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).
As a consequence of the sale of the New Capital Wealthy Nations Bond Fund (see bonds), the money market allocation rose slightly, so this asset class is now slightly overweight.
During the fourth quarter, we sold the units in the UBAM US Dollar Corporate Bond Fund and invested the proceeds in Dollar bonds of good quality names, with about a five year maturity for Swiss Franc based investors. The rationale behind this is the markedly higher hedging costs as a result of the rise in short-term interest rates, making hedged US bond positions less attractive. In addition, we consider the currency risk of the US Dollar versus the Swiss Franc as limited. For Euro referenced portfolios, the proceeds were partially invested in Euro-denominated bonds. Units in the New Capital Wealthy Nations Bond Fund were equally sold. On the one hand, the fund also holds bonds of issuers that may be affected negatively in a weaker economic environment. On the other, we were unable to maintain as close a contact with the fund manager as we wished.
Since the beginning of the year, yields on 10-year government bonds developed in a non-uniform manner:
Swiss equities suffered their biggest annual loss since the 2008 financial crisis. The Swiss Performance Index (SPI) fell by 8.6%. This figure, however, only tells half the story as the performance is sanitised by the highly- weighted and relatively stable performing heavyweights, such as Nestlé, Novartis and Roche. In contrast, losses on many small and medium capitalised stocks were markedly higher. The worst affected was the group of mid-caps (-19.4% for the year), some of which were punished massively as they were unable to fulfil the high expectations of the investment community.
Other funds employed by us developed as follows:
The calendar year performance of the directly-invested “Swiss Stock Portfolio” (SSP) amounted to -13.9%, including dividends. Since 2010, the SSP’s annual performance amounts to 9.4%, a result that clearly beats the benchmark performance of 6.4%. Since 2010, this strategy’s cumulative total return amounts to about 125%. The SSP figures bear transaction costs and withholding taxes, whereas the benchmark index does not bear any costs. The “Strategy Certificates linked to the SIM Swiss Stock Portfolio Basket” (Valor: 36524524, ISIN: CH0365245247) closed the year with a performance of -13.7%.
European equities also had to come to terms with an unfavourable year. They suffered from the cooling economies of the Old World, not least due to significant homemade political uncertainties. Amongst these were; the confusion about Brexit, Italy’s budget tussle with the EU, an adverse environment for the German car industry, as well as the protests of the “Gilet-jaunes” (yellow vests) movement. During December, we implemented some changes to our directly-invested “European Stock Portfolio” (ESP). Part-profits were taken on Eutelsat, Meggitt, Merck as well as Tate & Lyle. The proceeds were used to add to the particularly troubled stocks of Aurubis, Barratt Developments, Covestro, Fresenius and Renault.
Measured on the price/earnings ratio using the latest 12 months profit figures, most equity markets have become more attractive:
The ESP suffered a loss of 17.6% during the year and with that, underperformed its benchmark index Dow Jones Stoxx 600 for once, which closed at year end with a negative of 10.8%. Both figures are total return, meaning they include price changes as well as dividends.
Since 1993, this equity selection’s average annual performance amounts to about 8%, compared to the 6.4% achieved by the above-mentioned broad benchmark. 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 712%, that of the benchmark to about 438%.
As announced in our last report, we bought the Adamant Medtech & Services Fund at the beginning of the fourth quarter. This fund, from the Swiss provider, Bellevue Asset Management, invests in companies in the healthcare sector excluding pharmaceutical producers. Under the headline “digital health”, these companies seek to improve efficiency and cost effectiveness in the healthcare sector. Minimally-invasive techniques and optimised processes aim to cut treatment periods and cost, as well as to increase the well-being of patients. The fund carries a 5-Star rating from Morningstar, as well as an AAA-rating from Citywire. As the bulk of the capital is currently invested in American companies, we will attribute this investment to the US equity allocation in our reporting.
Price/Book and Dividend Yield of major equity markets:
Equities Asia (excluding Japan)
Equities of developed as well as emerging Asian countries suffered badly from the changed trading environment. In particular rising US Dollar interest rates (increasing their Dollar debt servicing cost), as well as the trade war, are impacting export opportunities negatively. This on top of the fact that emerging countries are always first in line to fall victim to nervous investors repositioning their money to safe havens.
In 2018, the Japanese equity market was amongst the weak performers of the established markets. Slow growth, high export dependency and at the same time, intense linkage with its Asian neighbours weighed on sentiment. We have not made any changes to the position.
The positioning in alternative investments too, remained unchanged during the fourth quarter.
Gold benefited from equity weakness during the fourth quarter, with a rise of about 6%, bringing the year’s total near to a break-even. No changes were made to the Gold ETF position, leaving the precious metal allocation overweight vis-a-vis our own strategic asset allocation.
Summary of our current Asset Allocation: