will be winners and losers. For a tracker, what happens over time is that one cancels out the other. What we aim to do with the managers we select is for them to find the winners, and over time they will add significant value. Clearly there will be times when the index does better, especially when there is a rush to safety (which pushes up the value of the index) and, naturally because of some of the holdings of the funds, we may lose out in the short term.

This year we have seen two extremes of volatility in January and towards the end of June. As we expected we have seen defensive stocks get increasingly expensive but we believe at some point this will correct. There are many good small, mid and large-cap companies which have become cheap and picking the right ones can deliver opportunities.

We have run some figures from 1 July which may point to a correction in prices:

Company 1 July – 12 July
BP +3.68%
Glaxo +2.44%
Rolls Royce +1.76%
Diageo +1.28%
Astra -0.59%


Company 1 July – 12 July
AngloAmerican +9.56%
Barclays +6.11%
Taylor Wimpey +4.31%
Lloyds +3.50%
Travis Perkins +3.17%

Looking at this we then ran the portfolios over the same period:

1 July 2016 – 12 July 2016
Portfolio Return Benchmark Difference
Adventurous 4.44% 3.17% +1.27%
Moderately Adventurous 4.26% 3.04% +1.22%
Balanced 3.66% 2.94% +0.72%
Cautious Growth 3.10% 2.58% +0.52%
Cautious Income 2.74% 2.41% +0.33%
Defensive 2.56% 2.41% +0.15%

These are very early days, but we are starting to see the portfolios outperform the index in the short term; if this continues then we could see the benchmark come down at the same time as the portfolio performance goes up.

If would be interesting to see if the FTSE remained at roughly the same level at the end of the year. If this was the case, then we would expect the portfolios to do well and the benchmarks to fall back. We will be monitoring this trend over the coming weeks and months.


The last few weeks have highlighted two important features about the way we manage money.

Firstly, the portfolios are globally diversified. As the markets responded to the EU vote the fall in sterling effectively provided downside protection for the portfolios, which meant we were able to deliver positive returns in June.

Secondly, we know that in periods of extreme volatility investors will turn to defensive stocks and this doesn’t always reflect their true value. We are looking for managers who over the long term will find opportunities and deliver value. It is possible that we could be see a rotation out of defensive stocks and this will benefit the portfolios. To illustrate, the performance of the portfolios is shown below up to 12 July; you can start to see the difference with the benchmarks coming down in comparison to the figures at the end of June shown above:

1 January 2016 – 12 July 2016
Portfolio Return Benchmark Difference
Adventurous 7.95% 14.88% -6.93%
Moderately Adventurous 7.39% 14.78% -7.39%
Balanced 5.06% 13.87% -8.81%
Cautious Growth 6.13% 14.28% -8.15%
Cautious Income 5.97% 15.43% -9.46%
Defensive 5.29% 14.07% -8.78%

Note: This is written in a personal capacity and reflects the view of the author. It does not necessarily reflect the view of LWM Consultants. The post has been checked and approved to ensure that it is both accurate and not misleading. However, this is a blog and the reader should accept that by its very nature many of the points are subjective and opinions of the author. Individuals wishing to buy any product or service as a result of this blog must seek advice or carry out their own research before making any decision, the author will not be held liable for decisions made as a result of this blog (particularly where no advice has been sought). Investors should also note that past performance is not a guide to future performance and investments can fall as well as rise.