fund manager monthly report february 2014 manager...3 fund manager monthly report artisan – dan...

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F U N D M A N A G E R M O N T H L Y R E P O R T

Fund Manager Monthly ReportFebruary 2014

I N V E S T M E N T S

Aberdeen Asset Management (Asia) – Hugh YoungFar East

In February, the fund rose by 1.86%, outperforming the benchmark FTSE World – Asia Pacific’s return of 0.11% in sterling terms, as the currency impact, asset allocation and stock selection all contributed positively.

Easing concerns over Fed tapering and emerging markets contagion, coupled with Janet Yellen’s assurance to keep US rates low, lifted Asian equities in February. The recent sell-off, which appeared excessive, also helped revive risk appetite. Within Southeast Asia, further support came from some better-than-expected GDP numbers. However, Chinese shares wobbled on disappointing manufacturing news, with further uncertainty fuelled by the yuan’s tumble. Japan’s GDP data undershot expectations, compelling the central bank to extend cheap loans.

In corporate news, BHP Billiton and Rio Tinto are slashing capital investments amid rising overcapacity and weaker commodity prices. This allowed BHP to post positive free cash flow for the first time since 2011. Rio returned to profitability on the back of record iron ore output, although write-downs continued at its aluminium division. We are pleased that there were no further surprises in QBE Insurance’s fourth-quarter results and, having met incoming chairman William Marston Becker, we are supportive of the changes at the board level. Honda Motor appointed its first foreign operating officer and first female board director, in a step towards improved corporate governance.

Our Singapore banks DBS, OCBC and UOB all registered robust annual loan growth, although interest margins contracted due to the competitive environment. In comparison, HSBC’s revenues were weaker than expected, particularly in its global banking and markets segment. We think its strategy of cross-selling across its divisions, while taking advantage of its global network should stand it in good stead in its Asian expansion. Standard Chartered’s full-year profits fell for the first time in over a decade on the back of a write-down in its South Korean business, slowing growth in emerging markets and rising bad loans. Reassuringly, the bank’s capital adequacy ratio remains robust, allaying for now worries over its capital position. Long term, its prospects in emerging markets remain bright.

There were no major portfolio changes in February.

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Aberdeen Asset Management (Glasgow) – Jamie CummingEthical

In February, the fund’s value rose and outperformed the benchmark. Positive stock allocation and the currency impact, a result of our stock selection decisions, offset negative asset allocation.

Top contributors to relative return included our holdings in US energy group EOG Resources and Korea’s Samsung Electronics. EOG Resources was boosted by solid fourth-quarter profits on the back of higher oil production. Samsung Electronics’ share price rebounded from its previous weakness and some anticipation over the launch of its high-end Galaxy S5 phone.

Against this, holdings such as Italian-listed pipemaker Tenaris, as well as US companies PepsiCo and cable company Comcast were among the main detractors. Tenaris announced slightly better-than-expected fourth-quarter earnings due to a higher premium mix, although it sees little improvement in 2014 sales due to ongoing delays in Brazil. PepsiCo rejected calls to split its sluggish drinks business, despite a weakening domestic soft drink market. This issue weighed on the share price despite the company posting decent fourth-quarter results overall. Comcast’s shares declined after it announced that it would acquire Time Warner Cable for US$45.2 billion.

In portfolio activity, we added to Banco Bradesco following price weakness.

Artemis Investment Management – Adrian Frost & Adrian GosdenUK & International Income

Markets rallied well in February, although in truth our reading of life from a company perspective continues to see a resumption of earnings growth as receding rather than advancing. In a busy period for company meetings we are finding that generally, we are cautious rather than optimistic, but in all fairness, currency is also a factor. For our part, some of our modest positions produced noticeable underperformance, namely Tate & Lyle and Pearson.

Transactions included additions to Drax, Imperial Tobacco, Norfolk & Southern and Novartis. We sold Cisco believing that the apparent low valuation and financial strength to be insufficient to offset structural and re-investment risks. New additions in the international list were Energa, the Polish equivalent of National Grid and HollyFrontier, a US refinery company.

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Artisan – Dan O’Keefe & David SamraGlobal Managed & Global Unit Trust

The MSCI World index rose 4.2% in February (all returns in local terms unless otherwise noted), with nearly every major global market except Japan posting gains. Europe led the charge. US-based investors benefited from an additional currency tailwind, as the dollar weakened against nearly every major currency. Global markets are posting new highs again. Although earnings season was generally positive, we see little in overall economic activity to justify the buoyant prices in the market. Except, perhaps, for Janet Yellen – who officially took the reins of the US Federal Reserve this month and appears to be following in the footsteps of her predecessor.

The top drivers of returns this month included Oracle and Novartis, which rose 6.0% and 5.7%, respectively. Similar to the buoyancy in the overall market, there was little fundamental news to justify the increase in either company’s stock price.

The largest detractors from performance this month included RBS and Sankyo. RBS declined 3.5% after reporting earnings that included a strategy review outlining their restructuring efforts. RBS plans to shrink the balance sheet and increase focus on their core UK retail and commercial banking business – which we continue to believe is a highly valuable franchise. Sankyo fell 13.4% after lowering their full-year earnings forecast due to a weak pachinko and pachislot market and competitive pressures.

As we have said in prior months, we believe that stocks are mostly fairly valued. Our cash position remains elevated, and there was limited activity in the portfolio this month. We made no new investments, and sold the investment in Direct Line, which reached our estimate of intrinsic value.

AXA Framlington – Richard PeirsonAXA Framlington Managed & Balanced Managed Unit Trust

Equity markets rallied strongly after January’s weakness as the economic data reassured and investor liquidity was supportive. UK equities were the strongest area in local currency terms, while government bonds marked time. UK midcap stocks outperformed larger companies again though smaller companies underperformed. Banks, particularly HSBC and Barclays, were very weak following disappointing trading updates while pharmaceuticals, life insurance and tobaccos were the strongest UK sectors.

There were no significant changes in asset allocation during February. In the UK we sold industrial property company Segro, for after significant outperformance the shares were trading on a premium to asset value of 10%, which looked a full valuation. In Europe we sold chemical company Arkema, which had re-rated to fair value, and bought Orange, which should benefit from better pricing as consolidation takes place in French telecoms. In the US we bought biotechnology company Gilead which is launching a new drug to treat Hepatitis C, which could have a massive impact on the company’s valuation. We also bought Union Pacific, which been depressed by weakness in the railroad sector related to activity in Mexico, which we believe will be temporary.

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The Fund return was satisfactory in absolute and relative terms for we outperformed in UK, European, US and Japanese equities and only underperformed in Pacific ex Japan markets. Investors have been concerned recently about events in the Ukraine and poor growth data from China. It is difficult to know if this recent weakness was partly due to the timing of Chinese New Year. Regarding the former, we would be surprised if events developed in a way to undermine present global growth targets and hence the support for equity markets.

AXA Framlington – George LuckraftDiversified Income & Allshare Income Unit Trust

Markets rallied strongly reversing the weakness seen in January. The turmoil in Emerging Market currencies began to settle down which helped sentiment. As a result of the recent strength in sterling, the UK market has had to deal with a period of reductions in forecasts by analysts.

The portfolio underperformed the rising market, partly reversing the relative gain of January. The main cause was some profit taking in stocks such as Cineworld and Topps Tiles which had been strong in the past year. In addition, Latchways downgraded profit expectations on the back of some delays in the award of new contracts. A lack of holdings in Barclays and Rolls Royce (who warned on profits) was beneficial.

During the month, the Fund acquired shares in DX Group and Manx Telecom in their initial public offerings. They both offer attractive prospective yields and are trading at good premiums. In addition, a new holding in McKay Securities was purchased while the holdings of Medicx Fund and Trap Oil were sold.

The events in Ukraine as well as financial markets in China are likely to dominate short term sentiment. Within the UK, the May European elections could highlight the political risk in the UK and cause some reversal in the strength of sterling which would help profit translation.

Babson Capital – Zak SummerscaleInternational Corporate Bond

The International Corporate Bond Fund continued to perform well in February as senior secured bonds provided healthy returns in a resilient stock market environment coupled with lower Treasury yields. Despite the volatility in emerging markets, there was no significant impact on senior secured bonds and in fact the asset class had a strong February thanks to solid underlying corporate fundamentals in conjunction with robust inflows into the asset class.

Default rates in both Europe and the U.S. remained low, and we continue to see the market offering attractive investment opportunities. During the month, the largest contributions to fund performance came from names such as Liberty Global, an international telecommunications and television company; Manutencoop, an Italian facility management company; and Travelex, a UK foreign exchange specialist. The detractors for the month included names such as Takko, a German fashion retailer; and Headwaters Inc, a U.S. building products company. We continue to be able to invest in our favoured profile of robust, cashflow generative companies and maintain a well-diversified portfolio within the International Corporate Bond Fund whilst holding more concentrated positions in our conviction names.

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Both the U.S. and European senior secured markets performed well in February, with U.S. assets slightly outperforming. New issuance was relatively light in February and as a result we have seen increased activity in the secondary market, further supporting senior secured bond pricing. We believe the diversification within the International Corporate Bond Fund, combined with our strong credit discipline and the attractive yields on offer will continue to deliver healthy risk-adjusted returns to investors.

BlackRock – Market Advantage TeamAlternative Assets

February saw a more “risk-on” tone in markets, as commodities, property and high yield delivered strong performance and equities retraced January’s losses. Equities have been more volatile in 2014 but gained support from improved earnings, M&A activity and the extension of the US debt ceiling. Gains in commodities were driven by the potential impact of extreme weather conditions and the rising tensions between Ukraine and Russia, which coupled with softening momentum in US economic data also meant more defensive asset classes such as government bonds saw gains towards the end of February. US consumer confidence and retail sales fell, while housing, industrial production and labour market data also all came in below expectations. In Europe, some signs of recovery meant the ECB left rates unchanged despite unemployment remaining elevated. Emerging equities and bonds retraced some losses despite a weaker PMI reading from China and poor industrial output numbers from Latin America. Whilst the long-term case for holding emerging markets remains, they may continue to be a source of volatility in the near-term given the uncertain geopolitical landscape and disappointing economic data.

The fund delivered positive performance during February*. The main contributors to returns were commodities (Dow Jones UBS Commodity Index +4.2%) and equity sector exposures (G&P Global Clean Energy, Global Water and Global Timber and Forestry Indices up 5.7%, 5.7% and 2.8% respectively). In line with the risk-on tone, developed market property and infrastructure exposures were also additive to returns (FTSE EPRA/NAREIT Global Real Estate Developed Index +2.1%, Macquarie Global Infrastructure 100 Index +2.6%).

BlackRock – Nigel RidgeUK Absolute Return

Following the weak start to the year, investors were quick to remember the persistency of policy support behind risk assets and pushed equity markets back towards all-time highs. However, the strong and rapid bounce-back in the market was largely sentiment based with no immediate improvement in the outlook for corporate earnings. The liquidity driven argument was also aided by the Vodafone cash distribution and a healthy investor appetite continuing in the new issue market. The potentially significant hit from the extreme winter is not expected to derail the improving trajectory of the US economy. A more mixed picture in Europe though, the laggard impeding a more synchronised developed world recovery, means the focus in on the ECB to address deflation risk though.

