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Fund Manager Monthly Report - April 2015

22 May 2015

View the latest portfolio and market commentaries from our range of fund managers.

Aberdeen Asset Management (Asia) – Hugh Young

Far East

In April, the fund was flat in sterling terms, underperforming the FTSE World – Asia Pacific Index’s 0.44% gain. Our stock selection in Japan was the key detractor as key holdings Shin-Etsu Chemical, Unicharm and Chugai Pharmaceutical lagged the local market. This was despite Chugai’s decent first-quarter results that were supported by robust royalty income from parent Roche for its blockbuster arthritis drug Actemra. Shin-Etsu’s annual earnings also met expectations.

Stock selection in Hong Kong also weighed on relative returns, despite our holding HSBC’s good performance. The stock rose strongly after the bank’s chairman revealed that management has been tasked with reviewing where best to relocate its headquarters, now domiciled in the UK. Notably, Jardine Strategic’s stock price came under pressure because of a weak outlook for its Indonesian business held by its subsidiary Jardine Cycle & Carriage. Meanwhile, the fund did not hold Hong Kong Exchanges and Clearing, which surged on the back of higher average daily trading volumes as a result of increased inflows from mainland investors. Elsewhere, Standard Chartered corrected after prior outperformance.

Where we added value was in Australia. We did not hold the big four banks, which corrected. The sector trades at a premium to regional peers. Our long-term holding QBE Insurance also continued to be re-rated by the market after the chairman flagged a potential uplift in dividends. In Singapore, our banking stocks aided performance.

The three banks DBS, OCBC and UOB reported first-quarter results that largely met expectations, while their capital positions and asset quality remained sound.

Aberdeen Asset Management – Jamie Cumming


In April, the fund gained 0.95%, outperforming the benchmark’s decline of 0.83%, largely owing to positive asset allocation. The non-benchmark exposure to Brazil contributed to relative performance. Brazilian equities rebounded in April, buoyed by hopes that the country could avoid a credit-rating downgrade on the back of government spending cuts, as well as receding concerns of a debt default at state oil company Petrobras. Stock selection there was also positive, with our Brazilian holdings, Vale and Banco Bradesco, among the key contributors to relative return. Vale benefitted from a recovery in iron ore prices, and its first-quarter results showed further success in cost cutting. Bradesco posted solid results, with net earnings lifted by higher interest income. Elsewhere, South Africa-based telecommunications company MTN did well, buoyed by resilient results despite weak subscriber growth in Nigeria.

Conversely, Zurich Insurance detracted from performance, on concerns that low interest rates and a weak Swiss franc would weigh on its profits. Swedish telecommunications company Ericsson’s shares fell after it posted a decline in first-quarter profits, owing to a slowdown in US sales and lower margins in Asia.

In portfolio activity, we sold US telecommunications company Verizon, which no longer satisfies the fund’s ethical screens for business practices.

Artemis Investment Management – Adrian Frost & Adrian Gosden

UK & International Income

The UK market had been pretty sanguine in the run up to the election and indeed its 3% rise in April brought the bears onto their hind legs as they growled for a market correction. As we write, with the last election results drifting in, we will never know whether the market was lucky or propitious in its action. The electorate has endorsed the known rather than the promise and whilst markets had perhaps been fearful of a long running quagmire of coalition and compromise, it now looks as though those policies can be crafted and affected. The reaction of markets is understandable and contains a very audible sigh of relief from specific sectors which were seen to be the focus of Labour’s agenda.

The market sees this as a positive for the UK business environment, yet we believe that politicians of whatever creed will be more inclined to intervene in business where it sees fit and so this is most definitely not a return to the ‘free market economy’ of yesteryear. Investors had been reducing their UK exposure in the run up to the election.

As they now see a stable political environment with an economy that will continue to recover, flows should reverse and support markets. So, all is well for the moment but the European referendum - which may seem like a dot on the horizon for now – will loom larger as the year progresses and this presents another uncertainly for the market to overcome.

We viewed the strategy of the new CEO of Kingfisher as much needed, but judge that the practical implementation will be costly and not without risk. We sold the remainder of our holding into the enthusiastic share price response. We continued to add to Barclays and Lloyds.

