greystone wealth management quarterly report2018 q3 all performance in this report is based upon r...

Greystone Wealth Management

Quarterly Report

October 2018

Third quarter 2018

Conservative Managed Fund R Acc

IA Mixed Investment 0-35% Shares NR

Cautious Managed Fund R Acc


Balanced Managed Fund R Acc


Global Growth Fund R Acc

IA Global NR

0.120.41 0.25

0.860.86

1.61

3.734.26

0

2

4

6

2018 Q3

All performance in this report is based upon R share class accumulation units denominated in GBP. Investment Association (IA) sector NR refers to Nominal Returns. All performance data is sourced from Thomson Reuters Lipper for Investment Management and compiled to 28.09.2018 unless stated otherwise. The Conservative Managed Fund achieved a conservative allocation and assumed the name Conservative on 01.09.2012. The Cautious Managed Fund changed mandate on 24.07.2009. The Balanced Managed Fund changed mandate on 01.09.2010. The Global Growth Fund launched on 05.12.2005. Past, simulated past or future projected performance is not a reliable indicator of future performance and may not be repeated.

Quarterly Commentary 1

Third Quarter Review

We are pleased to send you our quarterly report for the Greystone funds. Portfolio performance and activity is discussed in our fund manager review, whilst global events are covered in the economic and market commentary.

The Investment Committee rotate between asset classes and incorporate high levels of portfolio diversification to help generate consistent returns.

Our strategic investment decisions help to reduce fluctuations in performance and protect the value of your investments.

Please see below a snapshot of our funds’ performance for Q3 2018 versus their respective Investment Association (IA) sector averages.

October 2018

Source: Thomson Reuters Lipper for Investment Management.

Q3 2018 Performance %

James MenziesInvestment Director | Fund ManagerGreystone Investment Committee

James JacksonHead of Investment ResearchGreystone Investment Committee

Christopher JeavonsInvestment AnalystGreystone Investment Committee

0

6

12

18

24

30

Sep/12 Sep/13 Sep/14 Sep/15 Sep/16 Sep/17 Sep/18

All performance in this report is based upon R share class accumulation units denominated in GBP. All performance data is sourced from Thomson Reuters Lipper for Investment Management and compiled to 28.09.2018. All Investment Association (IA) sector performance is Nominal Return (NR). The Conservative Managed Fund achieved a conservative allocation and assumed the name Conservative on 01.09.2012. *Data for 2012 shown for period 01.09.2012 to 31.12.2012 . The above are the views and opinions of the Greystone Investment Committee and are correct at the time of writing. Past, simulated past or future projected performance is not a reliable indicator of future performance and may not be repeated.

Fund Manager Commentary

Conservative Managed Fund

October 2018

Multi-asset Portfolios

Performance Summary

The fund rose 0.12% over the third quarter versus the Investment Association (IA) Mixed Investment 0-35% Shares sector average0.41% and the IA Money Market 0.13%.

Since the fund’s re-launch on 1st September 2012 it has delivered 29.57% versus the IA sector average 27.19% and IA Money Market 1.58%. The fund’s share price as at 28th September 2018 was; 125.19p (R share class accumulation units).

The fund continues to offer investors low risk access to investment markets and provides the opportunity to outperform inflation and cash rates over the course of an economic cycle.


Fund Objective & Review

The fund’s objective is capital growth with outperformance of its sector average and cash. We aim to achieve this with less than a third of equity market risk. The fund holds a minimum of 45% investment grade bonds and between 0% - 35% UK and overseas shares.

We target 3% - 6% annualised growth over the recommended investment time horizon of at least three years.

Performance %

Cash 10%Fixed Interest 42%GAM Star Credit OpportunitiesiShares FTSE UK GiltsMuzinich Global Tactical CreditRogge Short Duration Global Real Estate BondRubrics Global Credit UCITSSanlam Strategic BondVanguard Global Bond Index Vanguard Global Short-Term Bond

Equity 21%Majedie UK IncomeTB Evenlode IncomeCFP SDL UK BuffettologyPolar Capital UK Absolute EquityMarlborough European Multi-CapOld Mutual North American EquityHermes Asia ex Japan Equity

Alternatives 27%Carmignac Long-Short European Equity HedgedOld Mutual Global Equity Absolute ReturnLazard Global Listed InfrastructureVT Gravis UK Infrastructure IncomeAberdeen UK Property TrustAviva Investors UK Property TrustLegal & General UK PropertyStandard Life UK PropertyThreadneedle UK Property Trust

Holdings

-3

0

3

6

9

2018YTD

2017 2016 2015 2014 2013 2012

Conservative Managed Fund R AccIA Mixed Investment 0-35% Shares NR

Source: Thomson Reuters Lipper for Investment Management.(Key applies to both charts).