The Fund was down -0.2% in February in contrast to the capital preservation exhibited in January. The Fund decline was partly due to the position in Better Capital, a previously strong performer, that more than outweighed the gains from the Funds’ other core long term holdings. The private equity fund unexpectedly announced recent weaker trading that will impact the next official valuation of two of its significant investments. Elsewhere,

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positive performance came from two financial companies, 3i Group and Paragon. The latter received a banking license which should provide further future growth opportunities. Given the market background, the short book suffered with negative returns across all sectors with consumer defensives and industrial cyclicals hurting the most. Encouragingly, the pair book was a net positive contributor with a long position in Ashtead leading gains in the Construction pair while weakness in the Defence business at Rolls Royce meant the Aerospace pair hurt the most.

From an opening position of +19%, the net exposure was managed down to finish at +9%. Gross exposure was increased from 119% to around 131% reflecting greater opportunities in some long positions that could significantly outperform the current pedestrian growth environment. Improving GDP growth rates in the UK and the US should materialise suggesting the balance between a European rebound and an Emerging Markets slowdown will potentially be the swing factor. In aggregate, we are positioned in expectation that there is more of a likelihood of greater volatility rather than a repeat of the significant equity gains seen in recent times.

BlackRock – Luke ChappellUK & General Progressive

The UK Focus portfolio returned 4.9%* over the month, modestly underperforming the benchmark FTSE All-Share Index, which returned 5.2%.

Over the month, the largest positive contributors to performance included British American Tobacco, which reported steady earnings growth in its preliminary results despite experiencing currency headwinds. Easyjet rose strongly as monthly passenger numbers increased and as fellow low cost carrier Ryanair reported an easing of pricing pressures. Reckitt Benckiser rose after reporting sales growth in line with expectations and that the group’s review of its Suboxone pharmaceutical business was continuing.

Offsetting these gains, Hargreaves Lansdown fell after reporting earnings that slightly missed expectations. Its investment platform has continued to see strong asset inflows but the group reported a lower cash margin. Within banks, Barclays detracted from relative returns as it reported a disappointing fourth quarter in its full year results. Catalytic converter and chemicals specialist Johnson Matthey lagged the index over the month having performed strongly last year. The group announced a new Financial Director whilst there remains uncertainty regarding the impact of currency movements.

Burgundy – Richard RooneyWorldwide Managed

The year 2014 promises to be a very interesting one, judging by its first quarter. World equity markets seesawed as uncertainties were encountered, but despite considerable short term volatility, never produced either a winning or a losing streak. Most of the gains or losses investors received came from changes in currency levels, not equity prices.

Janet Yellen’s succession as Fed Chair was seen by the markets as a Good Thing. So was the Ukrainian overthrow of Yanukovich. Russia’s intervention in Crimea caused some losses, especially in the Russian currency and stock

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market, but even the reawakening of Cold War rhetoric has not truly shaken most world equity markets. Nor did the first defaults on Chinese retail wealth products, or ungovernability in Thailand, Libya, Iraq, Syria and Venezuela, or the rise of secessionist sentiment in Scotland and Quebec. As always it is difficult to decide whether the markets are delusional, or simply looking through ephemeral events with great perspicacity.

Economic growth continues at a snail’s pace in most countries. Valuations are high though not generally extreme. Inflation appears to be a very distant prospect. The prudent course would appear to be to eschew financial risk and find the best balance of valuation and high quality available. Our cash positions are somewhat higher than normal, which will give us the ability to capitalize on opportunities, should they arise.

Edgepoint – Tye Bousada & Geoff MacDonaldGlobal Equity

We continue to search for companies that can grow regardless of macroeconomic headwinds. Strong performance globally has made finding attractive investments more difficult. Although it’s still possible to uncover businesses with good long-term growth prospects without paying full price for that growth, today we need to look much harder for these opportunities than we did a few years ago, which is more consistent with a normal operating environment.

The main contributors to our performance in February were Ryanair Holdings PLC, NKT Holding A/S and WABCO Holdings Inc.

As one of the few profitable airlines, Ryanair has the highest margins and the lowest fares in the industry, an excellent management team and a very strong balance sheet. Over the past decade, Ryanair has substantially increased its traffic and taken over a significant share of competitors’ business.

NKT Holding manages various businesses engaged in manufacturing and supply of power cables, floor care equipment and fibre optical components. Recently the company announced its involvement in a wind farm project named Gemini to manufacture more than 200 kilometres of high voltage submarine cables. The value of the contract is worth approximately 165 million euros.

WABCO has pioneered breakthrough technologies for braking, stability, and transmission automation systems supplied to the world’s commercial truck and bus markets. We believe that WABCO will have significant growth opportunities as more countries start to manufacture commercial vehicles according to a regulatory environment similar to the one in Europe.

First State Investments (UK) – Jonathan AsanteGlobal Emerging Markets

Emerging markets rose moderately over the month in sterling terms, lagging global equity markets.

During the month we purchased shares in Ultrapar, a Brazilian conglomerate which derives most of its revenues from fuel distribution. Although we have been meeting the company’s management for a decade and have long admired their standards of governance, we have not invested in the company before because of excessive valuations.

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We have never sought to understand, or predict, the swings in market sentiment between elation and despair, but we play close attention when our favourite companies become reasonably valued. Stocks such as Ultrapar are by no means cheap, but we think we can make acceptable returns from owning this company over the next five years. We are starting to find opportunities with more regularity than we have done for the last four years as enthusiasm for investing in emerging economies has moderated.

First State Investments (UK) – Jonathan AsanteWorldwide Opportunities

We continue to maintain high cash balances in the fund as we remain concerned about the nature and scale of global monetary experiments (quantitative easing). This experiment appears to be good for investors as it has driven the price of many assets to new highs, but we worry about the foundations upon which some of these valuations rest. For example, why are expectations about the prospects of many companies rising (high share prices) when the real median income in the US is 10% lower than it was ten years ago?

We continue to make the distinction between price and value and refuse to get drawn into buying expensive assets. We are looking harder than usual at some companies based in emerging markets – many of these are far more reasonably valued than in the recent past.

There has been little activity over the month other than trimming the fund’s position in McCormick, a strong consumer franchise that was looking a little expensive.

