investment policy · us stocks and short-term corporate bonds. in us dollars, which are barely in...
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Investment PolicyDecember 2018
Our market view in a nutshell – December 2018
• As we approach the end of the year, most asset classes show a negative performance. The only exceptions areUS stocks and short-term corporate bonds in US dollars, which are barely in positive territory. This poor resultreflects investors' concern about the progressive withdrawal of the monetary stimulus, as well as theextraordinary duration of the current economic expansion in the United States, which will soon become thelongest cycle that has been recorded
• Investors have been calibrating, alternatively, both higher interest rates due to the robustness of an economyapproaching its maximum capacity, and the risk of an economic slowdown caused by the tightening of financialconditions, a waning impact of fiscal stimulus in the US, and a possible trade war
• However, from a valuation perspective, recent corrections in both the equity and credit markets offer one of themost attractive entry points of recent years. Obviously, these valuations depend on companies fulfilling theirearnings projections. Cheap valuations can become expensive if, as is the case when the economic cycle turns,corporate profits decrease considerably
• So far, macroeconomic data show no visible sign of recession in the US. However, bond markets seem to beassessing an increasing probability of a slowdown in economic activity. This is revealed both by the current formof the yield curve and by the widening of corporate spreads
• For the coming year, the interaction between economic "hard data" (unemployment, earnings, inflation, etc.) and"soft data" (confidence and sentiment indicators) will be decisive both in the way the Federal Reserve will follow asfor the investors' faith in a continuation of the current economic cycle. Given this situation, we continue to advocate aconservative approach, favoring quality stocks and bonds, short maturities and the purchase of portfolio insurance
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MWM Investment Policy
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From a relative valuation perspective, we like European stocks as they trade at lower multiples, and we expect profits to pick up as economic activity accelerates
Multi-strategy / multi-manager hedge funds with daily liquidity are having a disappointing performance, particularly when compared with other less risky alternatives, like short-term corporate bondsA diversified commodities allocations, further help us to increase diversification and to protect the portfolios against a scenario of rising inflationInvesting in late-stage private equity provides access to the asset class with liquidity provision up to a certain degree
Corporate debt and High Yield currently offer the best combination of risk and return. We prefer medium maturities as theyield curve has flattened considerably and there is little term premium to compensate for taking interest rate risk
High quality debt in Euros presents a very unattractive combination of risk and return as current yields offer very little cushion to weather potential interest rates increases
In European credit we only see value in subordinated debt, asset-backed securities and short-duration high yield
Treasuries offer protection from a slowdown in growth – although this less likely with the fiscal stimulus in the US – whilstTIPS offer protection against rising inflation as a consequence of reflationary policies
We avoid Emerging Markets until there is more clarity on the new US administration trade policy, and the effects of astronger dollar and higher financing costs for Emerging Markets are calibrated by the market
Amongst others, we favor Biotechnology and listed Real Estate
Japanese stocks are the cheapest in developed markets, but have suffered recently due to sluggish growth, and concerns about global tradeEmerging markets have corrected sharply since the beginning of the year affected by a strong dollar and trade concerns. We deem the correction suffered has been excessive, and continue favoring India and Frontier Markets within EM
After the recent market corrections, valuations have improved substantially. We have therefore increased our exposure to US equities, mostly through quality and growth oriented companies
Equities
Multi-Strategy Hedge Funds
Commodities
Private Equity
Alternative Investments
Fixed Income
US Credit
European Sovereign
US Treasuries
Europe
Emerging Markets
European Credit
Sectors & Themes
Japan
Emerging Markets
US
Asset Class RationaleView
+
+
−
−
+++
==
Overweight+ Underweight− Neutral=
+
−
A (difficult) year in review
4
• With rising interest rates, and widening spreads, most areas in fixed-income had a negative performance this year.Only the shortest parts of the yield curve offered positive returns
• Equity markets, one more time, showed a divergence between the US and the rest of the world• Commodities and gold suffered from higher real interest rates and a stronger US dollar
Source: Bloomberg, as of December 7, 2018
-2.4%-1.1%
-1.8%
0.9%0.0%
-0.3% -0.3%
-3.7% -3.8% -3.6%
2.7%
5.2%
-9.1%
-3.1%
-13.4%
-7.9%
-4.5%
-0.6%
-2.1%
3.3%
-15%
-10%
-5%
0%
5%
10%
Glo
bal A
ggr.
US
Aggr
.
US
Trea
surie
s
US
Aggr
. 1-3
Yr
EUR
Agg
r.
EUR
Agg
r. 1-
3Yr
US
Hig
h-Yi
eld
EUR
Hig
h-Yi
eld
EM A
ggr.