Calendar Year Performance %

*

Underweight


Conservative Managed Fund

October 2018

10%

42%

12%3%

3%

3%

27%

Cash

Fixed Interest

UK Equity

European Equity

North American Equity

Asian Equity

Alternatives

Asset Allocations

Please see below the current asset allocation for the Conservative Managed fund and the relative position versus the IA sector average.

Current Asset Allocation

Source: Greystone Wealth Management.


All data is sourced from Greystone Wealth Management for current fund asset allocations and historical fund asset allocations. Data compiled to 28.09.2018. The above are the views and opinions of the Greystone Investment Committee and are correct at the time of writing. Past, simulated past or future projected performance is not a reliable indicator of future performance and may not be repeated.

Relative Positioning versus IA Mixed Investment 0-35% Shares sector average

Source: Greystone Wealth Management and Lipper.

The fund rose in value, but lagged sector average peers in Q3. Mixed performance from fixed interest and alternative investment strategies were key reasons. UK and overseas equities drove returns. Commercial property had another solid quarter and helped defend capital.

The US Federal Reserve (Fed) started the process of unwinding its $4.5 trillion balance sheet in October 2017. Achieved through the bank’s bond-buying programme, quantitative easing has been replaced with quantitative tightening. In Europe, despite Central Bank President Mario Draghi signalling intentions to end the bond-buying programme by December this year, monetary policy remains accommodative.

Even though the withdrawal of central bank stimulus is expected to be gradual, small changes in market expectations can have a large impact on asset prices. Bonds with a longer time to maturity are particularly sensitive to these kinds of movements.

Our bond managers with less sensitivity to interest rates fared better than those with more, as yields continued to push higher and bond values fell. Sterling-denominated government bonds benefitted from this, however ended the quarter flat.

Dollar weakness in the latter part of Q3 meant our sovereign debt manager was the laggard. Commercial asset-backed securities and limited interest rate sensitivity drove returns for a global real estate specialist.

All but one of our UK equity funds contributed positively. Economically sensitive small-cap stocks outperformed defensive large-caps. Long positions in technology and mining, coupled with short positions in utilities and index futures, benefitted our UK absolute return fund. Oil and insurers pushed a large-cap income manager into the red, whilst a games manufacturer and biotechnology company powered returns for our top-performing UK holding.

Within the international equity component, North America led the way up, followed by Europe and Asia. Overweight positions in technology and healthcare delivered for our US holding. A Hong Kong-based shipping business and Chinese oil producer helped our Asian value specialist defend capital in Q3, whilst Norwegian financials and a Spanish chemicals manufacturer buoyed returns for our multi-cap growth fund.

Long positions in health care, along with short positions in telecommunications and consumer discretionary stocks, tempered returns for our global equity market neutral fund.

Listed infrastructure funds offered mixed returns. Italian and US utilities held back our international specialist, meanwhile solar energy and wind farms boosted performance for our UK manager.

All UK commercial property delivered positive numbers. An out of town shopping centre in the North East and London-based retail units drove returns for our top real estate fund, whilst office space in the South East held back the laggard.

-20% -10% 0% 10% 20%

Alternatives

Emerging Markets Equity

Japanese Equity

Asian Equity


European Equity

UK Equity

Fixed Interest

Cash

Overweight

Cash 1%Fixed Interest 29%BlueBay Global Sovereign OpportunitiesCapital International Global High Income OpportunitiesGAM Star Credit OpportunitiesMan GLG Global Emerging Markets DebtRogge Short Duration Global Real Estate BondRoyal London Short Duration Global High Yield BondRubrics Global Credit UCITSSanlam Strategic Bond

Equity 49%Eden Tree Higher IncomeLF Miton UK Multi-Cap IncomeMajedie UK IncomeMan GLG UK IncomeMI Chelverton UK Equity IncomeSchroder Income MaximiserTB Evenlode Income Montanaro European IncomePrusik Asian Equity IncomeArtemis US Extended AlphaArtemis Global IncomeLazard Global Equity FranchiseSarasin Global Higher Dividend

Alternatives 21%LF Ruffer Total ReturnLazard Global Listed InfrastructureVT Gravis UK Infrastructure IncomeAberdeen UK Property TrustAviva Investors UK Property TrustF&C UK Property FeederLegal & General UK PropertyStandard Life UK PropertyThreadneedle UK Property Trust

0

25

50

75

100

Jul/09 Jul/11 Jul/13 Jul/15 Jul/17

All performance in this report is based upon R share class accumulation units denominated in GBP. All performance data is sourced from Thomson Reuters Lipper for Investment Management and compiled to 28.09.2018. All Investment Association (IA) sector performance is Nominal Return (NR). Cautious Managed Fund changed mandate on 24.07.2009. Natural yield data sourced from Thomson Reuters Lipper for Investment Management and compiled to 30.06.2018. The above are the views and opinions of the Greystone Investment Committee and are correct at the time of writing. Past, simulated past or future projected performance is not a reliable indicator of future performance and may not be repeated.