Invesco Perpetual – Neil WoodfordIncome Distribution, UK Equity & UK High Income Unit Trust

Market CommentaryFebruary saw the stock market resuming its upwards progress after January’s pause - despite growing concerns over the situation in Ukraine and China’s growth outlook as well as with some disappointing UK company results. The head of the US Federal Reserve calmed nerves with confirmation that US tapering would continue in “measured steps” while the £50bn return of the Verizon stake to Vodafone shareholders helped support demand for the UK equity market generally.

Fund Strategy and OutlookThe rise in the UK stock market over the last year or so was noteworthy for its breadth. While previous rallies have been driven by a relatively small number of sectors, notably mining and banks, last year witnessed strong performances from a broad range of sectors, which is a positive sign of widespread demand for the asset class.

Over the coming year, we believe the main question relevant to the outlook for the UK stock market relates to how a market driven by quantitative easing can transition to one driven by the strength of the underlying economy. With equity valuations now at a level anticipating upgrades to earnings for 2014 and beyond, we believe that the performance of the market over the past year is unlikely to be repeated over the coming 12 months. The fund is positioned with a focus on companies which can deliver attractive cash flows, earnings and dividend growth. It therefore has the potential, we believe, to deliver an attractive positive return over the longer term.

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Fund PerformanceThe fund’s value increased by 5.5% in February, compared with the FTSE All-Share index, which rose by 5.2%.

The pharmaceutical sector has maintained its recent flow of more positive news and performance in 2014. AstraZeneca – the fund’s largest single holding - has unveiled a series of positive surprises on the drug pipeline front and recently stated that it has made significant progress towards achieving scientific leadership. A conference call with the company reassured us that the new management are achieving an exceptional turnaround of a once ailing company.

The tobacco sector faced some headwinds in 2013, notably concerns over the possible impact of e-cigarettes, plain packaging and emerging market exposure. Headwinds are, of course, nothing new for this sector and last month’s results served to remind the stock market of the companies’ ability to deliver profit and dividend increases against a backdrop of declining cigarette volumes. Imperial Tobacco confirmed that it was on track to meet its outlook for the year of growth in earnings and at least a 10% increase in dividends. Boots the Chemist is also to stock its Puritane e-cigarette brand. British American Tobacco confirmed 6% dividend growth and launched a TV campaign for its Vype e-cigarette brand.

The support services sector enjoyed mixed fortunes in 2013 but saw more consistently positive news in February. The share price of Capita hit yet another all-time high, as the company confirmed that its pipeline of tendered work had jumped to £5.5bn, up from the £4.2bn reported in November. There was, finally, some good news from Serco, which has poached Rupert Soames from Aggreko to be its new Chief Executive. The stock market’s reaction to the news confirms the high regard in which one of the FTSE 100’s previously longest standing Chief Executives is held.

February saw an example by one of the fund’s major holdings, Rolls Royce, of the share price vulnerability of previously strongly performing companies which fail to meet high expectations. Rolls Royce surprised the market with its first profit warning in a decade, as it confirmed that this year will see no growth in sales or profits. This is largely blamed on defence spending cuts. The company claims that this is a pause, not a change in direction, and that growth will resume in 2015. The share price, which had recently achieved a record high, fell sharply on the news.

BAE Systems also warned that profits would be hit by defence cuts, but saw a much more muted share price reaction. There was also the welcome news that the company has now agreed pricing with Saudi Arabia over the rising cost of a long running Eurofighter deal.

Invesco Perpetual – Paul Read & Paul CauserCorporate Bond

Fund StrategyHigh yield bonds achieved positive returns in February, benefitting from their higher levels of income and from credit spread tightening to outperform investment grade corporate bonds and core government bonds such as Gilts and Bunds. Economic data in the major developed markets continued to be broadly positive, pointing to rising growth and modest inflationary pressures. Business confidence data for the eurozone pointed to a strengthening in GDP growth from the very modest levels we have seen in recent quarters and GDP data for Spain in the final quarter of 2013 showed household spending and investment growing for a second consecutive

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quarter. According to data from Merrill Lynch, European high yield bonds had a total return in February of 2% (all in sterling terms), the aggregate yield of the market falling 26bps to 4.66%. This compares to 0.5% for sterling investment grade corporate bonds and 0.2% for Gilts. High yield bond issuance was relatively subdued for another month, with £4.6bn of European high yield supply across all currencies in February. Year-to-date, issuance is down 30% on 2013 levels.

Fund StrategyWe favour higher credit quality high yield bond issuers as well as higher yielding investment grade names. High yield bond yields are low by historical standards but they remain relatively high compared to the yields available on core government bonds, like UK Gilts and German Bunds, and the highest credit quality corporates. We believe we can still find opportunities, most notably in banks and other financials, where we think aggregate yields continue to offer value. In our view, ongoing structural reform and the implementation of new, more conservative banking sector regulations should be supportive of subordinated bank debt for many years.

Portfolio ActivityIn trading during the month we bought a position in Bombardier 6.125% (industrial). We also bought floating rate notes in Kernos (construction) and Innovia (financial). We sold down our position in Jaguar Land Rover 8.125% (autos).

Invesco Perpetual – Nick MustoeGlobal Equity Income

Market CommentaryGlobal equity markets rose during February. Encouraging news over China’s growth prospects and waning emerging market tensions, aided by currency stabilisation, led to an improvement in sentiment for much of month. Despite this, emerging equity markets lagged developed equity markets, which were further impacted by the political instability in Ukraine in the final days of February. Developed equity markets were the beneficiaries of this unease as the economic recovery in the US, UK and Europe continued to gain ground. In the US, equity markets reversed the losses that had been incurred during what was their worst January since 2010, which helped the S&P 500 index to a new all-time high. Equity markets in Europe and the UK also continued to perform strongly, whilst Japanese equity markets continued to lag on concerns around slowing economic growth.

