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THE INVESTOR
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PORTFOLIO OVERVIEWS
also cost. UK retailer Next reported
falling sales and profits and signalled that
Brexit could push up input costs going
forward. Its shares fell 20% over the
quarter.Telecoms behemoth BT
was another holding that suffered.
The share price fell 16% as it was hit
with the largest fine in UK telecoms
history and was forced to lower prices
to provide competitors with access to
its infrastructure.
The Diversified Bond fund recorded
a positive return but slowed in
comparison to the previous two calendar
quarters. Brigade’s focus on US-listed
high-yield credits performed well,
reflecting the continuing strength of the
world’s largest economy.The team’s
focus on fundamental research and its
deep understanding of the individual
credits in the portfolio demonstrated
how credit-pickers can be rewarded in
this environment.
Donald Morgan III, Lead Portfolio
Manager at Brigade, believes these
conditions are suited to his flexible
approach:‘Given the sharp move
upwards in valuations over the past year,
we’re cognisant of the cyclicality of the
high-yield asset class and are monitoring
closely for potential triggers of volatility.
Overall, we remain excited about the
current market dynamic and believe
that this environment has the potential
to benefit investors with the ability to
differentiate between credits.’
DEFERRED INCOME
E
quities provided the main
thrust for returns as the
Deferred Income Portfolio
recorded the strongest
performance among the three income-
focused Portfolios.
The UK Income fund’s nascent
recovery continued as the strategy
managed by Chris Reid of Majedie
posted a third consecutive quarter of
positive growth. It was some of the
small-cap names that contributed over
the period, reflecting a general market
trend in the UK which saw large- and
mid-cap stocks lag behind their small-
and micro-cap peers.A closer look at
those contributors demonstrates the
diverse set of companies within the
portfolio: Centamin, an Egyptian-
focused gold miner, reported a 26%
increase in annual production;Man
Group, the hedge fund provider, noted
encouraging performance across most
strategies in 2017 so far; andAshmore,
the emerging market debt specialist,
announced a doubling of pre-tax profits
for the second half of 2016. On the
negative side, an overweight to the
energy sector hurt relative returns, as
did underweight exposure to tobacco
and consumer-facing stocks.
Underweight exposure to consumer
staples also held back the UK &
International Income fund managed
byAdrian Frost ofArtemis.The short-
lived bid for Unilever by US-listed food
giant Kraft Heinz helped the more
defensive parts of the market to rally.
The team added to existing positions
in the financial sector over the period –
increasing its stake in both Lloyds and
Barclays.They also added a new holding
in Nordea, the largest financial services
group in Northern Europe. Frost
sounded a note of caution, however,
pointing out that investing has never
offered any guarantees:‘Worthy of note
is that equity markets have been a one-
way street for a good while and volatility
is low.A change in sentiment would not
be surprising.’
The UK High Income fund was the
star performer over the quarter, yet
NeilWoodford also struck a cautious
tone.‘With the valuation of the UK
stock market now looking quite full,
it’s difficult to envisage another year
of strong returns unless we see a
resumption of robust earnings growth.
Nevertheless, there are pockets of
attractive valuations within the market;
and by focusing the portfolio towards
these undervalued opportunities, we are
confident that it is well-positioned
to deliver attractive returns in the
years ahead.’