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THE INVESTOR
THE INVESTOR CENTRE
All information correct as at 30 September 2015
I
n the third quarter of 2015, data from
the US, Europe and the UK was positive,
in contrast to the slowdown evident in data
releases from China.As well as concerns
over Chinese growth, concerns around low
commodity prices, the Greek elections and
uncertainty over the US Federal Reserve’s
timing for its rst interest-rate increase
sparked market volatility.
US data continued its positive trend, with
jobless numbers at low levels and consumer
spending improving, while wages also picked
up.The eurozone held up well after the
uncertainty of the Greek referendum, and
a slowdown in its exports to China was
o set by increased demand from the US
and the UK.Weakness in Chinese industrial
production, retail sales and manufacturing,
as well as the devaluation of the yuan, were
the major concerns for investors inAugust.
UK GDP bounced back to 0.7% in the
second quarter, which was an improvement
on the rate of growth in the rst quarter.
Wage growth accelerated at its fastest pace
in ve years and consumer con dence
rebounded strongly, too. However, in ation
in the UK remains weak and falling import
prices are likely to continue to be a drag.We
therefore think the Bank of England remains
unable to raise interest rates at the moment.
T
wo of the criteria we apply when
seeking companies for investment
are long-duration growth and reasonable
valuations. Di culties in nding companies
that meet those criteria have left the
portfolio underweight in the China/Hong
Kong complex compared to the benchmark
for most of the period since its inception.
Similarly, we have also been underweight
in companies that are heavily dependent on
exporting commodities to the rest of the
world.Although our investment approach is
designed to generate favourable long-term
results, such departures from benchmark
weightings can produce signi cant
variations – both positive and negative –
over shorter periods of time.
During the third quarter our
underexposure to both the China/Hong
Kong complex and commodity exporters
worked to the portfolio’s advantage, as
Chinese stocks fell abruptly from their
highs. Because China is a large consumer of
oil and other natural resources, its slowing
economy had an outsized impact, not
only in China and Hong Kong, but also in
countries that depend on exports of raw
materials to drive their economies.As a
result, the portfolio bene ted from our
underweight positions in these hard-hit
areas of the market, as well as from our
general focus on countries and companies
whose unique demand drivers tend to make
them less sensitive to global economic
developments.
WELLINGTON MANAGEMENT
Gilts
UK Gilts
Economic data shows that the US, the
UK and Europe are on the right track
WASATCH
Emerging Markets Equity
Portfolio benefited from underweight
position in Chinese equities
Developedmarkets
prosperwhileChina
slowsdown
Stocks arechosenon
fair valuations and long-
termgrowthprospects
S
tock markets experienced increasing
volatility during the period as
developed world equity investors nally
started to pay attention to the warning
lights that had been ashing for several
months in other asset classes.
Continued weakness in commodity
prices has signalled a deteriorating global
growth outlook, especially in China. Fears
about the world’s second-largest economy
in recent months had spilled over into
emerging market currencies, their equities
and into the high-yield debt market.
Meanwhile, the Chinese stock market
had become completely detached from
the reality of its underlying economy and
subsequently halved in value in less than
10 weeks.All of this culminated in a
signi cant stock market correction in
late August and, although markets have
subsequently recovered some of their poise,
we believe it prudent to expect further
volatility in the coming months.
Given our concerns about productivity,
de ation, debt and the overall global
growth outlook, we have built the portfolio
on the expectation that it will receive
little help from macroeconomic trends.
In general, this strategy and our overall
investment approach served the portfolio
well through the volatile conditions.We
see no reason to change this strategy and
continue to view the long-term outlook for
the fund positively.
WOODFORD
Income Distribution, UK Equity and
UK High Income
Portfolio is built to withstand
macroeconomic trends
Expect further
volatilityover the
comingmonths
Ajay Krishnan and Roger Edgley
Haluk Soykan
Neil Woodford
