THE INVESTOR CENTRE
THE INVESTOR
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U
K investment grade corporate bonds
have underperformed government
bonds for the quarter.The majority of the
weak returns can be attributed toAugust,
when spreads widened by nearly 20 bps.
Investment-grade corporates are weaker in
all of the major markets but sterling issues
have broadly underperformed in Q3 after
outpacing euro and US dollar bonds for the
rst half of 2015. Metals and mining names
have been hit particularly hard as global
commodity prices have trended lower.
Insurance and communications companies
have also been under pressure.
The British economy continues to fare
well, with the PMI manufacturing and
services surveys recording solid expansions.
Private consumption was again the mainstay
of growth, supported by con dence levels
that are well above trend and real income
progress.The trade balance has also
surprised to the upside owing to stronger
exports. Still, the market is increasingly
wondering about the timing of rate hikes
from the Bank of England, given global
volatility and uncertainty over the Federal
Reserve. In ation has been muted due to low
oil prices and a strong currency.
Credit selections in the energy, media and
transportation sectors have underperformed
versus the benchmark. Picks among issuers
from the capital goods and utility industries
have added value for the period.
LOOMIS SAYLES
Investment Grade Corporate Bond
Capital goods and utilities have
been the best-performing sectors
August turmoil leads
toweak returns in
UKbondmarket
T
he nancial tsunami we have written
about for months rolled in during
August. It was relatively less painful for our
fund but the more complacent‘surfers’
among the investment community will be
feeling the bruises from crashing hard on to
the beach.
Our crystal ball did not identify China as
the factor responsible for the heightened
market volatility seen in lateAugust;it was just
one of many possible triggers that could have
caused a market dislocation. Our long-held
fear, though, has been that markets driven
purely by momentum would, like a cartoon
character running o a cli edge, suddenly
nd nothing beneath their feet but air.
A crucial question now is: what do
investors with little interest in the minutiae
of cash ows do when the momentum
charts are broken? So far, the response
has been a move to‘bucket’ investing.
Everything now has to be in either a positive
developed world‘bucket’ or a negative
emerging markets‘bucket’.This shows signs
of becoming another lazy industry mantra:
blithely invest in the developed world
cyclicals‘bucket’ because China’s woes
will prevent interest rate rises in the UK
and the US.This approach could prove
misconceived but this investment behaviour
excites us.When people empty buckets
without checking their contents, it will
provide opportunities for investors prepared
to do the fundamental analysis.
J O HAMBRO
Joint manager:
UK & General Progressive
Looking into the finer details of
investments will pay dividends
Financial tsunami
rolled in, aswe
predicted itmight
John Wood
G
lobal equity markets moved sideways
for the rst half of the quarter before
falling sharply, seemingly as a result of China
allowing a fall in its currency versus the US
dollar of about 2% over three days.This,
together with the sharp falls in Chinese
equity markets since June and associated
government interventions in markets,
sparked speculation that the Chinese
economy might be slowing more than
previously thought, and resulted in a global
sell-o , sending equity markets around the
world to their lowest levels in seven months
in just one day.
During the period, PayPal separated from
eBay and started trading independently on
20 July. Our ownership of the combined
company, pre- and post-separation, has
delivered very strong performance overall.
Conversely, the IT sector was generally
weak, with Microsoft, IBM and Intel
underperforming the broader market.
Yum! Brands detracted from
performance.With more than 6,500 stores
in China and about 40% of operating
pro ts coming from China,Yum! Brands
is heavily in uenced by investor sentiment
regarding China’s growth. DuringAugust,
Yum! announced that its long-serving China
CEO is stepping down and will be replaced
by Micky Pant, previously CEO of KFC
globally.We believe his global experience
will bene t Yum! China during the next
phase of its growth.
MAGELLAN
International Equity
PayPal’s split from eBay has helped
generate positive returns
Global uncertainty
but still plentyof
strong stocks to back
Kenneth M. Buntrock
Hamish Douglass