($)
Subo
rdin
ated
Deb
t
S&P
500
Nas
daq
Euro
Sto
xx 5
0
Nik
kei 2
25
Emer
ging
Mar
kets
S&P
GSC
I
Bren
t Cru
de
Gol
d
HFR
I FoF
Dol
lar I
ndex
Looking forward into 2019
5
• From a valuation perspective, the suppression of volatility engineered by central banks since the financial crisis canstill be felt in a number of indicators, like corporate spreads
• Only equity markets seem to be more attractively valued, particularly if low interest rates are not to revert to theirhistorical mean as a consequence of structural factors (demographics, globalization and technological disruption)
Source: PIMCO and Bloomberg as of December 5, 2018
14.0%
2.5%
345
143
15.1
18.4%
3.7%
468
171
16.7
24.3%
4.7%
645
215
18.5
59.9%
6.7%
1,891
575
26.7
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Volatility
10 Yr UST
HY Spreads
IG Spreads
S&P 500 P/E
Percentile 1 Percentile 2 Percentile 3 Percentile 4
Min Max
11.42
118
239
1.5%
9.5%
Current
16.9
174
423
3.12%
18.1%
Rising investor anxiety about the economic cycle
6
• Investors have been calibrating, alternatively, both higher interest rates due to the robustness of an economyapproaching its maximum capacity, and the risk of an economic slowdown
• In this interplay, corporate earnings, inflation and growth data will be key to determine the future direction of equitymarkets
Source: Bloomberg
2.3%
2.5%
2.7%
2.9%
3.1%
3.3%
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec2,500
2,600
2,700
2,800
2,900
3,000
S&P 500 10 Yr US Treasury Yield
Where is the neutral rate?
7
• Financial conditions have tightened to levels close to its historical average, despite the still low levels of interest ratesfrom a historical perspective
• This complicates further the task of the Federal Reserve, as the risk of a policy mistake has considerably increasedsince the lift-off in 2015
Source: Bloomberg
1
2
3
4
5
6
7
8
9
1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 201798
99
100
101
102
103
104
105
GS US Financial Conditions Index (lhs) Bloomberg Barclays US Agg - Yield to Worst (rhs)
First cracks in credit are emerging
8
• US High Yield spreads, which have remained relatively immune to stock market volatility bouts, have widenedsignificantly in November. European High Yield have fared significantly worse, and spreads are now approaching levelsclose to the 2015 sell-off
• As we consider credit markets to be one of the best leading indicators of a recession, this is an indicator to monitormore closely in the future
Source: Bloomberg
2%
3%
4%
5%
6%
7%
2015 2016 2017 20184%
5%
6%
7%
8%
9%
10%
11%
US High Yield - Yield-to-Worst (lhs) European High Yield - Yield-to-Worst (rhs)
Leverage remains an area of concern
9
• Concerns about credit markets are compounded because of the increase of financial leverage experienced by thecorporate sector in the US since the financial crisis
• However, debt affordability is relatively ample at current interest rate levels, and there is no immediate “debt maturitywall” that needs to be refinanced
Source: Bloomberg
40
60
80
100
120
140
160
180
20
30
40
50
60
70
80
1952 1957 1962 1967 1972 1977 1982 1987 1992 1997 2002 2007 2012 2017
Total Credit to Non-Financial Corporations (US) Total Credit to Non-Financial Sector (US)
No signs of recession, but turns are sharp
10
• Despite the unease observed in credit markets, the main leading indicators continue pointing to a continuation of thecurrent economic expansion
• However, it is important to be cautious and remain vigilant, as the deterioration in economic conditions can be verysudden
Source: Bloomberg
3%
4%
5%
6%
7%
8%
9%
10%
11%
1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 201830
35
40
45
50
55
60
65
ISM Manufacturing PMI (lhs) US Unemployment Rate (rhs)
Dollar strength to remain
11
• As long as dollar-denominated bonds continue yielding significantly more than those of the major currencies, the USdollar will remain strong
• Although a large part of the increase in interest rate differentials was priced in at the onset of the Fed normalizationprocess, the latter has become more pronounced than initially anticipated by the market
Source: Bloomberg
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
2014 2015 2016 2017 201875
80
85
90
95
100
105
U.S. Dollar Index (lhs) Bloomberg Barclays Global Aggregate Yield-to-Worst US vs. Rest (rhs)
Model portfolio evolution
12Source: Bloomberg as of December 1, 2018* Fund publishes monthly NAV with a 1 month of delay
-20% -15% -10% -5% 0% 5% 10% 15%
Partners Group Global Value*Franklin K2 Alternative Strategies Fund
Amura Absolute ReturniShares Diversified Commodity Swap UCITS
Polar Capital Funds JapanT.Row Price Frontier Markets Equity Fund
Henderson Global Property EquitiesPolar Capital Biotechnology Fund
Pictet Indian EquitiesBNP Paribas TIER US 4% Index
Bonus Certificate SX5EBonus Certificate SMI
Wellington Global Quality Growth PortfolioiShares Edge MSCI USA Quality FactorSchroder ISF - Global Convertible Bond
Ellipsis European Convertible FundGAM Star Credit Opportunities
Neuberger Berman Corporate HybridOddo Compass Euro Credit Short Duration USDh
AB Mortgage Income Portfolio - A2M&G Global Floating Rate High Yield Fund
Muzinich Short-Duration High YieldiShares USD Short Duration Corporate Bond
iShartes Ultrashort Bond UCITS ETFiShares $ TIPS
iShares $ Treasury Bond 3-7yr UCITS ETF
Ytd Last Month
Investment scenarios
13
Driv
ers
Mar
ket i
mpa
ctPr
obab
ility
• Global economic slowdown caused by political accidents or policy errors (Trade war with China, EU breakup, a too aggressive Fed, etc.)
