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Fund Manager Monthly Report - December 2015

26 January 2016

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

Aberdeen Asset Management (Asia) - Hugh Young

Far East

In December the fund rose by 2.70% in sterling terms, outperforming the benchmark’s gain of 2.57%, largely because of positive stock selection.

Our Japanese holdings, particularly Japan Tobacco, Seven & I and Nippon Paint, boosted relative return, along with the non-benchmark exposure to the Aberdeen Global – Indian Equity Fund. Japan Tobacco’s November sales indicated a marginal month-on-month increase in market share, with Winston in particular making inroads with new products. Nippon Paint’s share price saw signs of a recovery after an earlier sell-off on concerns over the slowing economy in China, a key market.

In Taiwan, stock selection also contributed to performance as we have no exposure to pure Apple plays that have suffered on news that their key customers would reduce production by up to 30%. Our preferred exposure to the tech sector is through TSMC, which has a more diversified customer base.

Against this, our underweight to Australia detracted, as the market staged a relief rally on the back of the Fed’s decision to raise interest rates. Stock selection also cost us, as we are underweight the banking sector, which led the domestic rebound. Elsewhere, our non-benchmark exposure to China via PetroChina hurt performance.

Aberdeen Asset Management – Jamie Cumming

Ethical

In December, the fund fell by 2.58%, underperforming the benchmark’s gain of 0.32%. Both stock selection and asset allocation were negative.

At the stock level, Daito Trust Construction contributed to performance, as it was buoyed by increased orders for new building projects in November. Not holding Apple was beneficial, as the tech company’s shares slumped over concerns about slowing iPhone sales, the most significant part of its business. Wood Group rebounded after winning a US$400 million contract with StatOil in Norway and another with Woodside Petroleum in Australia.

Conversely, the oil-price slump contributed to waning confidence in EOG Resources, a key detractor. Casino Guichard’s shares fell when investment research firm Muddy Waters announced it was betting against the French retailer and accused it of using financial engineering and legal accounting tricks. Potash Corp was fined for the death of a worker, amid ongoing oversupply and weak demand concerns.

In December, we introduced Whitbread, impressed by its competitive positions in its key UK markets, and its plans for overseas expansion. Against this, we sold Engie. Despite the company’s best efforts, political, environmental and regulatory pressures will likely remain at the forefront of its operations. We also sold BHP Billiton, as it fails ethical screens following the Samarco incident.

Artemis Investment Management – Adrian Frost & Adrian Gosden

UK & International Income

Equity markets finished the year with a whimper, falling modestly in December as investors looked into 2016 and found little to be cheerful about. In broad terms, for the second year in succession, the FTSE All-Share produced a mighty 1% return and also for the second year in succession our return was decently in excess of this. Small and medium size companies were immune from the, mainly commodity, related headwinds that affected the FTSE 100, and as a result produced respectable returns. The fund was sufficiently well positioned and contained enough variety to counter a substantial portion of these headwinds.

During the final month of the year our activity was minimal, the only notable actions being the realisation of a profit in World Pay and a reduction in William Hill.

Whilst it is tempting to think that a New Year begins with a new set of expectations, threats and opportunities, and thus this requires a radical change this is very much not the case! We currently remain wary of the cyclical and where we choose to be contrarian we will go where we think the challenges are surmountable rather than structural.

Artisan Partners– Dan O’Keefe, David Samra & James Hamel

Global Unit Trust & Global Managed

Stock market returns were negative in December across most major global markets. Currencies remained volatile, although currency-movement impact was mixed, with the US dollar strengthening against the Chinese renminbi, Canadian dollar and British pound, but weakening against both the euro and yen.

Among the largest contributors to return this month were New Oriental Education & Technology Group and Medtronic. New Oriental shares continued a rally that began in late September. The company’s revenue growth has accelerated recently which is causing margin expansion and EPS growth. Medtronic reported solid earnings on December 3 that showed good top-line performance. Medtronic’s margins expanded as well due to synergies from its recent merger with Covidien.

