Rathbone Multi-Asset Enhanced Growth PortfolioQuarterly investment update, March to end June 2019

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Hot topics — ‘Top-down’ (market and macroeconomic)

Who to believe? At the end of last year we dusted off our textbooks to recall just what an inverted yield curve meant for markets: recession supposedly, but we disagreed. We believed that the US Federal Reserve (Fed) had heeded the message and would pause in its tightening. We put the inversion down to difficulties gauging the new normal long-term interest rate in a post-Quantitative Easing world, and we were sort of right. But, then the rhetoric did a 180 degree turn. The Fed did hold fire, and expectations mounted for three quarter point cuts this year, pushing markets to new highs, particularly in the US. This change of message implies that the Fed does see a greater risk of recession; it wouldn’t cut rates otherwise. And tumbling yields show the bond market sees several coming. Conversely, not all asset classes are in agreement and that’s the tricky bit. Equity markets are at an all-time high, telling us that recession is nowhere to be seen. The challenge lies in navigating this disagreement. We’re not going to bet on either. Instead, we’re going to carefully position ourselves so that neither side can hurt us too much.

Abnormal times. To us, gold’s never had much allure. It doesn’t generate income, so how can it be valued? But this abnormal time calls for abnormal decisions, and that means buying gold. With negative interest rates on various 10-year bonds, you’re actually paying the German, French or Swiss government to lend them money. By selling these negative yielding bonds to buy gold, you are sort of increasing your income: the opportunity cost of gold has fallen to its lowest level in decades. That isn’t the only reason to turn to gold. Over the long term, the price of the shiny metal usually moves in the opposite direction to US interest rates. So when times are good, there’s confidence in the economy and rates are increasing, investors don’t need gold, which is traditionally a safe haven. But when dark economic clouds are poised to open and already low rates are cut further, investors look to gold for shelter. And that’s what’s happening now. The Fed is creating a supportive environment for gold and we’re buying it.

From a strategic point of view, gold is a good hedge against disinflation: a valuable benefit these days considering we think we’re heading into 10 years of disinflationary headwinds. Stagflation, deflation and disinflation destroy capital but a bit of  inflation is actually positive for an economy, and that often gets forgotten. Everyone says that gold is a hedge against inflation, which it absolutely is not. It’s actually a hedge against capital destruction, which stagflation and the others do in any event. So, having spent years arguing the case for every other asset, these abnormal times have lead us in an abnormal direction

and we’re now buying gold as a good store of value. Ramping up tensions in Iran gave us the final affirmation we needed as the metal is also a useful hedge in times of geopolitical strife.

And our survey says… Front runner Boris Johnson’s ‘do or die’ rhetoric has done sterling no favours. The currency acts as a barometer of the world’s opinion of the UK; an opinion which has been pretty dismal over the past few weeks. Sterling has fallen and so have bond yields as the risk of recession lurks around the corner. We’ve been positioned for a recession in the UK for a couple of years, which has been a lonely view at times. The general consensus was that ‘project fear’ was overdone and life wasn’t actually that bad — we disagreed. We just think that ‘project fear’ will take a bit longer to play out and ‘kicking the can’ further down the road just extends the risk of recession. Continuing uncertainty slows the car crash down, but make no mistake, it’s still a wreck. The sterling barometer reflects that. It’s like a confidence survey of the UK economy and right now, it’s more depressed than a Love Island reject.

This is a big risk for us given our positions in overseas assets, so we’ve mostly hedged our dollar and euro exposure. However, these hedges limit our gains when sterling falls. There’s always more to it anyway: the overseas assets we hold go up when sterling falls. So the currency gives with its right hand and takes with its left; we have to be careful. As we mentioned, if sterling falls, we say goodbye to some upside due to the hedges but, importantly, we don’t lose money. If we don’t hedge at all and sterling rises, we lose money. In essence, we hedge to protect the downside but still get some upside. The more sterling falls, the bigger the risk gets. But if confidence increases and sterling shoots back up, we’ll be taking our hedges off quick smart. Keeping the right balance is pretty headache-inducing — it’s going to be a busy summer.