Artisan – Dan O’Keefe & David Samra

Global Managed & Global Unit Trust

The MSCI All Country World Index rose 1.5% during April (all returns in local terms unless otherwise noted). There was meaningful divergence in the performance of major global markets during the month. The UK, Hong Kong and Japan all had significant gains (up 3.3%, 9.1% and 3.3%, respectively), while Germany and Australia declined (down 4.4% and 2.0%, respectively). France and Switzerland were roughly flat. Currency continued to have a significant impact on investment results, with the US dollar reversing a year-long trend and weakening 4.2% against the euro and 3.4% against the British pound. Among the largest contributors to performance this month were Microsoft and Bank of New York Mellon.

Microsoft rose 19.6% after announcing earnings that showed good growth in key business lines and continued cost discipline. Bank of New York Mellon rose 5.6% after reporting first quarter earnings that finally showed some discipline on controlling costs.

Among the largest detractors from performance this month were Applied Materials and Tesco. Applied Materials declined 12.3% after cancelling its merger with Tokyo Electron due to concerns about obtaining approval from the US Department of Justice. Tesco declined 9.1% after reporting Q4 2014 earnings that included large writedowns in its real estate portfolio and weak performance in its non-UK markets. Tesco’s new management team is still in the early stages of executing its turnaround plan. While there remains a long way to go, we are encouraged by some initial signs of stabilization in the UK business. During the month, we exited our investment in TNT Express, which is being acquired by FedEx at a price above our estimate of intrinsic value.

We continue to review a variety of potential investments across the globe. Yet as markets post new highs, we are finding that stocks are mostly fairly priced. As a result, we remain cautious about valuations and our cash positions are elevated.

AXA Framlington – George Luckraft

Diversified Income & Allshare Income Unit Trust

Equity markets saw some volatility as bond prices fell. Previously large cap yielding equities were supported as investors sought income. The weakness in oil shares following the fall in the oil price prompted Royal Dutch Shell to bid for BG group. A lack of a holding in BG Group accounted for the underperformance of the fund during the month. A profit warning from Shoe Zone was also a negative factor. Following continued strength the holdings of both Cineworld and Redefine were further reduced.

The clear cut General Election result should bolster corporate and consumer confidence with the property market in London seeing a big rise in transactions. Sterling has strengthened and this will be a negative factor for the translation of overseas earnings. Performance in the bond market is likely to be the key factor with some commentators suggesting that this could be the start of a bond bear market.

Babson Capital – Zak Summerscale

International Corporate Bond

High yield bonds continued their strong performance in April, with the International Corporate Bond Fund producing positive returns for the month. The market continued to be buoyed by a ‘risk on’ trend, evidenced by record highs in the equity markets. Additionally, a cautious rate outlook by the US Federal Reserve combined with a steadily resurgent Energy sector in the U.S, provided further support. Other factors proving beneficial in boosting the risk appetite during the month included alleviating fears over Greece’s potential exit from the

Eurozone and subsiding deflationary concerns with the gradual rise in the price of oil. The result has been a healthy demand for global senior secured bonds, with the asset class continuing to provide attractive yields with a robust earnings profile.

New issue volumes in the U.S. continued to be strong through the early part of April with a slight tapering off as we moved towards the end of the month, although the overall year-to-date volumes remain robust. In Europe, the year-to-date high yield bond new issue volumes are already ahead of the total full year issuance volumes of both 2011 and 2012 respectively, with 42% of the year-to-date issuance in Europe being secured bonds. In the U.S., high yield bond issuance has been dominated by refinancing activity, making up around 50% of the yearto- date volume. M&A deals have accounted for around 30% of the year-to-date new issue volume in the U.S., with around 28% in Europe.

Notable contributors to returns in April included names such as Murray Energy Corporation, the biggest privately owned coal mining company in the U.S.; and Shelf Drilling, a global provider of shallow water drilling services.

Negative contributors over the month included names such as Four Seasons Health Care, a UK private care home business; and Univision Communications, an American media company serving the Hispanic market. From a regional perspective, the U.S. high yield bond market outperformed its European counterpart in April, helped in part by the rally in U.S. Energy names.

With the benign interest rate environment in the U.S. and negative central bank interest rates in Europe combined with healthy global corporate balance sheets, we would expect global senior secured bonds to remain an attractive investment option in the current environment. As such, the International Corporate Bond Fund will continue to take advantage of selective primary and secondary market opportunities, ensuring a diversified combination of robust senior secured credits with attractive yield profiles.