Fund StrategyOur strategy is to look for companies with attractive valuations that we believe can sustain profit margins and deliver returns through the economic cycle and which offer growing and sustainable dividends. We seek companies that we believe are high quality, with attractive franchises, and balance sheets with a conservative level of debt.

During February we initiated new positions in BP and Mead Johnson Nutrition. In the case of BP, we believe that it has recently entered a new era and we recognise the cash potential of its future growth. Dividends are at the core of the firm’s capital discipline and we view it as attractively valued. Mead Johnson focuses on infant nutrition within emerging markets in particular. We believe that it is a strong franchise and a well-run company. We sold our holdings in Exxon Mobil and Automatic Data Processing on valuation grounds.

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J O Hambro – John WoodUK & General Progressive

The investment industry is yet again showing its pre-disposal to amnesia. February saw the £1.2 billion IPO of AO, an online retailer of fridges, freezers and microwaves (and other low-tech, low margin white goods). The stock closed up 32% higher on the first day of trading, valuing the company at £1.6 billion. Even the original flotation valuation put the stock on a stratospheric 175 times earnings and 4.5 times sales. For its founder, John Roberts, AO could certainly stand for Absolutely Outstanding, but perhaps from a stock market perspective it should stand for Amnesia Outbreak. This is 1999 redux. AO is not the only technology stock to be punted at gravity-defying valuations. Venture capital backers of debt-burdened technology companies (i.e. anything with a half-functioning website) are making good on an exit while they still can. And investors seem only too keen to help, allocating capital away from companies with rock solid balance sheets, proven cash flows and established business models trading on sensible valuations towards these triumphs of hope over substance.

The above behaviour is perfect if you are angling to lose your clients’ a serious amount of money. Personally, we would rather leave the rehash of dot.com dreams to others. It didn’t turn out well last time and it won’t this time either.

Loomis, Sayles – Ken BuntrockInvestment Grade Corporate Bond

For the month of February, the portfolio returned 0.29%, compared to ML Sterling Non-Gilts, 25% FINCL Cap, 1-15yrs at 0.26%. The outperformance can be attributed to security selection and sector allocations decisions.

Specifically, names held in the Technology & Electronics sector add value, as did choices from within Real Estate, Consumer Durables, and Communications. Preferences within Utilities and Banking combined to detract marginally from relative performance.

Underweight positioning in the supranational sector lifted relative results, as did an overweight position in Technology and Electronics. However, an overweight allocation to the Capital Goods sector mitigated outperformance slightly.

The UK IG market posted another positive month and tightened to government bonds, albeit slightly and to a lesser degree than other major developed IG markets. The improving economic situation in the UK and the ongoing banking sector repairs have combined to support the market. Media-Cable and subordinated Banks were the best performers over the course of the month, while Supermarkets, Aerospace/Defence, and Utilities underperformed.

Overall, portfolio duration remains closely aligned with that of the Benchmark, 5.61 to 5.55. In addition, the portfolio is generally neutral in the key rate buckets across the curve. However, a small number of select exposures to the longer end of the curve did contribute positively over the course of the month.

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Majedie – James de UphaughUK Growth & UK General Progressive

Your portfolios lagged a strong market, albeit only slightly, during February. Following the worst January for developed market equities in three years, sentiment towards those regions improved.

The lead relative contributor during the month was Rolls-Royce – specifically our zero weighting in your portfolios. Cuts in US defence spending weighed on its outlook. However, what we gained in this case we lost, for similar reasons, through holding BAE Systems, which despite announcing the securing of the Saudi Eurofighter contract in one breath, warned on 2014 earnings in another. Aside of this, our increase in exposure to the Pharmaceutical sector reaped reward, as did our recent allocation to Man Group, whose earnings and net inflows surpassed expectations.

Naturally, during a month where your portfolios were a little behind the index, we had some detractors. Other than BAE Systems, our continued aversion to emerging market plays held the portfolios back a little. Specifically, not holding the tobacco stocks, Prudential and Reckitt Benckiser were detracted from performance, but we retain our view that companies reliant upon EM for their growth are likely to suffer as the effects of weak currencies and bloated money supplies play out in an uncontrollable manner.

Oldfield Partners – Richard OldfieldHigh Octane

The main underperformers of the month were Mitsubishi UFJ (-6%), Chesapeake (-4%), Lukoil (-3%), Japan Airlines (-2%) and General Motors (+0.3%). MUFG’s poor performance is a surprise. The bank is likely to have greatly improved profits at the end of the current financial year to March, and recently announced that loan growth is 3.3% year on year, in Japanese terms a formidable improvement. MUFG has a price to book ratio of 0.7. It has increasing exposure to emerging markets, especially through its recent purchase of Bank of Ayudhya in Thailand, a fact which may be concerning investors given the current problems in Thailand. However, its core overseas strength is in its growing US business, mainly through Union Bank and its shareholding in and corporate finance relationship with Morgan Stanley, both of which are strong contributors to profits.

Lukoil was weak as the Ukrainian situation deteriorated. In enterprise value – the sum of market capitalisation and debt – a buyer of Lukoil’s shares pays less than $3 for every barrel of the company’s reserves. It is the second largest owner of oil reserves in the world. The shares have a price-earnings ratio of 4. The company’s production is likely to grow at about 3.5% until the end of the decade. The board plans that dividends should be increased by 15% a year. The current dividend yield is almost 6%. But it is Russian, and that is a big but. Howard Marks, the legendary founder of the US manager Oaktree, has some maxims which are relevant to this: ‘I’m firmly convinced that investment risk resides most where it is least perceived, and vice versa. When everyone believes something is risky, their unwillingness to buy usually reduces its price to the point where it’s not risky at all...Scepticism is usually thought to consist of saying, “no, that’s too good to be true” at the right times. But...sometimes scepticism requires us to say, “no, that’s too bad to be true.” Not risky at all would be an overstatement for Lukoil; but it is probably the most outstandingly undervalued company in the portfolio.

