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 will decline marginally due to the planned purchase of a fund (see Equities USA). During the past quarter, it remained stable at a slight overweight level.
Again, it was a tiresome three-month period for bond holders. A gradual rise in yields weighed on prices of existing positions without providing for an attractive environment for new engagements. An exception being the Dollar Zone, where a more normal environment is now prevailing, with the interest rates being paid living up to their name. Which is the reason why we sold half of our gold position for US Dollar referenced portfolios and reinvested the proceeds in corporate bonds. Apart from this, no changes have been made.
Other funds employed by us developed as follows:
Performance incl. re-invested dividends where applicable.
As measured by the Swiss Performance Index (SPI), Swiss stocks performed well during the third quarter and are up 4.7%, managing to repair the dent suffered mid-year. The weighting did not experience any changes during the past months.
Year to date, the total return of the directly-invested “Swiss Stock Portfolio” (SSP) amounted to 0.4% (including dividends). With that, it came in a sliver below the benchmark index SPI (Total Return) with a plus of 0.5%. Since 2010, the SSP’s annual performance amounts to 11.7%, a result that clearly beats the benchmark performance of 7.8%. Since 2010, this strategy’s cumulative total return amounts to about 162%. 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) rose 4.1% during the third quarter and with that, also lifting its 2018 performance above the zero-line with a positive 0.1% return.
By and large, European equities trended sideways during the reporting period. The directly-invested “European Stock Portfolio” (ESP) managed to expand its performance slightly since the beginning of the year, closing at the end of September up 0.7%. With this result, it missed its benchmark’s performance, the Stoxx 600 Index, by a hair’s breadth, i.e. 0.2 percentage points. 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 9%, compared to the 7% 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 892%. We have not made any changes to the positions during the third and carry an unchanged neutral weighting in European equities.
Measured on the price/earnings ratio using the latest 12 months profit figures, all equity markets have become more attractive:
US companies are doing as well as can be. 2018 could turn out to be one of the best years since the financial crisis, and increase earnings per share of S&P-500 companies by about 20% on average. Part of the impetus, however, has to be attributed to the stock repurchases financed by companies repatriating foreign profits. During the second quarter alone, these are said to have amounted to well in excess of 200 billion US Dollars. About double that amount in share buy-backs already announced is still pending.
Just before the end of the quarter, we decided to establish a position in the BB Adamant Medtech & Services Fund. 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 are to cut treatment periods and cost, as well as to increase the well-being of patients. The fund’s assets currently amount to about 427 million Swiss Francs. It 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. The purchases will be executed during the course of October.
As for the existing engagements, the Performa US Equity Fund again provided reasons to be pleased. During the third quarter alone, it rose by a good 9%, and in so doing, raised its year-to-date performance to 28%. With this result, it beat its benchmark markedly. Smaller companies in particular, provided for much of the impetus within the fund. Together with the BB Adamant engagement, we are now overweight American equities.
Price/Book and Dividend Yield of major equity markets:
Equities Asia (excluding Japan)
Emerging market equities remained under pressure. Rhetoric and measures taken by the White House, in particular targeting China, the evolution of US Dollar and American interest rates, as well as rising oil prices, all add to international investors’ reserved sentiment vis-a-vis emerging economies. We are currently neutral weight.
We left the GAM Equity Fund position unchanged during the quarter, and so maintained our neutral weight. By comparison, both against stocks of other countries, as well as against their own historical data, Japanese equities are valued attractively. In the first nine months of 2018, the fund’s performance just about matches that of the broader market. The suspension of the fund manager, Tim Haywood, who managed a different vehicle, and the subsequent liquidation of that vehicle, in no way impacted the Japan equity fund held by us. The asset manager GAM, with its Far-East experts we have known for a long time, continues to manage the Japan fund in the usual reliable manner.
The positioning in alternative investments remained unchanged throughout the quarter. Prices moved only marginally, and the alternatives proved their worth in their role as a buffer against volatility from equities, bonds and gold.
Gold shone only faintly in the third quarter. Amongst others, the price trend is linked to rising US Dollar rates, rendering interest rate-bearing instruments denominated in US Dollars more attractive versus the non-interest-bearing precious metal. This is also the reason why we halved the gold position in US Dollar-referenced portfolios, as the original argument to buy (gold is a reserve currency without opportunity cost) lost significance. We invested the proceeds in US Dollar bonds. Quite possibly, sales by emerging countries, above all Turkey, may have hurt the metal’s price. It is quite possible that Turkey attempts to stabilise the country’s tumbling currency by switching gold into Lira.
Summary of our current Asset Allocation:
For a Swiss Franc reference portfolio.