Portfolios Structure

• Portfolios are made up of 14 to 17  Ucits or Alternative Ucits funds (according to profile).

• We have started two currency based family of portfolios ; in US dollar and in Euro.

• Apart one fund, with a bi-monthly liquidity, all funds have a daily liquidity.

• Usually we select the same funds for the USD or the EUR based portfolios, with hedged currency exposure for fixed income funds.

• The performances are shown net of fees, calculated on the cheapest share classes, and making our Model Portfolios fully replicable.

Strategic Allocations

We keep a constant balance between equity and fixed income strategies according to Model Portfolio profiles and guidelines. We also maintain a neutral currency and regional allocation compare to benchmarks.

The portfolio outperformance should mainly arise from the alpha generated by active management. Tactical bets such as investment style (value, growth defensive), sector allocation (e.g., commodities, real estate), interest rate or spread duration might also contribute, time to time, to the value added generation.

2018 will be remembered as a period that did not reward diversification. Out of the 44 sub-asset classes we monitor worldwide, only 5 closed the year in positive territory, hence the 39 others ended in red. The average performance for all of them was of -7.6%, with a maximum of +3.29% for the Emerging European Equity market, and a minimum of -18.9% for the China Equity market, ex-aequo with the Small-Cap Equity in Asia ex-Japan. The broad MSCI World index and BarCap Global Aggregate index, returned -8.9% and +1.76% respectively, as measured in US dollar.

The sell-off on the stock markets continued in December and the markets were hit by even greater volatility. As expected, the US Fed raised interest rates once again. However, the members of the bank’s Federal Open Market Committee have revised their growth and inflation forecasts for the next few years downwards slightly and are also now expecting one fewer interest rate hike in 2019, i.e. two rises (median) in total.

Healthy consumer data from Amazon and Mastercard on online sales in the Christmas period, coupled with the announcement that trade talks with China would continue, prompted a marked rebound in late December. The Dow Jones added more than 1,000 points in a single trading session for the first time ever, recording its biggest leap in percentage terms since 2009. However, these gains were not enough to haul the indices back into positive territory. Commodities suffered bitter setbacks on the price front, with the broad-based commodities market down -13% while crude oil slumped by -25%.

The increasing uncertainty pushed the yield on ten-year Treasuries down from 3.23% to 2.68% from November onwards. Spreads widened strongly for a third month in a row in High Yield bonds (+106bps in December). Since the bottom in September 2018 (330bps) the spread widened by +214 bps. In the Investment Grade credit spread widened moderately (+16bps) in December but since the bottom the increase remains very significant (from 79bps in January 2018 up to 161bps in December 2018).

Despite all the uncertainty, the fluctuations on the currency markets were relatively minor in December.

Outlook

We made no change in the portfolio in December. While we were reluctant to make harsh moves during the market correction, it is now time to evaluate the performance of our portfolios, both on the positioning side and on the fund selection side.

For 2019 we expect volatility persistence in the markets driven by changes in macro fundamentals and more importantly earnings growth slowdown, if any. The wild card will remain, as usual, political uncertainties such as the one we know already with the Brexit, or trade war situation. We will monitor closely how the monetary policies will evolve and their impact to the markets. We keep a relatively balanced positioning, favouring GARP portfolios in equities, and yield carry portfolios in fixed income, with or without duration exposure.

Equity positioning

Our slight underweight exposure in the US equity market, our overweight in small- and mid-caps names and the performance of active management have been the major factors of underperformance this year. On the other hand, our management style move (from deep value managers to quality growth managers) has proved to be appropriate.

In this highly volatile environment, we are tempted to reduce our small- and mid-cap exposure at the margin but we expect to keep our overweight EM exposure unchanged. Regarding the style exposure, we also remain comfortable to keep a neutral stance.

While we recognize the expensiveness of high-quality and defensive businesses, value opportunities are within the most cyclical and volatile sectors. We think it is still a bit too early to come back strongly in deep value style managers.

Equity fund selection

We are analysing the 2018 relative performance of each of our fund managers and carefully splitting their under or outperformance between their management bias (style and market capitalization) and their stock selection skills.

Within the 11 equity funds we have in the portfolios, 2 of them have a disappointing stock selection attribution and are subject to switch.

Fixed Income positioning

Our fixed income portfolio construction has shown strong resilience throughout the year except over the last month. A 100% fixed-income portfolio made of the funds selected in the Growth and Income portfolio would have indeed lost only 1% (USD) in 2018. Compared to most of multi-assets fixed income strategies, we think this result is quite decent.

While our underexposure to duration, our overweight to EM debt as well as to subordinated financials have been detractors, we have been helped by our exposure to uncorrelated fixed income strategies (i.e., RMBS, CLOs, Cat Bonds and Loans).

Going forward, our selection exhibits strong figures (in USD hedged):5.4% in yield-to-maturity, 2.7 years of duration, and an average IG rating compared to the ones of the BBgBarc Global Aggregate TR Hdg USD of 2.1%, and 7 years, respectively.

Our portfolios are ideally positioned in case the spread stabilize around current level and it would even be able to cushion a sensible spread widening due to its carry. While EM debt and subordinated financials remain the most valuable area for us, we keep a cautious stance on high yield bonds which remain expensive despite the recent correction. Finally, we are tempted to take some profit on Cat Bonds and on non-agency RMBS. Relative to more liquid areas (IG Credit for instance), these asset classes have become less attractive than at the beginning of 2018.

Fixed Income fund selection

We don’t expect to make any changes, there has been no disappointing fund performance relative to their benchmark or objectives.

Absolute Return strategies

They have fully played their defensive role in 2018 by softening the market correction in February and during the last quarter, and contributed to dampen the volatility. The Balanced Portfolio with a 50% Equity / 50% FI target objective was down only by 3.8% in USD and by 3.2% in EUR in 2018.

The MSCI ACWI (USD) was down 7.3% during the month while the Barclays Global Aggregate index (USD hedged) was up 1.4%.

In December, the performance of active management was mixed. Despite the persistent underperformance of small- and mid-caps equities, some Equity PMs managed to generate alpha, particularly in EM markets. The market downturn was broadly equally shared across sectors during the month, the Utility being the less impacted (-2.2%) while the Energy sector felt by 9.7%. Over the 26 funds we have in all Model Portfolios, 13 had a positive excess return.

In absolute terms, the Balanced portfolio (-2.1%) outperformed the Yield and Income portfolio (-2.5%) and the Growth portfolio (-4.1%).