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Among the strong performers were Renault (+12%), ING (+7%), BP (+7%), Rio Tinto (+6%), and Vivendi (+4%). We have around one eighth of the portfolio in car companies – Renault, Fiat, and General Motors. This year the European companies’ shares have been much stronger than the US, reflecting growing confidence that the European car market may have bottomed. Car sales in Europe have been extraordinarily depressed, in some countries lower than for any year since 1978. In January sales in Europe were 5.5% higher than a year earlier, the fifth consecutive monthly increase, although still the second lowest number of cars sold in a January since figures started to be collated in 2003. In some of the countries worst hit by the Eurozone crisis the recovery is now strongest: Ireland +33%, Portugal +32%, Greece +15%, Spain +8%. Renault has been making a profit in Europe, a rarity among the European car companies, and is aiming to increase its profit margin to 5%. The picture has changed a great deal in that a year ago, after allowing for the value of the company’s 43% stake in Nissan and other stakes, what was left in the company’s enterprise value for Renault was a minus number, whereas now what is left is around 20% - in other words, a positive value is now being attributed to Renault. But the improvement in operations still makes these shares appear undervalued.

PIMCOMulti Asset

Positioning

Tactically increased exposure to developed market equities as January’s mini sell-off provided with a good opportunity to add exposure. On the other hand, the Fund decreased its exposure to emerging market equities as negative technicals continue to overwhelm attractive fundamentals. Within EM, the Fund continued to target country specific allocations.

Maintained moderate interest rate exposure, emphasizing curve exposure, through an allocation to the short to intermediate part of the curve. Maintained interest rate exposure in markets with positive real rates, such as Australia and Brazil. Within spread fixed income sectors, we continued to favour non-Agency mortgage-backed securities (MBS) on attractive loss-adjusted yields.

Within Real Assets, we added U.S. Real Estate exposure through REITs, which offer high real yields and trade at attractive valuations, and maintained inflation-linked bond allocations. Additionally, the fund took profits on gold holdings as gold traded rich relative to real yields

Outlook and Strategy

PIMCO’s asset allocation approach recognizes that asset class returns are explained by three fundamental components: yield, income growth, and valuation change. These components are influenced by the underlying macro variables that explain global growth – real growth and inflation. This is why our secular and cyclical views are critical in informing asset allocation decisions.

While PIMCO remains positive on longer term EM fundamentals, EM equities continued to be shunned by investors on negative technicals (EM flows, FX weakness) and political uncertainty. As such, the Fund is tactically favouring developed market over emerging market equity risk.

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Importantly, we remain cognizant that certain parts of the developed equity market warrant caution, since the equity market performance in 2012-2013 was primarily fuelled by rising valuations (i.e. P/E multiples) instead of earnings growth. Going forward, earnings growth and momentum would be critical in supporting valuations.

-Within fixed income the Fund is seeking opportunities to increase yield, while limiting overall interest rate exposure. The Fund’s interest rate exposure is positive in markets with higher real rates, such as Australia and Brazil, and negative in the markets with lower rates, such as Japan. We also still see value in non-Agency MBS securities as they offer attractive levels of yield, even adjusted for potential losses.

In addition to positions reflecting our global macro views, the Fund will also use bottom-up “alpha” strategies to enhance returns within asset classes and tail risk hedging strategies that aim to limit losses during severe market downturns.

Month in review

The rally in both developed and emerging market equities in February benefited the Fund’s equity position.

Overall contributions from fixed income exposure were positive over the month despite broadly steady rates. Positive Australian interest rate exposure and a curve steepener in U.K. added to performance while duration hedges in Japan only partly offset the positive contributions. Non-Agency MBS positions gained value as they continued to benefit from limited supply and ongoing signs of recovery in the U.S. housing market. Performance was hurt by our short exposure to Japanese interest rates.

The Fund’s exposure to Real Asset strategies, focused in U.S. REITs and global inflation-linked bonds, also added to performance. Additionally, the Fund’s small allocation to gold contributed as investors continue to rush into the perceived safety of gold.

RWC Partners – Nick PurvesEquity Income

Memories of January’s equity market sell-off seem to be long forgotten and the short-lived EM crisis over; the mantra of buy on dips continues as we saw the S&P 500 in the US make new all-time highs by month-end and the FTSE 100 push back towards the highs seen in January. In the UK, the Bank of England presented the latest Inflation Report although no clear signal was given with regards to the future policy path. This comes as the unemployment rate actually increased marginally, although this was a function of normalisation in the series. The Bank of England believe the current headline unemployment rate does not accurately reflect the amount of slack in the economy and that there still remains ‘spare capacity concentrated in the labour market’.

The US Federal Reserve are facing a similar problem, as despite a weak headline payroll number, the unemployment rate continues to push down, and like the BoE, the Fed will soon find themselves at the threshold level of 6.5%; the FOMC minutes published during the month noted that forward guidance would need to be updated soon. This was another month of weak US economic data, however this did not deter equities as the S&P 500 pushed up to all-time highs of 1859. However, it is interesting to note that 10-year US yields did not react in the same manner, finishing the month almost unchanged. Risk-on sentiment is also prevalent in Europe as the conditions in the peripherals continues to improve with yields hitting post crisis lows, including the Greek 10 year yield falling below 7%. Despite this, deflationary pressures in the region may force the ECB to act.

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The Fund performed well over the month, providing a positive return, in line with the benchmark. The Fund’s pharmaceutical holdings had a very good month. AstraZeneca reported results which were broadly in-line with consensus both on revenues and EPS, although they guided revenues to decline to low-to-mid single digit and EPS to decline in the teens. GSK also reported; beating revenue estimates, but missing on EPS.

BSkyB continues to perform well; during the month the company announced they had secured live broadcast rights to eight major sporting events. The stock price has now recovered after BSkyB lost the rights to show Champions League football to BT. Next had another good month after the company announced at the end of January that they were to pay a further special dividend of 50 pence a share.

Smiths Group was the biggest detractor from performance with the stock falling -5% over the month. With the exception of a ratings cut by one of the investment banks there was little news flow surrounding the stock.

This continues to be a challenging time for equity investors. Over the last two years, stock markets have significantly re-rated as company profits have failed to keep up with the significant increase in share prices. This re-rating leaves investors vulnerable as it could of course go into reverse if risk premiums increase once again. The second risk comes from corporate profitability which remains at very elevated levels. Historically this has been a pre-cursor to poor future profit growth as this series has (up until now) been strongly mean reverting. It is of course difficult to see what might cause profitability to return to more normal levels. It may be rising interest rates or perhaps an economic downturn in China. It may be that this time is different and mean reversion does not happen. The point to make is that, in our minds, the risks today are reasonably elevated and accordingly it makes sense to focus on only those companies where the risks to profits are relatively low and the starting valuations provide some protection against a wider market de-rating.

Sands Capital – David Levanson & Sunil ThakorGlobal Equity

The rapid advancement and rate of change in the capability of mobile devices has spawned exciting opportunities for growth investors over the last decade. Today, we think companies like Baidu and Facebook can create significant economic value by enabling users to do more “stuff” on their devices, anywhere, anytime. In 2013, we initiated a position in Baidu once we gained conviction it was making the investments needed to extend is desktop search dominance to mobile.

Today Baidu is China’s clear leader in mobile search, maps, and app distribution. Management remains committed to investing in its mobile platform and improving its product offerings, which should meaningfully contribute to revenue and strengthen Baidu’s competitive moat over our investment horizon. Since 2012, Facebook’s mobile platform has risen from 0 to nearly 50 percent of total revenue. As the company continues to develop tools for advertisers, grow its user base, and keep engagement levels high, we think it is in a leading position to take share of the $500 billion global advertising industry. Increasingly inexpensive and capable mobile devices and Internet connectivity will continue to drive productivity, commerce, and online/mobile advertising globally. While mobile-based monetization is in the early stages, we believe and expect the most successful companies in this area will grow at above-average rates for years to come.

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Schroder Investment Management – Nick Kirrage and Kevin MurphySchroder Managed & Managed Growth Unit Trust

The emerging market concerns that stymied global equities at the start of the year faded in February, and most major markets delivered positive returns over the month. US stocks reached record highs despite a series of weak US economic data (which was generally interpreted as a result of severe weather rather than signs of underlying weakness). Eurozone growth data was generally strong, and markets reacted calmly to political change in Italy amid hopes that the new government will implement reforms more quickly. Emerging market equities were less volatile than in January, with most indices gaining ground, although worries about Chinese growth persisted. Overall, this environment was positive for equities and negative for core government bonds.

The fund’s equity portfolios delivered positive absolute returns in February, although both the US and UK equity portfolios underperformed their respective benchmarks. Within the UK equity portfolio, a number of banks fell following fears of increased regulatory pressure; however, their long-term prospects remain very attractive. Trinity Mirror was the largest individual positive contributor in the UK portfolio after it lifted its full-year profit guidance. The fund’s exposure to bonds was neutral overall. Broadly speaking, peripheral European government bonds performed strongly whilst core government bonds sold off. This reflected improving risk appetite following investors’ flight-to-safety in January.

Select Equity – George Loening & Chad ClarkWorldwide Opportunities

As expected, the largest mature economies reported choppy economic data in January and February. Manufacturing is gradually improving, but employment has shown only sluggish improvement and consumers continue to spend cautiously. Demographic headwinds will likely continue to dampen the developed economies’ rebound. Emerging economies around the world have recently endured foreign capital outflows, slowing growth, and falling currencies, though rising per-capita wealth should ultimately sustain long-term growth opportunities in many of those markets. The Fund continues to believe that overall global growth could be sluggish for the next several years. As global stock markets begin to reflect this reality, we expect to see more investment opportunities. As always, we continue to focus our investments on the highest-quality businesses operating in uniquely attractive value chains, as we believe these companies will capture an outsized piece of the global growth pie. We hope to take advantage of market dislocations to add to our investments in strong franchises with secular unit-growth tailwinds, pricing power, and strong competitive barriers. We believe these businesses can grow their cash earnings through difficult economic conditions; the bulk of the companies we own possess those characteristics and trade at a substantial discount to intrinsic value.

For the month of February 2014, the Fund returned +3.5% on a net basis, versus a +2.8% MSCI ACWI return, with an average net exposure of 95% during the period. There were no significant positions movements during the month. There were four positions that contributed greater than +0.2% to the Fund’s overall performance in February. The largest contributor was O’Reilly Automotive, a leading US automotive aftermarket parts retailer and distributor. There were no positions that detracted more than -0.2% to the Fund’s overall performance in February

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SW Mitchell Capital – Stuart MitchellContinental European, Greater European & Greater European Progressive

Unit Trust

We continue to believe that domestically orientated European companies present very good value. As we have written many times before, our company visits suggest that the European economy is recovering more rapidly than many expect. Domestically orientated companies, furthermore, continue to trade at discounts, in excess of 50 percent, to their American equivalents. By contrast, the market continues to under estimate the risks of doing business in the emerging world. Analysts have been woefully remiss at adjusting earnings forecasts for weaker currencies and slower economic growth. We have made a number of important new investments over the past few months.

Saint-Gobain. The company is world leader in almost all business areas including flat glass, high performance materials (ceramics, plastics and glass textiles), business distribution and packaging (Verallia). Management has introduced aggressive cost cutting measures (€580m) aimed primarily at reducing flat glass capacity in Europe (19% production) and withdrawing from the solar market. At the same time, the sales outlook for the business appears to be improving, with residential construction gradually recovering in the US, strong growth in Latin America and a stabilisation in the European automotive markets. Management is also working hard to reduce debt by reducing capital expenditure (€ 200m) and making a number of disposals (Verallia North America and PVC Pipe and Foundations). The share could be trading on 9 times 2015 earnings, generating a 13% return on capital.