• Deflationary scenario due to a combination of low growth and structural factors, although the rise of protectionism would be inflationary
• The Fed will have to reverse course, which would be complicated if inflation is rising
Scenario 1Recession by political/policy accident
• Correction in credit due to a rise in defaults and a widening of corporate spreads
• Correction in equities due to lower projected earnings, though low rates will offer support
• Sovereign and IG credit to profit due to flight to quality and the continuation of an ultra-loose monetary policy globally
• USD neutral to weak as flight to quality is counterbalanced by low interest rates
• Commodities will fall
40%
• The fiscal stimulus in the US provides a short-term impulse to the global economy, but not enough to attain a higher growth trajectory
• Inflation, particularly in the US will pick-up, but remains subdued globally due to structural factors (demographics, low aggregated demand, deleveraging)
• The Fed will continue its normalization path
Scenario 2Goldilocks
• Equities appreciate moderately, with Europe and Japan catching up with the US
• Credit spreads remain stable as the credit cycle is further elongated
• Sovereigns suffer as monetary policy is progressively normalized
• USD appreciate moderately due to higher interest rate differentials
• Commodity prices will rise in the short-term, normalizing once the impulse vanishes
30%
• Growth concerns dissipate, with economic activity accelerating in US, Europe and Japan
• Inflation in the US increases, as a consequence of president Trump’s fiscal stimulus, and pulls other developed economies off deflation
• The Fed will have to step up the pace of rate increases and/or reduce balance sheet
Scenario 3New regime
• Impact on equities will depend on how much real economic growth is sustained, and how accommodative the Fed remains
• Sovereign and IG bonds will face steep losses due to higher rates, particularly if long-term inflation expectations rise
• Corporate credit will correct moderately if inflation comes together with higher growth
• The USD will appreciate, particularly against those currencies facing deflation
• Commodities will gain from higher inflation
30%
Other risksTrade wars, EM crisis, Spread of populist political parties, China slowdown, Terrorism
Short-term catalyzersFiscal stimulus in the US, improvement in macro-data globally, lower geopolitical tensions
MWM Model Portfolio Balanced USD
14
Cash Fixed Income Equity Alternative Inv.Commodities
USD100%
USD
Asset Allocation Currency Allocation
2%
48%
39%
3%8%
Cash2%US Treasuries
3%
Short-Term IG14%
Convertibles26%
Sub. Debt28%
HY Europe3%HY US
3%HY Floating3%TIPS
5%MBS3%
Growth4%
Volatility16%
India3%
Biotechnology3%
Real Estate3%
Japan3%
Frontier Markets3%
US Quality4%
Diversified3%
Multi-Strategy5%
Private Equity3%
MWM Investment Profiles
Strategic Asset Allocation
15
Conservative Balanced Growth
AlternativeInvestments
Commodities
Equities
FixedIncome
Cash 3%5%
64%64%
24%
26%
2%2%
5%5%
2%5%
48%43%
38%
39%
3%4%
8%10%
1%5%
30%22%
54%52%
4%6%
10%15%
0%
10%
20%
30%
40%
50%
60%
2015 2016 2017 2018
Cash Fixed Income Equities Commodities Alternatives
MWM Model Portfolio – Asset Allocation evolution
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0%
1%
2%
3%
4%
5%
6%
7%
0%
2%
4%
6%
8%
10%
12%
14%
2015 2016 2017 2018
1Y VaR 99% MWM Balanced (lhs) 1Y Std. Dev MWM Balanced (rhs) 1Y Std. Dev Benchmark (rhs)
MWM Model Portfolio – VaR evolution
17
MWM Model Portfolio – Peer comparison
18
• Total Return (Ytd1): 5th out of 15• Standard Deviation (1 year1): 1st out of 15• Downside Risk (1 year1): 1st out of 15• Sharp Ratio (1 year1): n/a