Among the biggest detractors to return this month were Tesco, Oracle and Baidu. Tesco continues to be affected by food deflation in the UK, which industry sources reported worsened sequentially in November and early December. Oracle shares fell after the company reported earnings on December 17. The company reported a deceleration in its bookings for cloud software sales, which was below market expectations. However, we expect the bookings rate to accelerate over the next few quarters, and we believe Oracle is making good initial progress in exploiting the opportunity presented by the cloud. After a strong rally in the previous two months, shares in Baidu pulled back slightly in December but were still roughly 40% higher than their low point in September.

AXA Investment Managers – Richard Peirson

Balanced Managed Unit Trust & AXA Managed

December started poorly as the content of the ECB’s expected stimulus package disappointed.  On December 16 the Fed’s first increase in interest rates in 9 years had been well flagged, indeed risk assets would have panicked if they had not moved. The FED’s confidence in the health of the US economy allowed markets to rally in the second half of the month. Resources continued to underperform as the oil price fell further. Sterling weakened by 2.9% on a trade weighted basis, boosting the returns from overseas assets.

We added to our very low weight in government bonds, adding a holdings in US Treasuries and also to our UK gilts. We still find little value in this asset class but felt that the bonds and cash element of the portfolio, which has been unchanged in aggregate for some time, was too underweight in bonds, particularly overseas. The US bond position was hedged back into sterling. Stock selection in equities was mixed for we outperformed in the UK, Europe, Japan and Pacific ex Japan but underperformed modestly in the US and Emerging Markets.

The outlook for 2016 does not look materially different to that of 2015: modest, below trend, growth in the developed economies, slower growth from China, modest growth in company earnings and limited scope for those earnings to be re-rated with current valuations, albeit M & A will continue to provide support for equities. Higher US rates would normally be a negative for markets but the Fed is likely to move very cautiously. In the UK the possibility of BREXIT will generate volatility but the outcome looks too close to call at present.

AXA Investment Managers – George Luckraft

Allshare Income Unit Trust & Diversified Income

Equity markets weakened during the month due to continued falls in oil and mining related shares. Most of these commodities saw large price declines as production levels exceeded demand. Weakness in currencies of commodity producing countries helped to reduce costs meaning that closures to capacity are slow to appear. The falls in profitability has already led to dividend reductions with more to come.

The portfolio outperformed helped by strength in Kcom and Conviviality. An underweight position in commodity sectors was a broad positive. NAHL Group continued to be weak due to the uncertainty of the announcement in the Autumn statement of a review of personal injury claims.

During the month the holdings of Pack Group and St Ives were increased. The holding of Lancashire was sold and the proceeds of the takeover of Hellemanntyton were received which led to higher than normal cash levels at the year end.

The current market volatility will provide opportunities. A key factor will be at what levels do commodity prices bottom. The current scale of moves and commentary are starting to appear extreme.

Babson Capital – Zak Summerscale

International Corporate Bond

December saw another month of volatility for markets as the year closed out. Key contributing factors included the continued pressure on oil prices, uncertainty leading into the first US Federal Reserve rate rise since 2006, volatility within the global equity markets and retail outflows from the US high yield bond market. The SJP International Corporate Bond fund provided some insulation from this challenging environment, outperforming its benchmark over the month of December and indeed for 2015.

New issuance levels were quiet in December, with issuers having to manage the turbulence in the US market coupled with somewhat muted investor appetite across Europe. In the US, ten bonds priced during the month totalling $4.7bn, whilst €3bn of issuance priced in Europe. These issuance figures were somewhat boosted by the upsized M&A financing from Ball Corporation; a supplier of metal and plastic materials to the food and beverage industry in the US and UnityMedia; an independent publisher of business to business magazines and websites here in Europe.

Notable contributors to the portfolio during December included names such as Swissport, a Swiss-based airport ground handling and cargo company; and Appvion Inc., a US manufacturer of coated paper products. Detractors over the month included names such as Accuride, the largest US manufacturer and supplier of wheels and rims for commercial vehicles; and Sabine Pass Liquefaction, a US developer and operator of natural gas liquefaction facilities.

Despite the continued market volatility witnessed in 2015, the fundamental corporate credit environment both in Europe and the US, outside of the energy sector, remains healthy. We do anticipate an increase in the US default rate with energy-related businesses continuing to suffer from low oil prices. The SJP International Corporate Bond fund however represents a very robust portfolio of our conviction names. With continued market weakness, we will capture further opportunities as they arise and will add to positions in the portfolio to enhance the fund’s overall risk-adjusted return.

BlackRock – Luke Chappell

UK & General Progressive

The UK & General Progressive fund returned -0.8% over the quarter compared to the benchmark FTSE AllShare Index, which returned -1.3%.

The UK stock market fell in December with the FTSE All Share Index returning just 1% for the calendar year. OPEC’s decision not to cut production contributed to a further fall in the oil price, whilst the US Federal Reserve finally lifted US interest rates by 0.25% - a much trailed event and one which was seen as a positive reflection of the strong US economy.

The fund outperformed during the month and has performed strongly relative to the benchmark in 2015. Merlin,EasyJet and AutoTrader outperformed following positive recent market updates. Merlin reported strong growth in its Legoland parks in a trading update and maintained its profit expectations despite the impact from the Alton

Towers tragic accident. EasyJet reported a strong rise in passenger numbers for November, +10% compared to November 2014, whilst the load factor also edged higher to over 90%. AutoTrader continued to outperform following its maiden results last month covering its H1, which showed they are on track growing volume and price, leading to revenue and profit growth.

Next shares fell over the month as investors began to factor in the impact of warm weather on larger ticket winter clothing sales for the UK clothing retailers. Rio Tinto underperformed with the wider mining sector as weak iron ore prices persisted.

Strong returns were seen from Compass, Hargreaves Lansdown and Merlin. Next weakened in the face of more difficult trading conditions; Wolseley slipped as manufacturing data from the US, its largest market, was weaker than expected.

Activity over the period saw us reduce BG Group and Johnson Matthey.

Overall we think there is enough domestic economic growth in the US, UK and Europe to allow the world to continue to grow slowly, despite clear signs of slowing Chinese growth. The UK vote on EU membership may provide a source of volatility for UK equities over coming quarters. From a valuation perspective we remain constructive on UK equities relative to other asset classes and highlight the ability of fundamentally driven active management to deliver investment returns when benchmark returns have been low. We believe this environment is suited to our strategy of investing in a concentrated but economically diversified portfolio of best ideas that aims to identify companies with structural growth, and those companies able to positively impact earnings through self-help.

BlackRock – Nigel Ridge

UK Absolute Return

Growth and inflation levels continued to struggle into year end and with the UK stock market falling in December the FTSE All Share Index returned just 1% for the calendar year. The month saw risks around monetary policy and the oil price remain centre-stage, much as they have done all year.

The UK Absolute Return fund generated positive returns in December of +1.0% against the falling market backdrop. Further uncorrelated alpha at year end therefore helped achieve a net return of +7.5% over 2015. Particularly pleasing was that positive performance was not just seen from the short side - the long book also ended in positive territory in a down market thanks to alpha generation from some long-term core ideas.

Carnival delivered the largest contribution as the world's largest cruise line operator announced impressive full year earnings and an upbeat outlook that helps underpin our own expectations of the company's potential. Other contributors included gaming company Betfair and also motoring business the AA Group benefitting from a positive read-through from newsflow in the sector.

The largest negative contributor was specialist lender Paragon Group given nervousness around regulation within the UK buy to let market. Financials more broadly also struggled in the month however including 3i Group.

Reflecting slightly more caution on the wider market, the net exposure was reduced towards the end of December to around 20% while the gross exposure remained in its recent operating range and finished at 127%. While the Fed interest rate hike was taken well by the market, the negative market response to the ECB’s underwhelming extension of their QE program earlier in December highlighted how policy change remains a key source of market volatility.

