At its meetings, the Investment Committee decided on the following changes to the asset allocation for medium-risk balanced Swiss Franc portfolios, not subject to client’s restrictions (mandates in different reference currencies at times display different nominal weightings and weighting changes).
The money market allocation remained unchanged throughout the quarter. Liquidity serves as an equalising reservoir and a risk buffer for other asset classes, but remains devoid of return.
The global decline in yields again continued during the third quarter, bestowing capital gains on existing positions, however, at the same time making the task of employing newly available money in a reasonably sensible manner even more difficult. We have not initiated any active changes to the inventory and remain underweight in this field.
Since the beginning of the year, yields on 10-year government bonds declined across the board:
We remain unchanged neutral weight in Swiss stocks. The directly invested “Swiss Stock Portfolio” (SSP) achieved a performance including dividends of 18.3% during the first nine months of the year. The Swiss Performance Index (SPI) is ahead with 24.4%, whereas it has to be said that on its own, the index heavyweight Nestlé contributed about one third to the SPI’s performance. Apart from this, our concentration on the in the long-term, very successful value style investing (more on this in the “Equities Europe” section) accounts for the difference. Since 2012, the average annual performance of the SSP, typically comprised of about 20 stocks, amounts to 15.5%, a result that clearly beats the average benchmark’s performance of 11.3%.
Since 2012, the total cumulative return of this strategy amounts to about 206%, while that of the index to “only” 129%. The SSP figures bear transaction costs, whereas the benchmark index does not bear any costs. The “Strategy Certificate linked to the SIM Swiss Stock Portfolio Basket” (Valor: 36524524, ISIN: CH0365245247)has achieved a performance of 16.3% since the beginning of the year
Price/Book and Dividend Yield of major equity markets:
The directly invested “European Stock Portfolio” (ESP) achieved a performance of 9.8% during the first nine months of the year. The Dow Jones Stoxx 600 Index achieved a total return (price change plus dividends) of 19.5% during the same period. Long term, the ESP selection’s outperformance remains intact. Since 1993, the ESP has returned on average 8.2% compared to the 6.9% achieved by the Dow Jones Stoxx 600 Index. The transaction costs, as well as taxes withheld, are deducted in ESP figures, whereas the index is calculated without bearing any costs. The cumulative performance of the ESP since 1993 amounts to above 793%, while that of the benchmark to about 543%.
Value style investing, the style we follow with the ESP and SSP (see “Equities Switzerland”), also lagged slightly behind growth style investing during the third quarter. It is not unusual for the performance of these two investment approaches to diverge. In the past this could be observed time and again, during certain cycles growth stocks took the lead, whereas during others, value stocks were one step ahead.
We are convinced that it makes sense to remain faithful to value style investing, particularly so since value stocks are valued markedly more attractive than their brethren in the growth segment, and therefore possess catch-up potential. Additionally, we are now putting even more emphasis on companies with distinctly high dividend pay-outs coupled with a solid financial footing.
At present, there is a marked valuation gap between growth and value stocks. The price/earnings ratio (P/E), for example, currently amounts to a lofty 23.8 on the MSCI Europe Growth Index. The MSCI Europe Value Index, however, is a mere 12.7. Whereas the price/book ratio of growth stocks stands at an airy 3.7, the reading on value stocks is on average a moderate 1.2. Likewise, a look at the dividend yields reveals a large gap; 2.3% annual yield on growth equities as opposed to 5.5% in the case of value stocks.
Even when compared to the general index without any style-specific metrics, it crystallises that, based on various key figures, the value segment is more attractively valued than the general market. You will find more on the value topic on our web site www.salmann.com in the “Medien” section of the Investment Blog titled “Value Investing funktioniert nicht immer, aber immer wieder” (unfortunately this article is only available in German). Should you wish, we are happy to send you a hardcopy of the article by mail.
American equities finished second place in the nine-month performance ranking. In spite of high waves and treacherous currents (threat of impeachment proceedings against the president, a trade war with China, a dicey situation in the Near and Middle East), the American super tanker stays its course undeterred in stormy seas. We did not make any changes to the US stock weighting and with it, maintained its slight overweight position.
Measured on the price/earnings ratio using the latest 12 months profit figures, most equity markets have become more expensive:
Equities Asia (excluding Japan)
Asian equities came under pressure during the third quarter. The global economic slowdown and the firm US Dollar (which impedes often US Dollar indebted Asian corporates’ ability to service their debt), as well as the risky situation in Hong Kong, dampened investors’ appetites. The index performance for the three quarters of the year amount to 5.7%, the Aberdeen Asia Pacific (ex Japan) Fund employed by us in this area managed to outperform this markedly. The weighting of Asian stocks remained unchanged throughout the reporting period.
In contrast to the rest of Asia, Japan cut quite a good figure and did credit to its nickname of the “Land Of The Rising Sun”. The MSCI Japan advanced by 3.5% in the third quarter and achieved a performance of 9.5% in the current year. We remain neutral weight in Japanese equities, which fundamentally are amongst the most attractively valued ones of all industrial nations.
Hedge Funds developed slowly but steadily this year. Their global index advanced by 1.6% during the quarter and achieved 5.9% (in US Dollar) in 2019 to date. The instruments employed by us in this area exhibited a slightly better performance across the board measured in US Dollars. We have not made any changes to the positions.
Gold built seamlessly on the good performance of the second quarter and continued to climb. The continued decline in interest rates, respectively, the expansion of negative yields made the precious metal an increasingly presentable alternative. According to all accounts, Central Banks are raising their bullion stockpiles to diversify their currency reserves. Last but not least, gold appears to be an increasingly suited security element with a view to the numerous flashpoints and potential for conflict. Our positions remained unchanged throughout the quarter.
Summary of our current Asset Allocation: