Standard Life Investments

Market funds report - MyFolio

Risk Levels I to V

Environment

Equity markets worldwide delivered another quarter of positive returns, driven by the improving global economy and a generally positive corporate reporting season. Sentiment received a boost after Emmanuel Macron won the French election, triumphing over his anti-EU rival Marine Le Pen. Elsewhere, a surprise election in the UK and its inconclusive result unsettled domestic markets. Meanwhile, the US Federal Reserve (Fed) raised rates as expected in June and the European Central Bank (ECB) unsettled markets when it hinted that it might start to reduce quantitative easing later this year.

June was the pivotal month for government bond markets during the quarter. Three of the world’s major central banks issued statements that seemed to signal a move towards tighter monetary policy. The result was to send government bond yields sharply higher in the last few days of the month. Politics dominated corporate bond markets during April and May. Investors warmly embraced the victory of centrist candidate Emmanuel Macron in France’s presidential election and credit spreads tightened. The prospects for monetary policy occupied investors as the period closed but corporate bonds remained broadly resilient and finished the quarter with a positive return. 

UK commercial real estate maintained its stable performance during the second quarter. Having turned positive in the first quarter, capital values continued to rise, while rental growth also remained positive.

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. Following the most recent review, we made no changes to the SAA model.

During the quarter, we increased the level of risk in the portfolios, favouring the sustained global uptick in real growth, given the lack of inflationary pressure, in part driven by a weaker commodities landscape. We therefore made the following Tactical Asset Allocation (TAA) changes at the relevant risk levels.

  • Increased our exposure to European equities growth momentum in Europe has been strong year-to-date with consensus 2017 GDP growth continuously revised upwards, and manufacturing and services data highlighting the positive economic backdrop.
  • Reduced exposure to global index-linked bonds – including in the UK, where inflation dynamics look set to face headwinds. We are underweight versus the SAA.
  • Slightly increased our position in Asia ex-Japan equities – we believe that any economic slowdown here is unlikely in the next year. We are now at a neutral allocation versus our SAA.
  • Slightly increased our overweight holding in Japanese equities – due to attractive valuations and the potential for improved dividends. Wage growth is progressing and inflation stalling, so rising real incomes, as well as a weaker currency, should support corporate earnings.

In addition, we have listed below some of the main TAA positions held during the second quarter.

  • Underweight position in UK equities – we favour positions in other developed markets where our convictions are higher, such as Europe, the US and Japan.
  • Overweight allocation to US equities – as the economic backdrop remains positive, though President Trump’s policies have proved harder to implement than expected.

Any changes to the weightings of the underlying funds were as a result of the changes in TAA carried out over the review period.

Performance

3 months to 30/06/17 (%) 1 year to 30/06/17 (%) 2 years to 30/06/17 (%) 3 years to 30/06/17 (%) Since launch to 30/06/17 (%)
MyFolio Market I Inst 0.51 6.61 11.42 16.79 41.32
MyFolio Market II Inst 0.77 10.87 16.03 23.04 57.64
MyFolio Market III Inst 1.07 14.98 20.26 28.13 69.28
MyFolio Market IV Inst 1.24 19.20 24.82 33.83 79.66
MyFolio Market V Inst 1.30 22.92 29.53 39.61 92.22

Overall, the strategic allocations to European equities, UK equities and sterling corporate bonds were the strongest contributors to returns over the period. At the TAA level, the overweight position in European equities was beneficial in performance terms, with no significant detractors.

At a fund range level, the performance of the tracker funds over the quarter was in line with expectations. The returns matched their equivalent indices and timing differences, fees and slight variations between the asset classes and the underlying fund benchmarks could explain tracking errors. Within the active funds, the Royal London Short Duration Global Index Linked Fund outperformed its benchmark, as did the Putnam World Trust Global High Yield Bond Fund. Meanwhile, the PIMCO Global High Yield Bond Fund and the Standard Life Investments UK Real Estate Fund underperformed their respective asset class benchmarks during the quarter.

Outlook

Global equities have performed well year-to-date and confidence remains in the outlook for earnings, cashflows and dividends. That said, there is still political uncertainty, with elections in Germany and, potentially, Italy on the horizon. The UK also has the thorny task of negotiating its exit from the EU; the recent inconclusive election result has made that task more daunting. In the US, President Trump’s policy agenda also faces numerous headwinds, while geopolitics will remain an ever-present source of volatility.

Fixed income investors will focus on the course of monetary policy. The ECB’s ongoing bond purchase programme will encounter seasonal low supply over the summer, which should also provide support. This should lead to spread compression (a narrower yield difference between government bonds and corporate bonds).

UK real estate dynamics remain supportive although we expect moderate market returns. In a low growth environment, UK real estate continues to provide an elevated yield compared with other assets.