BlueBay Asset Management – Polina Kurdyavko

Strategic Income

December was a strong month in terms of relative performance, as the portfolio generated 77bps of alpha. On a sector basis, our underweight to the metals & mining sector again continued to pay dividends as distressed commodity sensitive credits continued to trade poorly against the deteriorating commodity backdrop.

Stock selection in the oil & gas sector was also very strong, as our avoidance of distressed credit Pacific Rubiales in Colombia was additive as the oil price tested new lows. Likewise our overweight position in Venezuelan state owned oil credit, PDVSA outperformed; there were positive developments on the political front in Venezuela over the month with an increased probability of policy reform in 2016. Country selection was also positive as our overweight in Argentina contributed on the back of positive elections earlier in the month, while our zero weight in Peru was also additive given the sensitivity to weakening copper prices.

Looking forward, there’s a sense of deja-vu in the market currently, as the themes that were in play in December remain in play today (lack of clarity, weak sentiment, risk-off) as we look to navigate a low growth, weak commodity environment. As such our positioning has not changed all that much in recent times. We are maintaining a beta of about 0.8 to the benchmark. We maintain our preference for solid credits in more defensive sectors that should prove more immune to bouts of volatility. We also favour higher-quality credits and crossover names, and are expressing more caution in the very low quality B and CCC segments of the market. We are also choosing to take some risk in more quasi-sovereign and sovereign bonds in some countries where the valuations case is compelling and there is superior liquidity.

Looking purely at fundamentals, we expect for the EM high yield corporate default rate to come in at around 5-6% this year in our base case. Given the default rate in 2015 was around 3.7%, this does mark an increase; however we do not believe that we will see the default rate spiking to levels seen in previous EM crises (i.e. into high double digits). The strong technical argument remains in play, as issuance is expected to come in lower than previous years, while companies are seemingly still intent on managing their liabilities by buying back bonds. We do not expect to see an uptick in outflows from the asset class given the compelling valuations case, with EM high yield corporate debt yielding close to 10% in a low interest rate world.

Overall we feel that, although there are a number of headwinds facing the asset class, there will likely be many dislocation opportunities to take advantage of and generate alpha in the coming year.

Burgundy Asset Management – Ken Broekaert

Worldwide Opportunities Unit Trust & Worldwide Managed

World equity markets put in a strong performance in the last quarter of calendar 2015. The US Federal Reserve Board raised interest rates in the most carefully prepared move of its kind in history. The initial effects were modest and markets appear to believe the Fed’s pledge that they will be very cautious with further rate increases. Late in the year, equity markets were roiled by a steady weakening in the government-controlled exchange rate of the renminbi against the US dollar, which now appears to be official Chinese policy.

Our fund roughly matched the fourth quarter benchmark returns. The stars of the show were our Japanese equities, which as a group appreciated over 20% in sterling terms. Our energy related holdings, Union Pacific and Cenovus, continued to perform poorly relative to the rest of the portfolio, and were our two worst positions in the calendar year. Keyence, Hannover Re, Heineken, Walgreens Boots Alliance and Philip Morris International were our best performing companies in 2015.

Equity markets started 2016 on a very weak note, but we see this volatility as normal and healthy. Absent aggressively tighter monetary policies, or a visit from the four horsemen, we anticipate positive returns from our portfolio in the coming year. Our companies represent a compelling mix of quality and attractive valuation.

Burgundy Asset Management – Ken Broekaert

Greater European Progressive Unit Trust & Greater European

We are pleased to report an exceptionally strong quarter to December 31, 2015. Burgundy’s return was almost 9%, more than 3% ahead of the European market.

Of late, you may have heard some commentators and investment professionals debating “quality” vs. “value”, stating quality investing has outperformed the market for a number of years, leading to “quality” stocks becoming significantly overvalued relative to “value” stocks.

Quality and value are not mutually exclusive. We are quality AND value investors, seeking to own companies trading for less than what we think they are worth. The value of any investment is a function of both its quality AND its price.

For instance, we will not buy “quality” companies at any price. Almost 30% of our Dream Team companies are trading at more than 25 times earnings. We won’t pay that price. Our most expensive portfolio holding, Nestle, is trading at 22 times earnings, but Nestle was purchased at a P/E ratio well below that. 

Likewise, we won’t buy what would typically be defined as “value” companies without a highly critical assessment of their quality. A very low P/E or price/book ratio is not sufficient. This has helped us avoid large losses and value traps. Hannover Re is a long-term holding and one of our best return contributors in 2015 and longer-term. We’ve added to, and trimmed Hannover, based on our assessment of its value, but we own it also because we judge it to be of sufficiently good quality.

We will continue to go where we see the most value, which will always be a function of quality and price.

Columbia Threadneedle – Richard Colwell, Stephen Thornber & Jim Cielinski

Strategic Managed

Overall, global equities fell back in local-currency terms over the month but managed a small positive return in sterling terms as the pound weakened. Factors influencing sentiment included a further drop in oil prices, continuing signs of a slowdown in China, changes to the European Central Bank’s monetary policy, and the first interest-rate hike by the US Federal Reserve in nearly a decade.

The UK Growth and Income portfolio underperformed the benchmark over December, but remains strongly ahead over the year to date. At the stock level, Marks and Spencer fell due to lower-than-expected sales at the beginning of the Christmas period, but we remain confident that these areas of weakness will be addressed, and so we topped up our holding during the month. Positions in Stagecoach and Pearson also dragged on returns. On the positive side, the holding in AstraZeneca added some value.

The Global Equity Income portfolio outperformed its index in December. The overweight position in Six Flags added value as the company continues to benefit from unseasonably warm weather, lower gas prices and improved employment, which is driving increased customer footfall and spending. The zero weighting in Apple also boosted returns.

The Investment Grade portfolio performed in line with its index in December. Meanwhile, the US High Yield portfolio outperformed the benchmark over the period.

EdgePoint – Tye Bousada & Geoff MacDonald

Global Equity

The Global Equity fund underperformed its benchmark, the MSCI World Index, in December. The major contributors to performance included Anthem Inc. and Clariant International Ltd. Significant detractors were concentrated in the industrial sector and included Rexnord Corp., WESCO International Inc. and Flowserve Corp.

We continue to search for great businesses that have fallen out of favour due to irrational price movements caused by short-term noise. A recent addition to the Portfolio, Union Pacific Corporation, a railroad company in the United States, became a top 10 holding in December. We’ve always considered railroad companies great businesses as they tend to be natural duopolies due to large barriers to entry which allow them to extract significant pricing power. Union Pacific in particular has been able to raise prices by 4-5% per year. We believe the pricing power of railroads will increase in the future due to headwinds facing their competitors in the trucking industry in the form of various regulatory and demographic changes. In addition to pricing growth, Union Pacific has potential for volume growth due to their access to Mexico and ports along the US west coast. Despite potential tailwinds, the railroad industry was hit hard in 2015 due to the decline in commodity prices. We feel the decline in Union Pacific’s stock price is short term in nature and presented us with this buying opportunity. Thus, our investing requirements of significant barriers to entry, an appropriate entry price and growth potential have combined to create an interesting investment story.

First State – Jonathan Asante

Global Emerging Markets

At a stock level, Housing Development Finance rose as investors responded positively to a repositioning of its insurance businesses in recent months, one of which may be listed in the future. Unilever gained as the company is performing well with its ‘glocal’ portfolio of products and Axiata Group outperformed as M&A activity has seen the company expand its regional footprint. Axiata bought 80% of Nepal’s leading mobile operator.

On the negative side, Standard Bank declined due to slow growth in the domestic market and discussions with the UK Serious Fraud Office in relation to an issue in one of their African subsidiaries. Tiger Brands was negatively influenced by a difficult domestic operating environment and the decision not to recapitalise their poorly performing Nigerian investment. Remgro fell as revolving Finance ministers upset the market and was reflected in a weak currency.

First State – Jonathan Asante

Worldwide Opportunities Unit Trust & Worldwide Managed

At a stock level, Baxalta rose as Shire increased its offer to buy the company and Unilever gained as the company is performing well with its ‘glocal’ portfolio of products. Henkel climbed as it continued to focus on costs and supply chain initiatives.

On the negative side, Standard Bank declined due to slow growth in the domestic market and discussions with the UK Serious Fraud Office in relation to an issue in one of their African subsidiaries. Banco Bradesco was weak as the company had a rights issue to fund the purchase of HSBC’s Brazilian arm and Tesco fell as the company is still facing pressure from the discounters.

Invesco Perpetual – David Millar

Multi Asset

Global equity markets were mixed during the month. Eurozone equity markets were particularly volatile as the European Central Bank’s (ECB) much anticipated expansion of its monetary policy turned out to be something of a damp squib. On the day of the announcement, the euro jumped 3% against the dollar as markets felt somewhat deceived by the ECB’s dovish rhetoric in the lead up to the December meeting. In the US, stock markets were up and down but ended flat as the US Federal Reserve finally took action, nudging its benchmark interest rate higher. The oil price dropped over 16% as the supply glut continued unabated.

An interest rates idea was added. Long-dated gilts and US Treasuries are trading at historically low levels compared to similarly dated interest rate swaps. We believe this provides an opportunity to benefit from a narrowing of this spread, as banks’ balance sheet constraints reduce while interest rates may increase and corporate issuance falls.

The fund finished December higher with a number of ideas contributing. Among our equity ideas, the outperformance of US consumer staples stocks versus consumer discretionary stocks boosted returns. Currency ideas were also prominent. Our Indian rupee versus Chinese renminbi idea benefited as the People’s Bank of China continued to guide its currency lower. In contrast, the Indian rupee appears to be benefiting from the lower oil price. Our preference for the Japanese yen against the Korean won also benefited from the weakening renminbi as it put pressure on the Bank of Korea to weaken its currency.

Our selective exposure to emerging market debt proved negative with South African yields spiking after the country’s widely respected finance minister was abruptly dismissed.

Invesco Perpetual – Paul Read & Paul Causer

Corporate Bond

December was a challenging month for the European high yield bond market, which delivered a negative return. The failure of the European Central Bank (ECB) to meet the heightened expectations that had built through November for aggressive easing of monetary policy was a key driver. The ECB did announce a 10 basis point cut in the deposit rate (the rate which banks receive on funds they have on deposit with the ECB) and a six month extension of its current Quantitative Easing (QE) programme. These announcements were however at the lower end of expectations and as a result bonds and equities that had rallied through November in anticipation of further aggressive easing sold off sharply.

Meanwhile, the continuing slump in crude oil prices had a negative impact in the US high yield sector, which has a high allocation to energy companies. European high yield bond issuance was stronger than December 2014 with Barclays estimating €4.3bn of issuance across all currencies, which compares to €2.3bn for the same period last year. Data from Merrill Lynch showed euro high yield bonds returned -2.4%, sterling high yield returned -0.5% and US high yield returned -2.7%. All returns are total returns, sterling hedged.

In terms of positioning we are defensive. Our exposure is skewed toward higher quality, well established high yield issuers. We also have high levels of liquidity, which includes short dated bonds from high quality corporates as well as cash. Many of our holdings are in the financial sector. The creditworthiness of the sector has improved significantly since the global financial crisis and we find these securities continue to provide a reasonable level of income for the risk.  We also hold some hybrid bonds (a type of relatively junior debt in a company’s capital structure) issued by companies we believe have strong balance sheets.

During the month of December 2015, we added positions in Entertainment One 6.875% 15/12/22 (Leisure), RWE 5.5% 06/07/22 (Utilities), Ball Corp 4.375% (Packaging) & Ball Corp 3.5% 15/12/20 (Packaging). We added to our position in Valeant 4.5% 15/05/23 (Pharmaceuticals).

J O Hambro – John Wood

UK & General Progressive

Weakness in our industrial names Smiths Group and IMI accounted for the portfolio’s modest underperformance in December.

The UK & General Progressive fund enjoyed a strong 2015, but our outperformance could frankly be described as somewhat puzzling given we were predominantly invested in large caps (2015 performance of FTSE 100 TR Index: -1.32%), underweight mid caps (FTSE 250 TR Index: +11.17%), had no small cap exposure (FTSE Small Cap TR Index: +9.17%) and maintained our large cash position. I’ve drawn on the lyrics of rapper Dizzee Rascal and his 2009 hit ‘Bonkers’ in a past commentary. The tune that springs to mind this time round though - and one perhaps more age-appropriate given my 1980s upbringing - is ‘Mad World’, by Tear for Fears (released in 1982).

Setting aside 1980s pop songs and the mysteries of fund performance in a mad world of asset prices distorted by extreme monetary policy and unprecedented experiments by fallible central bankers, our view and approach entering 2016 is much the same as it has been of recent years; a new year but an old message in that respect.

Regardless of whether or not the rate rise in the US and ongoing slowdown in China trigger the start of a great unwind – and the turbulence in global stock markets in the early days of 2016 suggest they just might  –  after many years of stock markets being inflated through high octane monetary policy rather than improving discrete fundamentals, our focus will remain: judiciously allocate capital to quality companies with strong balance sheets run by skilled management teams with a long-term, investment-led approach. These companies will ultimately offer the long-term compounding growth that we believe will serve fund holders well over the long term. It’s a mad world, but we’ll try and keep our heads.

Magellan – Hamish Douglass

International Equity

During the month, we reduced the position in Alphabet and increased the positions in Apple and CVS Caremark. On December 31, the portfolio held investments in 25 companies, with the top-ten investments representing 45.8% of the portfolio’s total assets. The portfolio held 14.7% of its assets in cash at the end of the month.

The portfolio is currently positioned to take advantage of the following major ongoing investment themes:

*Technology/software: We believe that entrenched global software companies boast enormous competitive advantages and exhibit attractive investment characteristics.

*The move to a cashless society: There continues to be a strong secular shift from spending via cash and cheque to cashless forms of payments, such as credit cards, debit cards, electronic funds transfer and mobile payments. The explosion of smart and internet connected devices will accelerate this shift on a global basis.

*US housing: A recovery in new housing construction, together with investment in existing housing stock, should drive a strong cyclical recovery in companies exposed to the US housing market, while providing a boost to the overall economy.

*Emerging market consumption growth: Through investments in multinational consumer franchises.

*US interest rates: It is likely that US short term and long-term interest rates will “normalise” over the next two or three years as the US economy recovers.

During the month, the portfolio returned +0.3% in sterling terms, before fees, in line with the benchmark return of +0.3%. In sterling terms, the largest contributors were Microsoft (+0.3%), CVS Caremark (+0.2%) and PayPal (+0.2%) while the largest detractors were Tesco (-0.3%), Apple (-0.3%) and eBay (-0.2%). In sector terms, Consumer Discretionary (+0.3%), Information Technology (+0.1%) and Consumer Staples (+0.1%) contributed positively while Financials (-0.2%) and Healthcare (-0.1%) detracted. Geographically speaking, the United Kingdom (-0.3%) and France (-0.1%) detracted from performance while the United States (+0.5%) and Australia (+0.1%) were positive contributors.

Majedie – James de Uphaugh

UK Growth & UK & General Progressive

The portfolios underperformed the market during December, returning -2.3% versus an index decline of -1.3%.