BlackRock – Luke Chappell

UK & General Progressive

The portfolio returned 1.9%* over the month underperforming the benchmark FTSE All-Share Index, which returned 3.0%.

The UK equity market rose in April, continuing the positive trend seen since the European Central Bank announced its quantitative easing bond purchase programme. Equities fell back towards the end of the month as inflation expectations began to turn as the oil price along with other commodity prices moved higher, contributing to a sharp sell-off in bonds and an increase in yields. Economic growth forecasts for European economies were raised, in contrast to the US, where economic indicators showed some short-term weakness.

The Fund lagged the market rise over the month as a number of the stronger contributors to performance in the first quarter of the year reversed gains. Positions in Reed Elsevier, Wolseley, Compass and Capital & Counties all fell despite no company specific newsflow. EasyJet fell following the rise in the oil price and the likely future impact on the group’s costs. Not owning HSBC detracted from relative performance following speculation around the company reviewing its domicile and a potential move to Hong Kong.

The largest positive contribution came from BG Group, following the proposed takeover by Royal Dutch Shell at a significant premium to the pre-bid share price. Next reported strong results towards the top of market expectations and announced a further special dividend, whilst Sky noted lower customer switching “churn” and a strong performance across its UK business and its recently acquired German and Italian businesses.

Activity over the period saw us add to Reed Elsevier and Barclays. We reduced positions in Reckitt Benckiser and Royal Dutch Shell and sold Berkeley Group.

US economic activity remains positive, in contrast to Europe where activity remains subdued. The announcement of QE in Europe has improved investor sentiment, but evidence of its real economic impact remains limited and we see a divergence of monetary policy between Europe and the US in 2015. We expect that inflation expectations and medium term GDP growth will remain modest, thereby limiting the risks of a substantial correction. In the longer-term, recovering global growth and confidence about monetary policy, which will remain loose to allow economies to pay down fiscal deficits, is a positive backdrop for corporate earnings and equity valuations. In a world of low but positive global economic growth we seek those companies that can meet expectations for earnings growth and drive returns through self-help with a clear strategy to deploy the cash flow they generate.

BlackRock – Nigel Ridge

UK Absolute Return

Equity markets posted gains in April although some fell back towards the end of the month. Inflation expectations began to turn contributing to a sharp sell-off in bonds while the oil price experienced its second mini rally of the year. The European economy continued its recent expansion helped by demand for credit improving while the US experienced some weakness which we believe to be temporary. Despite the negative effects of another difficult winter, broad-based US economic improvement should still materialise over the remainder of 2015.

Elsewhere, Chinese equities made rapid progress in April as monetary policy was eased further. An unexpected 1% cut in the refinancing rate was the latest move to address the slowing pace of economic activity and help ease concerns over the nations’ credit and housing bubbles.

The Fund produced a positive return of +0.2% taking the latest 12 month return to +12.8% (net of fees). The month was characterized by gains across the long book being partially offset by losses on the short side. The largest contribution was made from stock selection in long positions from across the financials sector. The largest contributor was our holding in global bank HSBC. The long term absolute return investment case persists yet short term support came from speculation around the company spinning off UK assets and announcing a review of the company’s domicile. Alpha came from a short position in a UK Food Retailer as the longer term negative trends re-emerged after a brief respite from shorter term Christmas trading volumes. Elsewhere in financials, 3i Group and Hargreaves Lansdown also benefitted from broader support for the sector. Carnival was the main detractor as shares responded more to the oil price rise than to any company news flow. We continue to believe that recent results support our view that both revenue and earnings prospects are on an improving trajectory.

Within industrials, long positions in manufacturers Essentra and Wolseley saw weakness with caution arising from weak US quarterly data. Within the pair book, UK house builders made the largest gains helped by Taylor Wimpey delivering good sales growth in the period while the staffing pair saw losses as a short position in an office solutions business detracted.

The gross exposure ended the month at 123% and the net exposure 25% which is consistent with the level of risk held for much of the year. Adding to March’s exceptional return with further positive progress in April is pleasing given the potential for some mean reversion after substantial returns in a relatively short space of time.

