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THE INVESTOR
THE INVESTOR CENTRE
All information correct as at 31 December 2015
T
he fourth quarter was dominated
by falls in both oil prices and mining
commodities. China’s attempts to rebalance
its economy away from infrastructure
investment to more consumer spending
caused demand for these commodities to be
less than expected.The collapse in prices –
with oil touching $40 and iron ore trading
below $40, having peaked at over $180 in
2011 – devastated pro tability.
This has led to the suspension of dividends
of companies such asAngloAmerican and
Glencore, with BHP Billiton likely to reduce
its dividend markedly.While the oil majors
are currently expected to retain their pay-
outs, the overall impact is such that dividend
levels for the UK market are likely to fall in
2016.The fund has an underweight position
in both sectors, thereby limiting the impact.
The other feature of the quarter was a
big rerating of long-term secure growth
stocks. In the main, these stocks do not o er
signi cant yields, so they are not natural
constituents of an income portfolio. New
holdings were purchased in Regional REIT
and St Ives; while holdings in Close Brothers,
Lancashire Group, Rede ne and Starwood
European Real Estate Finance were sold.
The course of monetary policy will be one
of the key factors for equity markets, while
the UK’s negotiation with Europe will be
crucial for the outlook of sterling.
T
he quarter’s highlights included
geopolitical tensions, further declines
in commodities, a focus on central bank
activity and stresses in US high yield.The
dominant theme throughout the period was
this collapse in commodities, particularly in
energy and base metals.These falls have been
driven by oversupply in many sub-sectors,
but markets have read these moves with
concern around end demand and what this
means for global growth.
Overall, equities were positive on a local
currency basis.While risk-aversion remained
elevated, supportive monetary policy and
moderately positive growth supported
returns.This allowed equities to weather the
headwinds of the commodity collapse and
worries over China, and absorb the rst rate
rise from the Fed since 2006.
What is evident in credit markets is the
contrast between the US and Europe.While
spreads have widened in the US, they have
narrowed in both European high yield and
investment grade.This primarily re ects the
exposure to energy, but also that the US is
further along the credit cycle.
Major government bond markets
struggled, with the exception of Japan.
Given the general disappointment with the
ECB’s lack of action, eurozone markets fell
approximately 0.5%.
Through the quarter, in ation-linked debt
and commodities were the biggest detractors
from performance, while clean energy and
timber were the largest contributors.
George Luckraft
Zak Summerscale
BlackRock Market Advantage Team
T
he fourth quarter of 2015 began with
risk assets rallying, although resurfacing
concerns around the energy and commodity
sectors caused the market to experience
volatility over the quarter. In the US, the
Federal Reserve has begun to raise rates. In
such a market environment, the portfolio has
held up well with our diversi cation along
with our credit selection helping to smooth
out some of the bigger market movements. In
Europe, guidance from the European Central
Bank on quantitative easing helped to boost
the European portion of the portfolio.
We believe that the volatility within the
broader markets will o er openings to take
advantage of investments at attractive pricing
levels. In both the US and European markets,
the leverage levels of the companies we invest
in remain restrained and the credit metrics
within the market indicate a relatively
robust set of underlying issuers. Credit
selection continues to play an essential role
in avoiding the weaker companies among the
opportunity set.The increase in M&A activity
has contributed positively to the overall levels
of senior secured bonds coming into the
market and we would expect this to remain
a strong contributor to issuance volumes
going forward.We remain con dent that the
portfolio is well placed to continue delivering
strong risk-adjusted returns to investors.
BABSON CAPITAL
International Corporate Bond
Volatility offers opportunities for
investing at attractive prices
BLACKROCK
Alternative Assets
Timber and water performed well
while infrastructure struggled
AXA INVESTMENT
MANAGERS
Diversified Income
Allshare Income
Monetary policy and UK’s talks with
Europe will impact sterling in 2016
International corporate
bonds holdupwell to
market volatility
Positive equity
performancemitigated
losses in commodities
Falls in commodity
prices continue to
a ect globalmarket
