WSP Model Portfolios are built from our universe of selected active Ucits funds. We manage actively the allocation according to current and expected market conditions and taking into consideration the fund managers’ exposure.

The aim is to demonstrate that an optimal combination of strategies, coupled with a careful selection of active fund managers, have the ability to deliver added-value to investors over the long run, while keeping a full exposure and constant asset allocation within the given investment profiles.

More detailed reporting including portfolio quantitative and qualitative data are available to customers having subscribed to the WS Partners Model Portfolio Services. Would you request more information on this service, please contact us.

Portfolios Structure

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

• Two currency based portfolios ; in US dollar or in Euro.

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

• Usually we select identical funds either for US dollar or Euro based portfolios, but keeping currency exposure hedge for fixed income funds.

• The performances are shown net of fees, calculated from the cheapest share classes, hence 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, and to a certain extent to a diversification optimisation. Tactical bets such as investment style (value, growth defensive), sector allocation (e.g., commodities, real estate), interest rate or spread duration may also contribute, time to time, to the value added generation.

Yield & Income Portfolio

A conservative portfolio with a 1/3 equity and 2/3 fixed income allocation.

Within the equity universe we tend to favour yielding strategies rather than pure price appreciation funds.

The objective is to outperform over time a benchmark composed by 1/3 of the MSCI All Country World Index, and by 2/3 of the Barclays Global Aggregate Bond Index.

Growth Portfolio

The most equity oriented portfolio with the aim to beat a benchmark composed by 2/3 of the MSCI All Country World Index and 1/3 of the Barclays Global Aggregate Bond Index. Growth of capital through capital appreciation is the main long term portfolio objective.

Market Review – March 2020

While it was already clear that we were in the later stages of the economic cycle, nobody could have predicted at the start of this year that large parts of the global economy would be brought to an abrupt halt by the COVID-19 pandemic. Unfortunately, the debate has now moved on from whether there will be a recession this year, to how deep and long it will be. As markets have moved to reflect this new reality, equities have fallen sharply, with the worst returns coming in March. The S&P500 fell 20% over the quarter.

At least the defensive part of portfolios has performed as expected with government bonds rising in price, as central banks cut interest rates and restarted quantitative easing. Gold has also delivered positive returns year to date, up nearly 5%. However, concerns about the effect of the shutdowns on corporate profits have led to corporate bond prices declining, which will have detracted from the returns of some fixed income portfolios. As should be expected, riskier, junk-rated corporate bonds have fallen by more than investment grade rated companies, with high yield energy bonds the worst hit.

Commodity prices, other than gold, fell sharply over the quarter. As countries around the world halted activity to try to bring the spread of the virus under control, demand for most commodities declined, hitting prices. Oil was caught in a perfect storm with an agreement between OPEC and Russia to constrain supply breaking down just as the outlook for demand fell. This led the oil price to fall by more than 60%.

An unprecedented shock requires an unprecedented policy response. Most encouraging has been the policy response from the likes of the UK and Germany where governments have committed to pay a significant proportion of workers’ wages during the shutdown to enable companies not to lay off staff despite the dramatic hit to sales.

In the US, a very substantial fiscal stimulus package has been agreed, worth about 10% of GDP, which will include some grants to small businesses. The package also provides government backing for credit to be provided by the Federal Reserve to investment grade companies. This should ensure that large investment grade companies don’t fail in the near term because of a lack of cash-flow.

Outlook

Markets will move in the near terms according to the fluctuation of the illness curve and potential treatments effectiveness. As it is unpredictable by nature, we believe it is best to focus on market valuation and understanding what is priced in the different asset classes.

In our view fixed income is discounting a much bleaker scenario than equities. At worst, high yield spreads were as wide as 1200bps, which implied an average default rate of around 20% (depending of the recovery rate) for the next 4-5 years. Also, investment grade credit was hardly hit, as the March drawdown was a negative 11 standard deviation move, based on 2019 volatility, much higher than the equity 3 standard deviation move.

We took benefit of that valuation distortion to cautiously add some exposure in fixed income, but also to some arbitrage strategies, such as merger arbitrage, which were pricing at worst, that every expected merger would fail to happen.

The MSCI ACWI (USD) closed the month down -14.4%, after plunging by more than -25% during the month. The Barclays Global Aggregate index (USD hedged) was down by -1.6% for the period.

Active management had a negative contribution in March. While equity managers were able to modestly generate positive relative performance, fixed income managers were severely hit in absolute and relative terms by the dislocation of the markets.  This is partly due to their need to provide liquidity, as well as  to preserve as much as possible the interests of existing investors.

Although painful, we are not surprised to see active fixed income managers lagging their index in that context. It is reminiscent of the 2008 crisis, where delevraging by invesotrs provoked liquidity drain with massive price distortion, decoupled from fundamentals.

Over the 25 funds we have in the portfolios, 6 were outperforming their respective benchmarks, all were in equities.

In absolute terms, the Balanced portfolio (-8.4%) outperformed the Growth portfolio (-9.7%) as well as the Yield & Income portfolio (-10.5%).

Yield & Income Portfolio (USD)

The portfolio was at the hearth of the storm and suffered its worst absolute and relative performance (-450bps).

Despite carrying some duration at the beginning of the crisis, by holding a 10-30 years treasury ETF, every risk premia skyrocketed in the different fixed income strategies, to often surpassed the downside of equity markets, like with EM debt (-12.6%), High Yield (-12%), Loans (-12.4%), Subordinated Financials (-15%), Investment Grade Corporate (-6.8%) or ABS securities.

The fixed income allocation was down 8.5% in the portfolio, while equity funds were down 13.2%. The Yield differential between the portfolio and the Barclays Global Agg index has never been as wide, at 600bps, or  7.2% vs. 1.2%.

Balanced Portfolio (USD)

The portfolio underperformed its benchmark by -82bps.

The fixed income allocation was a strong detractor (-5.6%), while the contribution of active management in equities was positive, adding +80bps of alpha.

The absolute return strategies were only modestly helping. Absolute return FI strategies were hit by the dislocation of the market, while  uncorrelated strategies such as Merger Arbitrage (-5.9% in March) registered their biggest drawdowns for years.

Growth Portfolio (USD)

The Growth portfolio finished almost flat vs. its benchmark (-5bps) in March.

The fixed income allocation was a strong detractor (-5.2%), as for the other portfolios, while the contribution of active management in equities was positive, adding +120bps of alpha.

Our sector allocation to Healthcare was a positive contributor (+30bps), as well as our allocation bias toward defensive large cap growth.