Cautious Managed Fund

October 2018



The fund’s objective is high income generation and capital growth along with outperformance of the sector average. We aim to achieve this with less than half of equity market risk. The fund holds a minimum of 30% fixed interest and between 20% - 60% UK and overseas shares. We target 4% - 7% annualised growth over the recommended investment time horizon of at least five years.

Performance %

Holdings

-5

0

5

10

15

2018YTD

2017 2016 2015 2014 2013 2012

Cautious Managed Fund R AccIA Mixed Investment 20-60% Shares NR


Performance Summary

The fund rose 0.25% over the third quarter versus the Investment Association (IA) Mixed Investment 20-60% Shares sector average 0.86% and the IA Money Market 0.13%.

Since the fund’s mandate change on 24th July 2009 it has delivered 85.58% versus the IA sector average 79.04% and IA Money Market 3.89%. The fund’s share price as at 28th September 2018 was; 162.47p (R share class accumulation units) and 113.66p (R share class income units).

The fund’s natural yield of 2.94% (IA sector average 2.01%) is generated from equities, fixed income and alternative investments.



1%

29%

27%

7%

8%

7%

21%

Cash

Fixed Interest

UK Equity

European Equity


Asian Equity

Alternatives

Underweight


Cautious Managed Fund

October 2018

Asset Allocations

Please see below the current asset allocation for the Cautious Managed fund and the relative position versus the IA sector average.







The fund rose in value, but lagged sector average peers in Q3. Commercial property and overseas equities had a solid quarter, whilst UK equities were mixed. Fixed interest and absolute return strategies were flat.

In the US, quantitative easing has been replaced with quantitative tightening, as the Federal Reserve (Fed) is actively unwinding its $4.5 trillion balance sheet. In Europe, Central Bank President Mario Draghi has signalled intentions to end the bond-buying programme by December this year.

Within the bond component of the portfolio, managers with less sensitivity to interest rates fared better than those with more, as yields continued to push higher and bond values fell. Shorter duration delivered for our global high yield specialist, whilst currency positions in Brazilian Real and Turkish Lira pushed our absolute return bond fund into the red.

Despite Dollar weakness and emerging market debt detracting from performance in the latter part of the quarter, US corporate debt enabled our high income manager to be the standout performer over the period.

Turning to the UK, investors preferred small-cap growth stocks over large-cap defensives during Q3. Energy and insurers detracted for our core income manager, whilst a data analytics business and beverages manufacturer boosted performance for our multi-cap income specialist.

US stocks led the way up amongst the overseas component. Solid returns from IT and an online data storage business delivered for our core US manager. North American pharmaceuticals and Taiwanese semiconductors drove returns for our top international equity income fund.

Indian utility stocks and Chinese infrastructure tempered returns for an Asian income manager, whilst our European small-cap fund benefitted from exposure to Swiss financials.

Japanese banking stocks and long duration bonds held back our absolute return manager.

Listed infrastructure funds were mixed over the period. Wind farms and solar energy drove returns for a UK manager, whilst Italian and US utilities detracted for our international specialist.

All UK commercial property delivered positive numbers. London-based retail units and an out of town shopping centre in the North East drove returns for our top real estate fund, whilst office space in the South East held back the laggard.

-18% -9% 0% 9% 18%

Alternatives


Japanese Equity

Asian Equity


European Equity

UK Equity

Fixed Interest

Cash

Overweight

-20

0

20

40

60

80

100

120

Sep/10 Sep/12 Sep/14 Sep/16 Sep/18

All performance in this report is based upon R share class accumulation units denominated in GBP. All performance data is sourced from Thomson Reuters Lipper for Investment Management and compiled to 28.09.2018. All Investment Association (IA) sector performance is Nominal Return (NR). Balanced Managed Fund changed mandate on 01.09.2010. The above are the views and opinions of the Greystone Investment Committee and are correct at the time of writing. Past, simulated past or future projected performance is not a reliable indicator of future performance and may not be repeated.


Balanced Managed Fund

October 2018



The fund’s objective is capital growth and outperformance of its sector average, with less risk than equity markets. The fund holds between 40% - 85% UK and overseas shares. We target 5% - 9% annualised growth over the recommended investment time horizon of at least seven years.

There is flexibility to rotate between asset classes which helps smooth returns and protects against volatility.

