Standard Life Investments

Market funds report - MyFolio

Risk Levels I to V

Environment

Global equities finished 2017 in fine style, with many indices hitting all-time highs. The ongoing improvement in the world's economy and a strong corporate reporting season drove this. Sentiment also received a fillip after US President Trump signed his much-vaunted $1.5 trillion tax cut into law. As with much of the year, politics remained to the fore. This included a vote for independence in Catalonia (rejected by Madrid), the formation of the EU's first far-right government in Austria and a landslide snap election victory for Japanese Prime Minister Shinzo Abe. Meanwhile, Brexit talks progressed to the second phase after the striking of a last-minute deal.

Bond markets were volatile in the final quarter of 2017. There was another interest rate hike in the US, while in the UK the Bank of England raised interest rates for the first time in more than a decade. Global government bonds did manage to deliver a small positive return. In the UK, the breakthrough in Brexit negotiations was positive for gilts. Meanwhile, the announcement that the European Central Bank would reduce its bond-buying programme more gradually than expected benefited European bonds. Corporate bonds experienced a positive quarter given the generally robust global economic environment and solid corporate earnings.

UK commercial real estate delivered positive performance during the fourth quarter, concluding a relatively rewarding year for investors. Income returns remained strong, supported by robust occupational demand, while capital values also strengthened over the year. UK investment volumes held up well, still largely driven by overseas buyers. Demand for industrial assets was particularly buoyant, as favourable fundamentals and the security of long-lease income continued to attract investors. As a result, the sector delivered the strongest returns over the quarter and the year.

Activity

We review the Strategic Asset Allocation (SAA) for each of the MyFolio funds every quarter, with the aim of ensuring that we continue to meet investors’ long-term interests. At the most recent review, we made several changes to the SAA model. We added two new defensive asset classes – global corporate bonds and short-dated global corporate bonds. Introducing global corporate bonds enables the MyFolio funds to access a far larger and more liquid bond universe. These investments serve to both diversify risk and to broaden each fund’s range of return sources.

Within the growth assets, we added global REITs as a longer-term strategic holding, believing that it is now appropriate to make these assets a permanent feature of the strategic asset mix, rather than a tactical allocation. This should provide the funds with even greater liquidity and enhanced diversification across global property markets.

Meanwhile, we continue to seek growth opportunities in the MyFolio funds alongside income in a world of low yields. Despite historically low growth, there should be cyclical opportunities as economic activity broadens out, so company profits may be sustained. Political risks have dampened but could still surprise investors, positively or negatively. In addition, monetary policy does not need to tighten aggressively as underlying inflation is restrained. As a result, we favour equity risk assets and selected high-yielding fixed income assets. We therefore made the following Tactical Asset Allocation (TAA) changes (where applicable within each risk level) during the fourth quarter.

  • Within equities, we continue to favour European equities and we also increased the overweight position in Asia Pacific and emerging market equities.
  • We retained the underweight allocation in UK equities, given our tactical preference for overseas equities.
  • We introduced a modest overweight allocation to global high-yield bonds.
  • We closed the underweight position in UK real estate and closed the overweight position in global REITs.

In terms of the underlying funds, we have highlighted below some key purchases and sales during the quarter (please note transactions may not apply at all risk levels).

  • Bought the Amundi Index FTSE EPRA NAREIT Global Fund
  • Bought the Vanguard Global Short-Term Corporate Bond Index Fund
  • Bought the Vanguard Global Corporate Bond Index Fund
  • Sold the iShares Global Property Securities Equity Index (UK) Fund
  • Sold the iShares Corporate Bond Index Fund
  • Sold the Vanguard UK Short-Term Investment Grade Bond Fund

Performance

3 months to 31/12/17 (%) 1 year to 31/12/17 (%) 2 years to 31/12/17 (%) 3 years to 31/12/17 (%) Since launch to 31/12/17 (%)
MyFolio Market I Inst 2.31 4.80 13.78 14.89 44.62
MyFolio Market II Inst 3.28 7.01 19.68 21.77 63.08
MyFolio Market III Inst 4.08 9.37 25.44 28.23 76.90
MyFolio Market IV Inst 5.05 11.52 31.71 35.05 89.58
MyFolio Market V Inst 5.73 13.09 37.48 41.10 104.00

Source: FE Analytics, based on Institutional share class

Outlook

Global equity markets enter 2018 on a sound footing. The world economy is growing at a robust rate, which is feeding into healthy corporate profits. Central banks have started to withdraw monetary stimulus, although any future moves will be measured and data-dependent. Challenges remain, notably around geopolitics, the US debt ceiling and potential policy missteps. China could also slow more sharply than expected. Nonetheless, the overall the outlook is encouraging.

The outlook for bonds is generally less positive. However, there is enough uncertainty to make it unlikely that government bonds will fall in value significantly. Valuations in some parts of the corporate bond market are a little stretched. However, we believe that the fairly benign macroeconomic environment should provide support.

UK real estate dynamics remain supportive, although we expect returns to moderate as the economy experiences weaker growth in 2018. Although Brexit negotiations progressed at the end of 2017, the full economic impact remains unknown and this will continue to affect sentiment towards UK commercial real estate. Despite this uncertainty, we expect real estate to remain attractive to investors seeking a source of sustainable income.