This aligns with the long term strategy seeking to deliver sustainable rather than temporary alpha predominantly from bottom-up stock ideas. A clear race to the bottom for currencies looks set to continue with the relative strength of the US Dollar likely to remain one of the most notable features for company earnings.

First State – Jonathan Asante

Worldwide Managed

Global equities are fully valued and increasingly bubble prone – mainland China, some Indian smaller companies and internet-related ventures globally may have already succumbed to market euphoria. Fortunately, bubbles always burst providing opportunities to buy good quality companies at prices which should deliver acceptable long-term returns.

The outlook has remained unchanged for many years and is unlikely to change drastically in the future. We believe companies are likely to face a tough environment of low growth, unpredictable government policies and the proliferation of technological threats.

At a stock level, Coca-Cola Hellenic (UK: Consumer Staples) rose on good results mainly driven by volume improvements in emerging markets and improved cost control. LG Chemicals (South Korea: Materials) recovered from cyclical lows and Tullow Oil (UK: Energy) gained after receiving approval to develop an oilfield off the coast of Ghana.

On the negative side, Indian stocks Housing Development Finance (Financials) and Infosys Technologies (Information Technology) both declined on a market sell-off as investors anticipated that Modi’s reform efforts will face challenges from vested interests. Uni-President Enterprises (Taiwan: Consumer Staples) was weak on concerns about the loss of market share in some beverage categories.

Invesco Perpetual – Paul Read & Paul Causer

Corporate Bond

European currency high yield bonds delivered a positive return in what was a challenging month for bond markets. The underlying German Bund market sold off aggressively in the last 10 days of the month, partially due to profit-taking amidst stronger economic data, higher inflation and increased hopes of an agreement between the Greek government and its creditors. This had a negative impact on bond returns, however high yield debt, which tends to benefit from positive economic data delivered a positive return. Whilst the signs of a potential agreement helped Greek government bonds to rally, other peripheral European sovereigns succumbed to post Quantitative Easing profit-taking. The European high yield primary market remained buoyant with Barclays estimating issuance of €13.6bn across all currencies. This brings year-to-date issuance to €52.8bn, a year-on-year increase of 16%. Data from Merrill Lynch showed the European Currency High Yield bond market returning

0.6% with BB bonds returning 0.5% and CCC and below 1.5%. European investment grade corporates returned -0.4%. Italian and Spanish sovereign debt returned -1.6% and -1.7% respectively. Bunds meanwhile returned -1.3% (All returns Sterling hedged.)

In terms of positioning we are defensive. Our exposure is skewed toward higher quality, well established high yield issuers, predominately rated BB. Many of the holdings are in the financial sector, which we think have the type of defensive qualities we are seeking while still achieving a reasonable level of yield. The fund also has positions in Italian peripheral Europe, as we seek to benefit from a further tightening of the yield spread over German Bunds.

In a busier month of trading, we participated in new issues in Fiat 4.5% 15/04/20 (Auto), RWE 2.75% 21/04/75 (Utility), Moy Park 6.25% 29/05/21 (Food), Levis Strauss 5% 01/05/25 (Retail) and Senvion 6.625% 15/11/20 (Industrial). We bought new positions in Time Warner 5.25% 15/07/42 and Marfrig 8.375% 09/05/18 (Food). We sold our positions in Equiniti Cleanco Ltd 7.125% 15/12/18 (Services) and J Sainsbury’s 1.25% 21/11/19 (Retail).

Invesco Perpetual – GTR team

Multi Asset

Fund performance was positive during April. Increased equity volatility across Asia boosted returns from the long volatility component of our selective Asian equity idea and our relative view on Asian equity volatility versus US equity volatility. A combination of pre-election jitters and weak data weighed on the pound, which meant our preference for the Norwegian krone was also a strong performer during the month. However, other currency ideas fared less well with the US dollar losing ground versus both the euro and the Canadian dollar and the yen hitting a seven-year high versus the Korean won. In the equities space, our idea preferring US large capitalisation stocks over their small cap counterparts was another positive over the month. During the month, there were few major changes to the portfolio. One idea that was removed was our Japanese curve flattener idea as the drivers for the idea are now less apparent. The idea has worked well for the fund but looking at its risk/reward profile going forward, we felt that its volatility had risen versus the idea’s potential returns.

Following review, we also changed the implementation of our European Divergence equities idea, in particular our preference for German equities over French equities. Following strong performance in Germany, the valuation case for Germany versus France has been eroded and the tailwind of a weaker euro for German exporters may be less of a driver going forward. We still believe there is value in European equities but decided to remove our preference for Germany versus France within the idea. No new ideas were added.

J O Hambro – John Wood

UK & General Progressive

With the exception of our observation that investors should beware fat fund managers and narrow exits, we have nothing new to add to last month’s commentary. The recent cracks in global fixed income markets may or may not portend it, but we maintain that a financial tsunami is coming. We’re still sticking to the higher ground.

April 2015 commentary: “There is a generally accepted view that central banks printing money is fantastic for financial assets but that the withdrawal of monetary stimulus is not. The actions of the European Central Bank have, in recent months, prompted a reflex reaction by investors, with money pouring into European bonds and equities. In contrast, the timing of the inevitable rise in US interest rates is debated endlessly, the view being that it will be bad for financial assets. Indeed, given the role of the US dollar as the global reserve currency, it will be bad for ALL financial assets, regardless of their geographic location. A debate then usually ensues as to where the ripples of the rising interest rate policy will cause most damage: emerging market debt and equities, corporate bonds, ‘bond proxy’ equities, etc.

There is, then, seemingly a general acceptance that a financial tsunami is coming. But, for now at least, the investment community appears happy to slap on the sun cream and soak up the last rays of sunshine.

At a fundamental investment level, the “party past midnight” mentality is represented by investors clamour for shareholder returns via dividends and buy-backs, regardless of whether these are covered by earnings and cash flows. This has led investors to demand distribution over investment in the companies. A recent report by Citigroup strategists argued that 2014 saw a recession-like cut in corporate investment but a boom-time increase in shareholder pay-outs. For UK companies, the authors calculated that in 2014 investment fell by 9% yet shareholder distributions rose by 17%. Rising uncovered dividends unsupported by investment to protect (and grow) the long-term value of a business is a disaster waiting to happen.

We are leaving the sun cream behind and heading for higher ground. We will return to the beach to trawl through the wreckage after the financial tsunami has done its damage.”

Loomis Sayles – Kenneth Buntrock

Investment Grade Corporate Bond

Economic activity remains sound; growth could be somewhat above potential in 2015.The rate-hike cycle due to start this year has been priced out by many. Inflation has fallen well under the BoE’s targeted 2% given oil prices. Our house expectation is for a hike of 0.25% in the next twelve months. Monetary conditions are set to remain loose, until inflation and wage growth take hold. We are mindful of risks and volatility around the May 7th elections. Although, we expect the BoE to begin raising rates in the next 12 months, we are not looking for dramatic rate increases and should remain a rate friendly environment for corporations. UK PMI numbers appear to be slowing, but remain in expansionary territory.

Spreads remained stable during April but the UK IG market continues to perform the best among the major, developed IG markets year-to-date. Demand for UK IG has benefited from the significantly better yield proposition versus Euro IG. Subordinated Banks and Energy led the way, while Cable Satellite and Communications lagged during the month. High yield spreads were very strong during the month and closed tighter. UK yields drifted higher to levels above where they began 2015. Active yield curve strategies are not alpha drivers for this portfolio as this time.

Holdings in Media companies led to some underperformance in April. The portfolio was overweight to Time Warner Cable and the GBP-pay bonds widened as the market digested the news of failed merger talks with Comcast. These losses were partially mitigated by selections in the Energy sector, such as Petrobras and BG Energy Capital. Names held in Transportation, Financial Services, and Consumer goods added modest value. The overall allocation to high yield issues contributed positively to relative results.

Majedie – James de Uphaugh

UK Growth & UK & General Progressive

Your portfolio rose 2% during April, lagging the broader market which, even in the face of political uncertainty, rose 3%. The UK General Election dominated the newswires, yet despite the prospect of a hung parliament equities were well supported and demand for European assets, more broadly, remained strong as evidence of a pick-up in underlying economic momentum began to come through in the data. Thin positioning exacerbated the flood of money into the region as global asset allocators swung the guns off the US where soggy prints began to leave flecks of doubt in the minds of investors who had previously gone all in on a Fed-inspired sustainable recovery.

Performance for the month was weighed down by stock specific issues. The collapse in the price of crude oil through the fall of last year had wrought havoc in a sector prone to boom and bust. Company announcements were littered with job losses and mothballed projects. Valuations hissed leaving many companies’ valuations cheap, relative to the market and their own history. For some, opportunity beckoned, and Royal Dutch Shell, the Anglo-Dutch super major, announced to the market plans to buy the London listed explorer BG Group

in an eye-popping deal worth £55bn. The shares in BG, in which we only hold a small position, leapt on the announcement. Your holding in Tesco, meanwhile, gave back some of the year to date gains, after the company announced a set of results that reminded the market that big ticket turnarounds take time. Whilst underlying trading was in line with forecasts, there was a sizeable property write down and comments on the outlook pared expectations. We continue to believe there is a significant opportunity for the new management team to turn the business around, and saw the results as suitably measured. There is no quick fix for Tesco. The cruise ship operator Carnival also came off after a competitor announced some disappointing results, talking about softer spending patterns in the some key routes. Forecasts got knocked lower on the yield guidance and the market took the opportunity to book profits after a strong run. We like the fundamentals of the cruise industry and continue to think the shares of Carnival offer decent upside as new management wring operational efficiencies out of the business.

We remain positive on the outlook and see good opportunities across the domestic market, specifically in the Banks sector where we have been increasing our exposure. We believe the valuations fail to reflect the structural changes that have been pushed through by management teams who are stepping away from capital intensive activities and re-shaping their portfolios to focus on traditional ‘boring’ banking. With litigation headwinds subsiding, we believe the sector is ripe for the picking.

Majedie – Chris Read

UK Income

The UK Income Fund rose 1% in April, compared to a 3% return from the FTSE All-Share index. Approximately half of the underperformance was due to stock specifics, in particular not holding both BG and HSBC. BG Group received a bid from Royal Dutch Shell during the month, resulting in positive share performance. Indeed the Oil & Gas sector in general rebounded strongly; whilst our mid cap holdings such as Cairn Energy performed well over the month, ultimately the underweight large cap position detracted from performance. HSBC also rallied from what had been an oversold position, driven by improving sentiment towards emerging markets (signs of stabilisation in China) and a number of broker upgrades  highlighting a management team that is increasingly being driven by rising tax and capital needs towards focusing on the core businesses.

In addition, the month saw share price pullbacks in a few of our longer term positions e.g. Man Group, Aviva, easyJet and Pearson. These stocks have generally performed well in the year to date and therefore we have not been too surprised to see some profit taking, particularly with investors in UK equity markets increasingly skittish ahead of the General Election. We think a number of these companies are successfully building global businesses and so have sought to buy more into share price weakness.

Overall, despite reporting a slightly disappointing April in terms of relative returns we remain comfortable with our overall portfolio outlook and positioning, with the exception of the oil price which has had a stronger start to 2015 versus what we had expected; we continue to monitor developments closely.

Manulife – Paul Boyne & Doug McGraw

Global Equity Income

Stock selection in the consumer staples and information technology sectors contributed to performance. Individual contributors included Microsoft Corporation, Statoil ASA and Philip Morris International Inc. Microsoft and Philip Morris had strong earnings results, while Statoil benefited from rising oil prices.

Stock selection in the consumer discretionary and materials sectors detracted from performance. Individual detractors included Whirlpool Corporation, United Technologies Corporation and Johnson & Johnson. Whirlpool fell as the company adjusted its full-year 2015 guidance. United Technologies struggled with investors’ concerns about a slowing commercial aerospace aftermarket. Investors reacted negatively to Johnson & Johnson’s firstquarter earnings release.

During the month, we added a position in SES SA, for its strong balance sheet, solid capital allocation and good visibility of revenues, and eliminated the strategy’s position in Honda Motor Co., Ltd. as the stock approached our estimate of fair value.

Oldfield Partners – Richard Oldfield

High Octane

The UK general election result, confounding all the polls until Ipsos/Mori’s final exit poll, is a reminder of unpredictability, and a cue on VE day to recall (again) the experience of Kenneth Arrow, winner of the Nobel Prize for economics and employed as a meteorologist in the US Air Force in World War 2. He quickly realised that his medium term weather forecasts were no better than randomly right and asked to be relieved of the responsibility of producing them. The response came back: ‘the Commanding General is well aware that your forecasts are no good. However, they are essential for planning purposes.’

There is a tremendous tension in markets at the moment – on the one hand record low interest rates, record levels of debt, and high valuations in the US stock market; on the other the possibility, as Warren Buffett discussed at the 50th AGM of Berkshire Hathaway last week, that interest rates might stay low for some time, in which case price-earnings multiples for shares might well continue to rise. We frequently refer to the expensiveness of the US stock market. From comparable levels of valuation - in terms of the Shiller p.e. ratio or Mr Buffett’s apparently favourite measure of valuation, the ratio of market capitalisation to GDP - the average return over the next ten years has been low. But there are exceptions, and an exception might be justified by persistent low interest rates with which to compare the dividend and earnings yields of equities. However, it is not surprising against this background of general expensiveness that we find relatively few opportunities in the US and many more in Japan and elsewhere, where the markets are not expensive. The world is polarised, valuation-wise, to a greater extent than for many years.

During the month the main underperformers were Tesco (-9% in local currency terms), General Motors (-7%), Samsung (-2%), Kyocera (-5%) and Toyota (-0.3%) – the last two of these Japanese and down in the month in spite of the general strength of the Japanese market, but after performing strongly over the past six months. Both Kyocera and Toyota have cash and securities holdings which form a large part of the value which we see in these companies, as well as sound operating businesses – sound being an understatement in the case of Toyota. Tesco is looking after customers more by competing on price and improving service (with the addition of staff), as well as cutting costs. In the near term the first two of these – price and staffing – are bad for profit margins; but we are encouraged by the initial impact of these changes on customer satisfaction, and believe that in time Tesco in the UK should be able to restore profit margins of 3-4%, while its other operations, in Asia, Europe and banking, appear to us to have a value which is not reflected in the share price.

The main outperformers were Microsoft (+20%), Mitsubishi UFJ (+15%), Nintendo (+15%), Barrick Gold (+13%) and Lukoil (+11%). Microsoft, now close to our target valuation, announced excellent results, with progress especially in Cloud activities, and ambitious plans to ensure that the forthcoming Windows, an operating system for personal computers, tablets, and smartphones, will be on one billion devices within two to three years of launch.

Property Unit Trust

The portfolio valuation as at 30th April 2015 was up 0.5% month on month. In the City, we have completed a new 10 year lease on the remaining half of the fourth floor at New London

House. This letting has secured a new benchmark for the building at £55psf, has resulted in the property being fully let and has contributed to a valuation increase of £1.4m.

At Chelmsford Industrial Estate we have completed a new 10 year lease on Unit 15 securing £41,400 of rental income. The portfolio vacancy rate is 4.0% compared with 8.5% for IPD and the initial yield on the portfolio is 5.2% which compares with 5.3% for IPD.

Life & Pension Property Funds

The portfolio valuation as at 30th April 2015 was up 1.0% month on month. At Old Jewry in the City we have completed two 10 year leases on the 4th and 6th floors totalling £688,000 of rental income. This asset management initiative contributed towards a £1.2m valuation  increase for the month of April. The 5th floor is currently under offer and there is positive interest on the last remaining floor.

Also in the City, we have completed a new 10 year lease on the remaining half of the fourth floor at New London House. This letting has secured a new benchmark for the building at £55psf, has resulted in the property being fully let and has contributed to a valuation increase of £1.4m. At Trinity Trading Estate in Sittingbourne we have completed a reversionary 10 year lease on Unit J securing an income of £64,694 p.a. through to 2027. The portfolio vacancy rate is 8.2% compared with 8.5% for IPD and the initial yield on the portfolio is 4.8% which compares with 5.3% for IPD as at 30th April 2015.

SW Mitchell Capital – Stuart Mitchell

Continental European, Greater European & Greater European

Progressive Unit Trust

We made a significant new investment in the French aerospace group Dassault Aviation.