Performance %

Cash 1%Fixed Interest 14%BlueBay Global Sovereign OpportunitiesCapital International Global High Income OpportunitiesGAM Star Credit OpportunitiesMan GLG Global Emerging Markets DebtRogge Short Duration Global Real Estate Bond

Equity 63%LF Miton UK Multi Cap IncomeSchroder Income MaximiserTB Evenlode IncomeCFP SDL UK BuffettologyCity Financial Absolute EquityMI Chelverton UK Equity GrowthOld Mutual UK Dynamic EquityPolar Capital UK Absolute EquityJupiter EuropeanMarlborough European Multi-CapMontanaro European IncomeArtemis US Extended AlphaMajedie US EquityOld Mutual North American EquityHermes Asia ex Japan EquityPrusik Asian Equity IncomeHermes Global Emerging Markets

Alternatives 22%Carmignac Long-Short European Equity HedgedF&C Global Equity Market NeutralOld Mutual Global Equity Absolute ReturnOld Mutual UK Specialist EquityLazard Global Listed InfrastructureVT Gravis UK Infrastructure IncomePolar Capital Global Insurance

Holdings

-5

0

5

10

15

2018YTD

2017 2016 2015 2014 2013 2012

Balanced Managed Fund R AccIA Mixed Investment 40-85% Shares NR


Performance Summary

The fund rose 0.86% over the third quarter versus the Investment Association (IA) Mixed Investment 40-85% Shares sector average 1.61% and the IA Money Market 0.13%.

Since the fund’s mandate change on 1st September 2010 it has delivered 98.98% versus the IA sector average 81.43% and IA Money Market 2.48%. The fund’s share price as at 28th September 2018 was; 219.19p (R share class accumulation units) and 190.15p (R share class income units).

The fund continues to offer investors the ability to maximise capital growth whilst managing risk through a combination of bond, equity and alternative investments.



Underweight

Asset Allocations

Please see below the current asset allocation for the Balanced Managed fund and the relative position versus the IA sector average.


Balanced Managed Fund

October 2018

1%

14%

32%

8%

11%

9%

3%22%

Cash

Fixed Interest

UK Equity

European Equity


Asian Equity


Alternatives







-18% -9% 0% 9% 18%

Alternatives


Japanese Equity

Asian Equity


European Equity

UK Equity

Fixed Interest

Cash

Overweight

The fund rose in value but lagged sector average peers over the quarter. Alternative investment strategies and a long-short equity fund were the key reasons. Overseas equities led the way up, followed by UK stocks and fixed interest.

Bond managers offered mixed returns in Q3. Bank securities held back a specialist financials manager, whilst currency positions in Brazilian Real and Turkish Lira pushed our absolute return bond fund into the red.

Despite Dollar weakness and emerging market debt detracting from performance, US high yield bonds enabled our global income manager to be the standout fixed interest performer over the period.

In the UK, short positions in IT and healthcare were key detractors for our long-short equity manager. Technology and mining stocks, coupled with short positions in utilities and index futures, benefitted our UK absolute return fund. A games manufacturer and biotechnology company powered returns for our top performing UK holding.

All but two managers delivered positive returns within the international equities component. An online data storage business and IT stocks drove performance for our US growth manager, whilst an underweight position in online retail detracted for a value-focused fund. Primary commercial insurance and re-insurance delivered for our sector specialist, he was the standout performer over the period with double digit growth.

European equities held up well, posting solid returns during the quarter. Norwegian financials and a Spanish chemicals manufacturer buoyed performance for a multi-cap growth strategy, whilst a German electronic payments company and Danish pharmaceuticals helped our lead European manager outperform peers this quarter.

Indian utilities and Chinese infrastructure tempered returns for an Asian income manager, whilst a Hong Kong-based shipping company and Chinese oil producer helped our Asian value specialist defend capital. Taiwanese semiconductors and a South Korean electronics company pushed our emerging markets specialist into the red.

Listed infrastructure funds offered mixed performance. Italian and US utilities tempered returns for our international specialist, whilst solar energy and wind farms delivered for our UK manager.

Being long healthcare and short telecoms tempered returns for our global equity market neutral fund. However, an online retailer coupled with short positions in industrials meant our specialist absolute return manager had another solid quarter.

-50

0

50

100

150

200

250

Dec/05 Dec/07 Dec/09 Dec/11 Dec/13 Dec/15 Dec/17

All performance in this report is based upon R share class accumulation units denominated in GBP. All performance data is sourced from Thomson Reuters Lipper for Investment Management and compiled to 28.09.2018. All Investment Association (IA) sector performance is Nominal Return (NR). Global Growth Fund launched on 05.12.2005. The above are the views and opinions of the Greystone Investment Committee and are correct at the time of writing. Past, simulated past or future projected performance is not a reliable indicator of future performance and may not be repeated.


Global Growth Fund

October 2018



The fund’s objective is capital growth and outperformance of its sector average, with less risk than global equity markets. At least 80% of the fund will be held in overseas shares.

We target 6% - 10% annualised growth over the recommended investment time horizon of at least ten years.

Performance %

Cash 1%Equity 94%CFP SDL UK BuffettologyCity Financial Absolute EquityPolar Capital UK Absolute EquityArtemis US Extended AlphaBaillie Gifford AmericanF&C North AmericanFidelity American Special SituationsMajedie US EquityOld Mutual North American EquityPolen Capital Focus US GrowthSchroder US Smaller CompaniesVanguard US Equity IndexBlackRock European DynamicCarmignac Long-Short European EquityJupiter EuropeanLF Miton European OpportunitiesMarlborough European Multi-CapMontanaro European IncomeMan GLG Japan CoreAlphaMorant Wright SakuraHermes Asia ex Japan EquityPrusik Asian Equity IncomeHermes Global Emerging Markets

Alternatives 5%Polar Capital Global Insurance

Holdings

-10

0

10

20

2018YTD

2017 2016 2015 2014 2013 2012

Global Growth Fund R Acc IA Global NR



Performance Summary

The fund rose 3.73% over the third quarter versus the Investment Association (IA) Global sector average 4.26% and the IA Money Market 0.13%.

Since the fund launched on 5th December 2005 it has delivered 229.03% outperforming the IA sector average 170.82% and IA Money Market 12.67%. The fund’s share price as at 28th September 2018 was; 329.03p (R share class accumulation units).

The fund continues to offer investors the potential for high levels of capital growth from geographically diverse investments across more than 30 countries worldwide.


The Global Growth fund has outperformed its benchmark in ten out of the past twelve calendar years. (Source: Thomson Reuters Lipper for Investment Management).

Underweight


Global Growth Fund

October 2018

1% 9%

43%18%

8%

10%

6%5%

Cash

UK Equity


European Equity

Japanese Equity

Asian Equity


Alternatives

Asset Allocations

Please see below the current asset allocation for the Global Growth fund and the relative position versus the IA sector average.





Relative Positioning versus IA Global sector average


-10% -5% 0% 5% 10%

Alternatives


Japanese Equity

Asian Equity

European Equity


UK Equity

Fixed Interest

Cash

Overweight

The fund rose in value, but underperformed the sector average in Q3. North America and Europe led the way up, followed by Japan. Asia and emerging markets struggled.

Despite Dollar weakness in the latter part of the quarter, US stocks benefitted the fund as indices hit record highs.

Primary commercial insurance enabled our sector specialist to be the standout North American performer over the period. Technology and online media providers delivered for a US large-cap growth fund, whilst healthcare and financials held back our deep value manager, he was the laggard this quarter.

A games manufacturer and biotechnology company powered returns for our top performing UK holding. Short healthcare and IT detracted for one of our UK equity long-short managers, he was the laggard during the period. In contrast, long positions in technology and consumer discretionary stocks, coupled with short positions in utilities and index futures, delivered for our core long-short fund.

European equities performed well, large-cap growth did better than small-cap value in Q3. A Swiss logistics company and German pharmaceuticals supplier boosted performance for our top European manager. Norwegian financials and a Spanish chemicals manufacturer buoyed returns for our multi-cap growth fund.

Transport and banking powered returns for our large-cap Japanese fund, whilst financials and media stocks benefitted our mid-cap manager. Yen strength also helped both managers during the quarter.

Over in the Far East, Taiwanese semiconductors and a South Korean electronics company pushed our emerging markets specialist into the red.

Indian utilities and Chinese infrastructure tempered returns for an Asian income manager, whilst a Hong Kong-based shipping company and Chinese oil producer helped our Asian value specialist defend capital in Q3.

Hopes of World Cup glory were dashed at the start of the quarter. Having exceeded expectations by progressing further in the tournament than expected, winning a penalty shootout for the first time, and teasing England football fans into believing “it’s coming home”, the team were ultimately defeated by Croatia in the semi-finals.

Mark Carney, Governor of the Bank of England (BoE) also lifted hopes in early August. He justified the second interest rate hike in twelve months (from 0.5% to 0.75%) by stating that economic fundamentals were now strong enough to withstand some modest tightening.

At his press conference - following a unanimous decision by the Monetary Policy Committee (MPC) to lift interest rates - he highlighted that; unemployment stands at a 42 year low, wage growth is at long last outpacing inflation, the number of people in work stands at record levels and consumer confidence remains high.

So why did the Pound fall in value against the Euro and Dollar after an interest rate rise? Traditionally, a rate hike makes UK assets more attractive to foreign investors, therefore increasing the demand for Pounds to buy them from overseas investors - and the value of Sterling. Answers lie in the nuanced comments given by Governor Carney at his post-rate rise press conference, where he outlined that monetary policy “needs to walk, not run, to stand still”, thus inferring that peak rates will be lower than previously thought and the pace of rate rises slower than expected.