Orange. We have, for many years, been intrigued by the strength of Orange’s franchise (230 million customers) coupled with the very low valuation of the shares (8% yield, 9 times prospective earnings). The outlook for the group appears to be improving in a number of important ways. Management is working hard to reduce costs through the Chrysalid programme which is trying to spread best practice across the group. For example, 35% of mobile sites are expected to be shared by 2015 yielding substantial cost savings. More importantly, perhaps, European regulators have begun to acknowledge that the industry has been so weakened by fragmentation that long term investment has been undermined. Notably, 4G investment is said to be 3 years behind the US. The regulatory burden is consequently easing somewhat with, for example, the stabilization of mobile termination rates expected in 2014. At the same the process of consolidation has begun to accelerate with most recently Vodafone’s sale of their stake in Verizon.

EDF. The company boasts the largest nuclear generation capacity in the world and is the largest power generator in France (80% market share) and the UK. The value of EDF could grow significantly in the future. Most notably, EDF are preparing to (80% market share) and the UK. The value of EDF could grow significantly in the future. Most notably, EDF are preparing to extend nuclear lifetimes from 40 to 50 years. If approved, by the French state, this could add some 50% to the value of the group. The French regulator, furthermore, appears to view the group more sympathetically than in the past. We could expect tariff and interconnect price increases to more fairly compensate for production costs in the future. Trading on 10 times earnings and yielding 6% the share appears good value.

Commerzbank. The bank has a strong franchise in Germany being the leading SME lender and having the largest online brokerage business. Management has worked hard to restructure the group following the financial crisis. We have been impressed by how the bank has been able to double market share to 8% in the mortgage market. More significantly, noncore assets have been reduced by over a half since 2008 with a minimal impact on equity. At the same time, costs have been reduced by over 30% since 2007. Capital remains a little light with

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a fully phased-in Basel 3 ratio of 8.6%. Profit generation, however, should lift the ratio above 9% before 2016. Trading on a half book value the share appears very attractive.

RWE. Management is working hard to reshape the group against the background of sharply lower power prices and early nuclear power plant closures. Some 4.2bn MW of capacity will be decommissioned or mothballed which should help balance the power market. At the same time, some €1.5bn of costs will be saved from 2012 to 2017 through a significant reduction in the workforce. Management is also working hard to reduce financial leverage. Some €2.2bn of disposals were made in 2013 and CAPEX will be reduced to maintenance levels. Debt to EBITDA should fall below three times by 2017. We also believe that there is a significant chance that German Constitutional Court will judge in favour of the German utilities on the question of the nuclear tax and early nuclear shutdown. Trading on eleven times prospective earnings the share appears good value.

Axel Springer. The company owns the highly successful BILD and Die Welt brands as well as the leading German news channel, N24. Some 60% of EBITDA is now generated from digital activities following the sale of a number of German regional newspapers, TV program guides and women’s magazines. BILD has managed to successfully move online with over fourteen million unique users. BILDplus, furthermore, has gained 152,000 subscribers after only six months. Springer also own SeLoger, the leading real estate portal in France and StepStone, the leading job portal in Germany. The group is planning to reduce a further €100m in costs over the next three years. Considering the growth potential of the company the share appears reasonable value trading on seventeen times prospective earnings.

Tweedy, Browne – Will Browne, John Spears, Robert Wyckoff & Thomas Shrager

Global Equity

Performance for the month was driven by strong returns in our pharmaceutical and energy related holdings, and a couple of our media stocks. This included companies such as Roche, GlaxoSmithKline, Total, Royal Dutch, Axel Springer and the Daily Mail. We had poor price action in two of our aerospace and defence holdings, BAE Systems and Safran. G4S, ABB and Emerson Electric were also marginally negative for the month. There were no new positions established, however, we did add to our positions in Imperial Tobacco and Standard Chartered Bank, and trimmed our position in Metcash. With February’s advance, bargain hunting has not gotten any easier, and cash reserves still represent about 15% of total portfolio assets.

Wellington – Haluk Soykan and Paul GraingerGilts

Gilts slightly sold off over the course of February. Domestic data releases were slightly weaker during the month, with Purchasing Managers Index numbers and inflation data both surprising to the downside, although still at robust levels. The Monetary Policy Committee opted not to change policy, though we did get the news that they are will no longer be using forward guidance linked to the unemployment level, as the unemployment rate is now at 7.1%, nearly at the 7% threshold, which was reached much earlier than they anticipated. Towards the end of the month gilts found support again as geopolitical tensions rose between Russia and Ukraine, leaving core markets supported by a flight to quality move.

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For the month of February the Portfolio underperformed, returning 0.07%, 5bps under the spliced benchmark return of 0.11%.

The underlying growth story in the UK is still strong and continues to gain momentum. Inflation printing below the Bank of England’s 2% target for the first time in more than 4 years driven by lower import and commodity prices means we could see a more benign inflation trajectory. We think this subdued level gives the MPC more time before they come under pressure to raise rates. However, if wage inflation starts to move up over the next couple of months, this have a significant impact on rate hike expectations.

The information contained herein represents the views and opinions of our fund managers, and not those necessarily held by St. James’s Place Wealth Management.

The ‘St. James’s Place Partnership’ and the titles ‘Partner’ and ‘Partner Practice’ are marketing terms used to describe St. James’s Place representatives.Members of the St. James’s Place Partnership represent St. James’s Place Wealth Management plc, which is authorised and regulated by the Financial Conduct Authority.St. James’s Place UK plc is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority.

St. James’s Place UK plc Registered Office: St. James’s Place House, 1 Tetbury Road, Cirencester, Gloucestershire, GL7 1FP, United Kingdom.Registered in England Number 2628062.

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