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Hot topics — ‘Bottom-up’ (direct and fund investment)

During the quarter we added Fever-Tree and Accenture. Fever-Tree is a drink mixer company with a fantastic brand stealing market share from sleepy and complacent large incumbents. Accenture is a consulting giant that specialises in helping companies digitise.

We have also been increasing our holding of the JP Morgan 1255 FTSE OTM Accelerator structured product. This bespoke contract should benefit from any upturn in Brexit news. We suspect overseas asset allocators would disregard a soaring pound and buy the FTSE 100 Index, leading the inverse FTSE/sterling correlation to break down, for a short while at least. This product should pay us handsomely if it does so.

We continued to build a position in Abbott Laboratories, having first bought this healthcare company last year. It owns one of the most popular monitoring tests for diabetes, a condition that is unfortunately becoming more prevalent around the world. The other side of its business is nutritional supplements — everything from baby formula through to vitamins — an industry which is also growing at quite a clip around the world.

We sold Bunzl, the global distribution outsourcing company we’ve held for a number of years. Whilst we continue to respect the business model, we are wary of its growth prospects in the current environment, particularly given the pressures many of its underlying customers are facing, as well as having concerns over margin pressure from increasing wages and cost inflation. Other sales included profit-taking from Ecolab, First Republic Bank and Lockheed Martin.

We added to our gold exposure, given our view that it will benefit from a disinflationary environment and safe-haven demand amid rising geopolitical uncertainty.

Key purchases/additions

Accenture (new purchase)

Fever-Tree (new purchase)

iShares Physical Gold ETC (addition)

JP Morgan 1255 FTSE OTM Accelerator (addition)

Key sales/trims

Bunzl (sale)

Ecolab (trim)

Lockheed Martin (trim)

Alcon (sale)

Portfolio activity

Source: Rathbones

Spotlight

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In this quarter, the spotlight is on Discover Financial Services and Assa Abloy.

Discover Financial Services

— Loans, credit cards and payment services business (owns Diners Club International) — one of the largest credit card companies in the US and aims to be the top card in their customer’s wallet

— Typical customer has a good credit score, above average income, and is a property owner — they actively target high quality customers rather than sub-prime

— Customer service is a key focus for the business — mostly online with highly rated apps, people answering phones rather than machines, innovative, and a well-recognised brand

— Average customer has been with them for around 12 years — service focus helps foster loyalty

— Focuses on customer experience, innovation, and employee satisfaction has led to numerous awards and leaves the business well positioned to continue to benefit from the strength of the US consumer.

Assa Abloy

— Global locks business which is number one or two across most of their divisions — Yale is an Assa Abloy brand

— Security spend globally is growing and Assa Abloy is well placed to benefit from this

— More than half of sales are now via the electromechanical sector where Assa Abloy has leading positions — hotel security is one of these areas with many hotel chains using Assa Abloy to provide the key cards and locks for room doors

— Focus on the huge potential in virtual keys and shift from traditional locks to smart locks — this market is expected to triple over the coming decade

— Joint venture with Google and Walmart on electronic locks and is also on the Amazon key device — residential is a smaller part of the business but presents an exciting  opportunity

— A leading supplier of locks and electronic lock systems in Europe.

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Fund performance

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Q2, 2019 1 year to30.06.19

3 years to30.06.19

5 years to30.06.19

Fund

UK CPI +5%*

* At 1 October 2015, the benchmark measure changed to CPI+5%

Data source: Financial ExpressPerformance (based on ‘L0-Class’ shares; 1.50% annual management charge). Net of expenses and tax. Net income reinvested.

The investment objective of the sub-fund changed on 25 March 2019 due to the sub-fund ceasing to be part of a master feeder arrangement. Therefore, performance in the chart shown prior to this date was achieved under differing circumstances.

We have been buying gold over the past 12-18 months and that position served us well over the second quarter. The metal rallied in June when geopolitical tensions increased and we’ll keep hold of it to protect ourselves from this heightening threat. Defence giant Lockheed Martin also rose on the back of these increasing tensions. We’ve always thought that with Mr Trump in the White House, defence budgets would rise and bouts of geopolitical tensions would become more frequent. This position enables us to benefit from the US President’s priorities.

The main detractors from performance were the S&P 500 put options which we added in earlier on the year. The S&P rallied over the quarter and any options fell further ‘out-of-the-money’ but it’s important to keep these positions as they protect the equity risk.

Top performers (%)

Holding Performance Contribution

Lockheed Martin +24.79 +0.22

Take Two Interactive +23.17 +0.05

Louis Vuitton Moet Hennessy — LVMH +20.35 +0.16

RELX +17.89 +0.15

London Stock Exchange +16.44 +0.13

Bottom performers (%)

Holding Performance Contribution

Fever-Tree -24.66 -0.15

Travelsky -22.39 -0.20

ITV -10.65 -0.09

Ubisoft Entertainment SA -9.99 -0.02

Danske Bank -7.61 -0.05

Source: Rathbones, based on structureof the UK-domiciled portfolio

Note: Top and bottom performers are taken from the list of all holdings of 0.25% and above of the portfolio. Performance and contribution data shown above is based on unhedged GBP returns.Performance (table above only): Gross of charges.

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There were no significant asset allocation changes during the quarter.

Asset allocation change and strategy

The investment objective of the sub-fund changed on 25 March 2019 due to the sub-fund ceasing to be part of a master feeder arrangement. Therefore, asset allocation shown prior to this date was prevalent under differing circumstances.

Investment outlook

Asset allocation ranges

Equity markets may have shot up but we’re not jumping for joy. In fact, we’re cautious, certainly in the near future as we don’t think that volatility is going away. Markets will scrutinise the Fed for its next possible move and the Chinese technological impasse is far from a calming influence. Brexit will continue to dominate Europe and the tensions in Iran are unsettling everywhere.

It’s safe to say that top-down uncertainty has not diminished and the margin for error in stock market valuations is low. Fixed income is far from plain sailing either and some yields have fallen to extremely low levels. Inevitably, the margin for error is pretty negligible there too. Levels of volatility in the bond markets are similar to those in equity markets, and even though yields are low, we’ll hold both assets to stay diversified. This quarter, it’s safe to say we’re going to need our wits about us.

Liquid Equity-type risk Diversifiers

0% to 10% 70% to 100% 0% to 20% (liquid: 0% to 20%; (less liquid: 0% to 20%)

12 month change

+2.22%

0.00%

0.00%

-1.05%

+1.34%

-1.03%

-3.27%

0.00%

+2.02%

-0.23%

Asset allocation split 31.03.19 30.06.19 % Change

Liquid assets/lower volatility 7.33% 9.10% +1.77%

Equity-type risk (economically sensitive assets) 87.62% 85.97% -1.65%

Diversifiers 5.05% 4.93% -0.12%

100.00% 100.00%

12 month change

-0.23%

+1.48%

-1.25%

Asset class split 31.03.19 30.06.19 % Change

Equities 79.82% 79.08% -0.74%

Index-linked bonds 0.00% 0.00% 0.00%

Conventional government bonds 0.00% 0.00% 0.00%

Corporate bonds 1.31% 0.90% -0.41%

Emerging market debt 4.73% 4.43% -0.30%

Private equity 1.76% 1.56% -0.20%

Alternative investment strategies 0.93% 0.51% -0.42%

Property 0.00% 0.00% 0.00%

Commodities 4.12% 4.42% +0.30%

Cash 7.33% 9.10% +1.77%

100.00% 100.00%

6560.07.19

Past performance should not be seen as an indication of future performance. The value of investments and the income from them may go down as well as up and you may not get back your original investment.

Rathbone Unit Trust Management Limited8 Finsbury Circus, London EC2M 7AZ

International information line+44 (0)20 7399 0800international@rathbones.comrathbonefunds.com

Investment manager:Rathbone Unit Trust Management LimitedAuthorised and regulated by the Financial Conduct Authority

A member of the Investment Association

A member of the Rathbone Group. Registered No. 02376568

Management company:FundRock Management Company S.A.Authorised in Luxembourg and regulated by the Commission de Surveillance du Secteur Financier