He also confessed that the United Kingdom’s decision to leave the European Union “takes up 50% of my time” and that Brexit talks were entering a “critical period” as negotiators moved towards an agreement on future relationships. Mr Carney emphasised that the possibility of Britain leaving the European Union without a deal on 29th March 2019 is “uncomfortably high,” but reinforced that “the financial system will be ready for that undesirable and still unlikely possibility”. He said “the UK financial system has tripled the amount of capital they had over the course of the last several years” and “they have increased the amount of liquidity by 10 times” in order to be “in a position to withstand a shock, wherever the shock comes from”, including a no-deal Brexit scenario.

BoE economists have been running worst case scenarios, which the Governor highlighted were not predictions, but stress test preparations for “real-estate prices going down by more than a third, interest rates going up by almost 4%, unemployment rising to 9%, and the economy going into a 4% recession.” All seven of the UK’s major banks now have sufficient Tier 1 capital and pass the BoE’s stress tests.

Politics will provide its own uncertainty in coming months, but it is the economics - and most notably the strength or weakness of the Pound – that will immediately impact asset prices, regardless of whether negotiators achieve a ‘deal’ or ‘no deal’ Brexit. We are mindful of both scenarios and have constructed portfolios that are more diversified now than they have ever been.


“No time like the present”

Mr Carney agreed in September to extend his term as Governor until January 2020 (having previously indicated he would not) and oversee the implementation of new regulations in a post-Brexit world. The “unreliable boyfriend” - as he was once dubbed by ex-Treasury Select Committee member Pat McFadden - is finally proving that he can be relied upon.

Nicolas Maduro, Venezuela's President, would relish Mark Carney’s financial woes. Venezuela's economy has shrunk by a third since 2013 and according to the International Monetary Fund (IMF), inflation is set to exceed one million per cent this year, consequently the currency has collapsed 95% versus the US Dollar. In response the government chopped five zeros off the old Bolivar and replaced it with a new crypto oil-backed ‘Sovereign Bolivar’ in an attempt to stave off hyper-inflation. Shortages of food and medicine has led to two million people fleeing to surrounding countries. Despite vast oil wealth the socialist revolution, begun by Hugo Chavez in 2003, has failed the Venezuelan people.

Devastating consequences follow if fiscal and monetary policy are misused. Argentina, despite recently playing by the economic rule book, has requested a $50bln loan from the IMF. Tax receipts haven’t kept pace with the previous government’s spending commitments and international investors no longer trust the creditworthiness of the state. Interest rates were hiked 15% in late August to 60% in an attempt to defend the sliding Peso.

Switching from South to North America, the Federal Open Market Committee lifted the US base rate to 2.25% on 26th September. Importantly, they are full steam ahead with their quantitative tightening programme and reducing the Federal Reserve’s (Fed) $4.5tln balance sheet. The Fed are selling back to the market $50bln worth of Mortgage-Backed Securities and Treasury Bills each month, thereby reversing the quantitative easing process that led to them buying these securities in the first place.

Also of note are the Fed’s infamous ‘dot-plots’ - indicating committee members’ predictions for interest rates out as far as 2021 – which suggest that Chairman, Jerome Powell, will lift rates again in December and three times in 2019. The US economy is set to grow by nearly 4% this year, employment is high, inflation is ticking up and the Fed is actively trying to cool economic activity following the boost given to US companies by the Trump administration’s tax cuts.

Fiscal reform and interest rate hikes are sucking overseas Dollars back to America and strengthening the currency as a result. Governments and businesses in developing markets that have sold Dollar denominated debt, but earn revenue in; Pesos, Lira or Real, are feeling the strain.

Returning to domestic politics, back in July Prime Minister Theresa May, outlined her plans for leaving the European Union to cabinet colleagues at her country retreat in Buckinghamshire. Foreign Secretary, Boris Johnson, allegedly described the Chequers agreement as “polishing a turd” and resigned from the cabinet, but only after he had used his ministerial car to return him to London.

Investment Committee

Economic & Market Commentary

October 2018

The above are the views and opinions of the Greystone Investment Committee and are correct at the time of writing. All performance data compiled from Thomson Reuters Lipper for Investment Management, data correct to 28.09.2018. Past, simulated past or future projected performance is not a reliable indicator of future performance and may not be repeated.



October 2018


Brexit Secretary David Davis also resigned. They were quickly replaced by less hard-line figures Jeremy Hunt and Dominic Raab.

International politics and global trade is receiving greater attention from investors. President Trump’s trade war twitter storm continued to vex markets, mainly in China. Retaliatory tit-for-tat trade tariffs have the potential to derail global economic growth, but efforts to resolve bilateral deals with North America’s neighbours and allies meant that Western markets largely ignored the President’s tweets this quarter.

Trade tariffs are part of Donald Trump’s domestic political agenda. Putting ‘America First’ and aiming to ‘Make America Great Again’ are both policies that resonate well with his supporter base. Mid-term congressional elections are creating a febrile atmosphere in Washington DC. All 435 seats in the House of Representatives are to be contested along with 35 of the 100 Senate seats, on 6th November.

In his new book, veteran political reporter Bob Woodward (who broke the Watergate scandal), quotes top administrative figures as saying there is a "fifth grade”, "unhinged", "liar," aggrieved and abusive "Shakespearean king" raging in the Oval Office. Continuing in the same vein, the author of an anonymous New York Times editorial in early September - allegedly written by a member of President Trump’s inner circle - described themselves as “….part of the resistance inside the Trump Administration…..I work for the President but like-minded colleagues and I have vowed to thwart parts of his agenda and his worst inclinations”. The article goes on to say “don’t get me wrong, there are bright spots that the near-ceaseless negative coverage of the administration fails to capture; effective deregulation, historic tax reform, a more robust military and more. But these successes have come despite - not because of -the President’s leadership style, which is impetuous, adversarial, petty and ineffective”.

Special Council Investigator, Robert Mueller, has indicted a number of President Trump’s close allies linked to his election victory, including; former campaign chairman, Paul Manafort, former national security adviser, Michael Flynn and his former personal lawyer, Michael Cohen. The first two are already in jail.

The man in charge of the world’s largest economy and whose stock market constituents make up nearly 60% of global indices, is under intense scrutiny. The stability and tenure of a US President’s administration is not something that will necessarily impact portfolio positioning, but it is an issue that we think about and discuss at our investment committee meetings.

As uncomfortable and undignified as it has been, political events across the Atlantic, help put into context internal wrangling within the Labour and Conservative parties this Summer.

Despite political machination and economic uncertainty, in general, businesses continue to grow revenue and profits. Apple, quickly followed by Amazon, reached market capitalisations of $1tln in September. Technology stocks have supercharged US equity markets this year.

Looking more broadly, global equities are forecast to deliver approximately 16% Earnings Per Share (EPS) growth in 2018, a moderate improvement from forecasts in June. Further evidence of expansionary economic conditions globally, and supportive fiscal stimulus (most notably in the USA) are expected to feed through to corporate profitability over the course of the year.

North America is the main driver of the revised estimate and is expected to deliver approximately 23% EPS growth in 2018 (up from the 21% anticipated back in March) the strongest level of earnings growth across the major indices.

Better than anticipated Q2 financial results (80% of the S&P 500 constituents delivered Q2 earnings that exceeded expectations) have helped boost estimates for the full year. The Trump administration’s tax reform, which not only reduces the corporate tax rate for US companies (thus potentially increasing headline profitability) but also incentivises companies to repatriate vast levels of cash held overseas, is anticipated to provide a catalyst for heightened levels of share buybacks (another boost for EPS figures).

Equity markets in continental Europe, on an aggregated basis, are expected to deliver 8.5% EPS growth in 2018; an acceleration from June expectations of 8%, but still lower than the 10% growth anticipated in March.

Until recently, the UK’s unpopularity with international investors had hit levels not seen since the global financial crisis. This situation had weighed heavily on UK returns and earnings expectations at a time when investor sentiment in general was fragile, amid fears that resurgent inflationary pressures in the US could derail the ‘Goldilocks scenario’ of low inflation and stable growth. The continual dovish rhetoric from the Bank of England has been another positive for UK equities, as it contributed to a renewed decline in the value of Sterling against a strong US Dollar. Consequently, consensus points to 9.4% EPS growth in 2018 for the FTSE All-Share, which is a moderate improvement from the 9% anticipated back in June. The revised estimate is largely driven by improving fundamentals for the resources and materials sectors which have benefitted in recent months from the strong performance of commodity prices.

At an index level, consensus estimates currently point to 10.6% earnings growth for the FTSE 100 Index in 2018, 7% for the FTSE Mid 250 Index and 6.7% for the FTSE Small Cap Index. The improved outlook for the FTSE 100 Index is largely driven by the energy sector, which makes up more than 16% of the index and is expected to deliver strong earnings growth this year on the back of the sustained strength of the oil price in recent months. Improved capital discipline from some of the oil majors has also begun to feed through into the profitability of these companies.

In terms of valuation levels for the UK, the broader All-Share Index trades at close to 13 times (13x) 2018 estimated earnings; a 14% discount to the global market and a 9% discount to its absolute average over the last five years. The FTSE 100 Index trades on 13x, while the Mid 250 trades on 14.2x and the Small Cap Index trades on 12x.