We have long been intrigued by the company, having very successfully invested alongside the Dassault family through our holding in Dassault Systemes. The family have a well-deserved reputation for carefully managing their investments with an unusually long-term mindset. Dassault Aviation is no exception, boasting consistently impressive returns on capital over many years. Accounting, furthermore, is conservative with R&D expensed through the P&L. The company also has a very strong balance sheet, holding some €2.5bn net cash. The recent placing of Dassault Aviation shares by Airbus has given us the opportunity to invest in the company as the free float has risen from 1.9% to 14%. The free float should further rise to 38% by 2016 as Airbus fully dispose of their holding.

The company is at an interesting juncture with current profits depressed by an unusually high level of R&D (13% of sales versus 8% on average) spending as the company prepares to launch a new range of private jets focused on the more profitable large cabin end of the market (Falcon 5X, 7X and 8X). This has coincided with a cyclical low in the private jet market following the financial crisis. Orders, however, have begun to recover again rising from 64 jets in 2013 to 90 in 2014. As the market continues to cyclically bounce-back and the new range is progressively launched, then profits should rise significantly over the next few years.

On the military side of the business, the jet fighter Rafale is proving to be more successful than expected. The outlook for the business has improved dramatically following the announcement of significant new orders from India, Egypt and Qatar. There remains the possibility of further domestic orders from countries such as Malaysia and the UAE.

Considering the valuable stake in the defence group Thales coupled with the likelihood that profits could more than double in the medium term the share appears highly attractive. We sold our investment in Banco Santander having been somewhat unsettled by the extent of recent management changes and the worsening outlook for the Brazilian business.

We remain very positive on the outlook for European equities. As we have written many times before, the economy continues to rebound strongly as the Eurozone moves ever closer to full normalisation. Our company meetings over the past month confirm a significant acceleration in the economic recovery. In particular, we were very impressed by Carrefour’s first quarter figures which showed an encouraging acceleration in French sales growth. BNP, likewise, reported significantly better than expected results, with management confidently referring to ‘green shoots’ on the back of solid domestic loan growth.

At the same time, the Eurozone moves closer to normalisation with the arrival of Syriza bringing forward the likelihood of a longer-term solution to the country’s debt crisis. Less covered, but equally important, is the recent 3.4% pay award struck by employers and the highly influential IG Metall trade union in Germany. This is the highest pay deal struck since 2007 and is set against a background of falling prices in January. Crucially, this should boost the region’s largest economy and aid the recovery in the other weaker Eurozone economies. Recent surveys, furthermore, suggest that German consumer confidence is at the highest level since 2006. Matteo Renzi and Francois Hollande also appear to be making progress with much needed reforms. Crucially, in Italy, radical reform of the labour market and electoral system has been passed, whilst in France, Hollande employed the infamous 49.3 decree in order force through business friendly legislation.

Curiously, however, the market remains compellingly valued with shares pricing in an unusually bearish decline in returns on capital into perpetuity. Even more strikingly, the more domestically orientated companies are trading at, in many cases, a 50% discount to their counterparts in the US. We continue to find the best opportunities in the more domestically orientated areas of the market.

Companies from the periphery of Europe make-up 29% of our investments. On a recovery basis, for example, the Italian media group, Mediaset, represents great value. The same holds true for our holdings in Sacyr and Banco Popular.

Banks constitute a further 18% of the funds. We still believe that the market has failed to appreciate the benefits of a rapid recovery in financial margins coupled with draconian cost cutting and easing regulatory pressures. We have focused on the strongest retail banking franchises such as Intesa and BNP where we believe that returns should rather rapidly return to pre-crisis levels.

Telecom companies represent 15% of the fund including investments in the telecom groups Orange, Deutsche Telekom and Telecom Italia. Our favourite growth companies, such as Amadeus and Essilor make up the remainder of the portfolios.

Wasatch Advisors – Ajay Krishnan

Emerging Market Equity

Although many emerging markets posted gains in April, the portfolio’s country profile hurt its relative performance. In India, Indonesia and the Philippines, our stocks declined roughly in line with the benchmark’s positions. However, our higher weightings versus the benchmark in those countries were headwinds for the portfolio. While China and Russia were among the top-performing countries in the benchmark, the portfolio holds no investments in Russia and was significantly underweighted compared to the benchmark in China.

Because our fundamental, bottom-up investment process focuses on companies rather than countries, performance can differ substantially from the benchmark. Rather than change our approach in response to shortterm shifts in sentiment, we continue to apply our disciplined process over a long investment horizon.

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.

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