THE INVESTOR CENTRE
THE INVESTOR
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35
W
eakness in the Chinese economy has
precipitated the recent weakness in
stock markets.We believe that high market
valuations are principally in the US rather
than in Europe or Japan. Even in the US, we
suspect the summer scare has been just that
– a correction – for several reasons.
First, the world economy is generally
improving. Recent consumer con dence
and other indicators in the US are strong.
Manufacturing activity in Europe has been
expanding and unemployment falling.
Japan has been spluttering but, on the
whole, showing some recovery.
Second, for decades we have paid
attention to the Investors Intelligence
Survey of Advisory Sentiment, a marvellous
inverse indicator.A lack of optimism that is
as pronounced as the latest gures is usually
a positive portent for the market – usually,
but not always (nothing is quite as useful
as that).
Third, and most signi cant to us, the
average upside to our target valuations
for stocks in the portfolio is 62%, only
exceeded in March 2009 when it was
63%, and over the ensuing two years this
upside was more than ful lled.These target
valuations – a combination of present share
price, a variable in the form of earnings
or cash ow or assets, and a multiple – are
spuriously precise, of course, but they
represent the knitting to which we stick
and give us grounds for optimism.
OLDFIELD PARTNERS
High Octane
Numerous factors point to an
optimistic outlook for the market
Strongworld economy
suggests summer scare
is just a correction
F
inancial market volatility has picked
up sharply as the slowdown in Chinese
growth and the unexpected devaluation of
the yuan prompted a sharp sell-o in global
equity markets. Commodity prices and
commodity-related currencies came under
signi cant pressure during the period.
Government bond markets performed
relatively well due to their safe-haven
appeal, although the extent of the rally was
limited by uncertainty over the possible
timing of the rst US rate hike.
The non-government bond markets
underperformed as credit spreads widened,
while investment grade corporates
outperformed high-yield and emerging
market bonds due to the sell-o in energy
and basic industry companies.The number
of bond issues in the primary market was
cut back sharply inAugust in view of the
spike in volatility.
The portfolio’s allocations to asset-backed
and non-agency mortgage-backed securities
have continued to contribute positively to
returns, although investment grade and high-
yield corporates have detracted as credit
spreads widened.Active foreign exchange
positioning enhanced returns, as the US dollar
appreciated versus a basket of commodity-
driven and emerging market currencies.
Despite the recent volatility we expect
that the strength of the US economy and, in
particular, the decline in unemployment, will
lead to a gradual rise in US interest rates,
possibly starting by year-end.
PAYDEN & RYGEL
Multi Asset
US interest rates are expected to
slowly climb from the end of 2015
The number of bond
issues droppedo due
tomarket volatility
I
nvestor demand for commercial property
remains strong, with both UK and
overseas capital targeting the sector.This
continues to support values and liquidity
in the market.We retain our patient,
disciplined approach to investment,
focusing on the key property fundamentals
that underpin long-term performance.
We have continued to deploy capital
with two acquisitions during the quarter
totalling £106.3 million, bringing the total
investment during 2015 so far to £285
million.The rst is Snipe Retail Park in
Manchester, for £61.8 million, and the
second is aTesco superstore in Cambridge
purchased for £44.5 million.
Asset management plays a key role in
generating property returns. Strengthening
occupier demand is becoming more
widespread across the UK, which is
unlocking opportunities to add value via
active management of the portfolio. During
the year to date we have completed new
leases on nearly 350,000 sq ft of space,
representing £8.6 million in annual rent.
Notable examples are at Old Jewry in the
City where, following a refurbishment,
ve out of six o ce oors have been let,
increasing value by approximately 20%.
Also, we have agreed a new 10-year lease
with the existing tenant at 33 Golden Square,
Soho; after a comprehensive refurbishment
the passing rent will increase signi cantly,
leading to a capital value increase of
(coincidentally) approximately 20%.
ORCHARD STREET
Property
Patient approach targets quality
property offering long-term returns
Demand for
commercial property
remains strong
Philip Gadsden
Richard Oldfield
Scott Weiner, Brian Matthews and
Brad Boyd