1 As of December 3, 2018Source: Bloomberg
-12%
-8%
-4%
0%
4%
8%
Dec 17 Jan 18 Mar 18 Apr 18 May 18 Jun 18 Jul 18 Aug 18 Sep 18 Oct 18 Nov 18 Dec 18Janus Balanced Fund Invesco Balanced Risk Allocation Fund Investec Global Strategic Managed FundTempleton Global Income Fund UBS Global Allocation PIMCO Global Multi-Asset FundUBAM Multifunds Allocation 50 Julius Baer Strategy Balanced BlackRock Global Allocation FundNordea Stable Return Fund Schroder Global Multi-Asset Flexible BNY Mellon Global Real Return FundJPMorgan Global Balanced Fund Carmignac Patrimoine MWM Balanced USD
-1.59%
MWM Model Portfolio – Ytd performance
19
• Total Return (Ytd1): -1.59% vs. -1.12% Benchmark2
• Standard Deviation (Ytd1): 3.01% vs. 5.09% Benchmark2
• Downside Risk (Ytd1): 2.33% vs. 3.89% Benchmark2
• Sharpe Ratio (Ytd1): -1.20vs. -0.59 Benchmark2
1 As of December 3, 20182 Benchmark = 5% Fed Funds + 43% JPM Global Aggregate Bond Index + 38% MSCI World + 4% S&P GSCI + 10% HFRI FoHF
-4%
-3%
-2%
-1%
0%
1%
2%
3%
4%
Dec 17 Jan 18 Mar 18 Apr 18 May 18 Jun 18 Jul 18 Aug 18 Sep 18 Oct 18 Nov 18 Dec 18
MWM Balanced USD Benchmark
MWM Model Portfolio – Historical performance (1)
20
• Total Return (1 year1): -0.69% vs. 0.22% Benchmark2
• Total Return (3 year1): 5.26% vs. 16.06% Benchmark2
• Total Return (Since Jan 121): 25.66% vs. 37.52% Benchmark2
1 As of December 3, 20182 Benchmark = 5% Fed Funds + 43% JPM Global Aggregate Bond Index + 38% MSCI World + 4% S&P GSCI + 10% HFRI FoHF
-20%
-10%
0%
10%
20%
30%
40%
50%
Dec
11
Mar
12
Jun
12
Sep
12
Dec
12
Mar
13
Jun
13
Sep
13
Dec
13
Mar
14
Jun
14
Sep
14
Dec
14
Mar
15
Jun
15
Sep
15
Dec
15
Mar
16
Jun
16
Sep
16
Dec
16
Mar
17
Jun
17
Sep
17
Dec
17
Mar
18
Jun
18
Sep
18
MWM Balanced USD Benchmark Difference
MWM Model Portfolio – Historical performance (2)
21
• Standard Deviation (1 year1): 2.93% vs. 4.94% Benchmark2
• Downside Risk (1 year1): 2.28% vs. 3.79% Benchmark2
• Sharpe Ratio (1 year1): -0.86 vs. -0.40 Benchmark2
• Var 95% - 1day (1 year1): -0.34% vs. -0.52% Benchmark2
1 As of December 3, 20182 Benchmark = 5% Fed Funds + 43% JPM Global Aggregate Bond Index + 38% MSCI World + 4% S&P GSCI + 10% HFRI FoHF
-5.0%
-4.0%
-3.0%
-2.0%
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
Jan
12
Apr
12
Jul 1
2
Oct
12
Jan
13
Apr
13
Jul 1
3
Oct
13
Jan
14
Apr
14
Jul 1
4
Oct
14
Jan
15
Apr
15
Jul 1
5
Oct
15
Jan
16
Apr
16
Jul 1
6
Oct
16
Jan
17
Apr
17
Jul 1
7
Oct
17
Jan
18
Apr
18
Jul 1
8
Oct
18
MWM Balanced USD Benchmark
c/ de l’Aigüeta, 3AD500 Andorra la VellaPrincipat d’Andorrawww.morabanc.ad
22www.morawealth.com
This document is for information purposes only and does not constitute, and may not be construed as, a recommendation, offer or solicitation to buy or sell any securities and/or assets mentioned herein. Nor may the information contained herein be considered as definitive, because it is subject to unforeseeable changes and amendments.
Past performance does not guarantee future performance, and none of the information is intended to suggest that any of the returns set forth herein will be obtained in the future.
The fact that MWM can provide information regarding the status, development, evaluation, etc. in relation to markets or specific assets cannot be construed as a commitment or guarantee of performance; and MWM does not assume any liability for the performance of these assets or markets.
Data on investment stocks, their yields and other characteristics are based on or derived from information from reliable sources, which are generally available to the general public, and do not represent a commitment, warranty or liability of MWM.