October 2018


In conclusion. the two principal factors we think about most when making investment decisions on behalf of our clients are - risk and return.

Our funds are more diversified now than they have ever been. On average we hold 26 different specialist managers in each portfolio. Delving deeper, there are nearly 4000 different securities in each Greystone fund, invested across the globe in; bonds, equities, commercial property, infrastructure and absolute return strategies.

The unofficial objective for all our funds is - to go up more than our peers when asset prices are rising, and down less when they fall. In recent years we have successfully managed to achieve this and we will continue to work hard on your behalf in order to deliver the best risk-adjusted returns we can for your portfolios.

Happy Autumn to all our investors and thank you for your continued support.

As always, please contact your usual adviser for further information or for access to our monthly updates.


1.20

1.25

1.30

1.35

1.40

1.45

1.50

1.55

1.60

Sep/15 Mar/16 Sep/16 Mar/17 Sep/17 Mar/18 Sep/18

US Dollars per UK Pound Sterling

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

Jan/13 Jan/14 Jan/15 Jan/16 Jan/17 Jan/18

10 year Treasury Yield 2 year Treasury Yield

“Brexit Means…?”

In the wake of the Brexit vote on 23rd June 2016, the pound fell in value against most major currencies, as investors responded to the uncertainty about the UK’s future relationship with the European Union.

This can be seen from the chart, which shows how many US Dollars could be bought with one pound over the past three years. The pound regained some value in the following months, but remains significantly below its long-term average.

If Theresa May manages to negotiate a comprehensive deal with the EU then the pound could rise further, but if talks break down, then it could fall again. A weak pound is good for companies that export goods out of the UK as it makes these goods cheaper. On the other hand, a strong pound is good for importers as the goods they buy from overseas become less expensive.

Exposure to “safe haven” currencies like the US Dollar has been proven to reduce equity and fixed interest market risk over the long term, and because of this we hold some US Dollar exposure within our funds. In addition, this can help to reduce the risks arising from one-off economic shocks focused on the UK, such as a disorderly “no deal” Brexit.

Yie

ld (

%)


Key Charts

Final Thoughts

October 2018

The above are the views and opinions of the Greystone Investment Committee and are correct at the time of writing unless otherwise stated. Data compiled by Greystone Wealth Management using Lipper for Investment Management, correct as at 28.09.2018. Data for US Treasury Yields compiled from The US Federal Reserve, correct to 28.09.2018. Past, simulated past or future projected performance is not a reliable indicator of future performance and may not be repeated.

Source: US Federal Reserve.

10-year and 2-year Treasury Yields – since 2013

Source: Lipper for Investment Management.

“Fed Warning”

Duration is the length of time between when a fixed interest investment (“bond”) is issued and when it matures. Normally, bonds with a longer duration tend to have a higher yield than those with a shorter duration, as investors want a better return in exchange for tying their money up for a longer time period.

The chart shows how the yields of 2-year and 10-year US Treasury bonds have changed over time since the start of 2013. The US Federal Reserve has been slowly raising interest rates since late 2015, and has also begun actively unwinding its “Quantitative Easing” programme. Both of these actions have led to the 2-year figure increasing at a faster pace than the 10-year figure, which means that the gap between them has narrowed.

If the 2-year figure moves above the 10-year figure, this can mean that investors are becoming nervous about the future growth prospects for the US economy.

US Dollars per UK Pound Sterling - 3 years

Va

lue

($

)

Brexit Vote – 23rd June 2016

IMPORTANT INFORMATIONThis document is for advisers and retail clients. It does not constitute a form of financial advice and should not be relied upon. This is provided for information only. At Greystone we seek to guide you with your investment strategies by assessing and continually checking the levels of investment risk you are willing and able to take, thus ensuring suitable investments are made on your behalf. Past, simulated past or future projected performance is not a reliable indicator of future performance and may not be repeated. Investment markets and conditions can change rapidly and as such any views expressed herein should not be relied upon when making investment decisions. Neither the payment of dividends or return of capital is implied or guaranteed. There is a risk of loss of capital. Rates of exchange may cause the value of investments to go up or down. The information and any opinions expressed herein may change at any time and therefore this document does not constitute investment, tax, legal or other advice or recommendation or an offer to sell or an invitation to apply for any product or service. Investors should consider carefully whether an investment in this fund or portfolio is suitable in light of circumstances and resources.

Greystone Wealth Management is a trading name of Foundation Investment Management Limited who are authorised and regulated by the Financial Conduct Authority. Financial Services Register Number 612117.

Q3 18-October

Visit www.greystonefs.co.uk for additional information

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