Our early move into the beaten up valuations of some of the commodity names, such as Anglo American, continued to weigh on performance as the market fretted about the short term price declines ignoring, in our view, the stark language of production cuts and the bust economics of producers in the upper swathes of the cost curve. Sentiment also remained poor towards UK supermarkets, so our holding in Tesco struggled despite evidence that re-vamped business models look set to offer shareholders improved returns.

Improving economic conditions in the UK saw the portfolios benefit from their exposure to the Majedie UK Smaller Companies Fund. Our constraint on the size of the UK Equity fund means the portfolio contains a number of treasured mid-caps, including bwin.party digital entertainment. The online gambling company benefited performance as shareholders approved the firm’s acquisition by GVC Holdings. Other stocks that provided positive returns included Ryanair and HSBC, both of which are making significant changes to their businesses. Ryanair is challenging easyJet as the dominant European carrier, and although the management at HSBC have a significant job on their hands, it is emerging as a much better capitalised business on a discount to book valuation.

We are increasingly convinced by our objective, fundamental research that we are on the cusp of a significant period of market rotation. The soft performance should prove to be a short term cost to giving the portfolio exposure to the decade-low valuations of those sectors the market continues to blindly ignore; despite increasing evidence to suggest the sands have already started to shift.

Majedie – Chris Reid

UK Income

The SJP UK Income fund returned -0.5% in December, outperforming the FTSE All-Share Index decline of -1.3%. During December mining and energy stocks suffered in line with continued weakness in the commodity markets. Unsurprisingly, our commodity holdings were detractors: Vedanta Resources fell after announcing their decision to drop the interim dividend payment (we support such moves to strengthen the balance sheet), and Rio Tinto, despite operating with the lowest costs in the sector, was not spared either. However, the macro background for the sector remains in transition as companies move to rationalise capacity in response to low prices and reduce supply – hence our view that the cure for low prices is low prices. 

Aside from the mining positions, we had a series of stock specific setbacks: Pearson announced a Q3 sales decline, with disappointing book returns in the US in particular and Delta Lloyd announced a rights issue for Q1 next year (we will take part). Chip maker Imagination Technology also announced a profit warning: the cancellation of one customer plus weak semi-conductor markets means near-term trading is bleak and as debt is higher the market has reawakened concerns. However, judging by the average royalty their customers pay, the market still values their product; as an aside, industry chatter is that people want an alternative to ARM. A profit warning also came from video games retailer Game Digital, prompted by challenging trading conditions in the UK video games market.

On the positive tack, Man Group, one of our long term General Financials holdings, was subject to a number of broker upgrades on the back of forecasts for double digit earnings growth and a 4% yield. Not holding Royal Dutch Shell and BP amid continued low crude oil prices also helped the Fund to outperform the Index.

We are frustrated to have given back some of the strong performance of earlier in the year, but equally this is the lot of a stock picking fund. We accept the inevitability of making mistakes, and under usual circumstances there are enough areas of the portfolio generating returns to mitigate errors; unfortunately, this quarter a cocktail of sharp commodity price falls and individual profit warnings has been a little too much for the portfolio to swallow.

Manulife – Paul Boyne & Doug McGraw

Global Equity Income

Global equities weakened in December as lower commodity prices continued to weigh on markets. The price of Brent crude oil fell 16% in December, capping a 35% decline for the year. The STOXX Europe 600 Index returned -5.1%, the S&P 500 Index returned -1.6% and the MSCI World Index returned -1.8%. Stock selection within the financials and materials sectors contributed to performance. Individual contributors included PNC Financial Services Group, Inc., Koninklijke Ahold N.V. and Huntington Bancshares, Inc.

Underweight exposure to the energy sector and overweight exposure to the consumer staples sector contributed to performance. Individual contributors included The Proctor & Gamble Company, Japan Tobacco Inc. and Roche Holding AG.

Stock selection in the consumer discretionary sector and underweight exposure to the utilities sector detracted from performance. Individual detractors included Whirlpool Corporation, Eaton Corporation PLC and Pearson PLC.

We initiated a position in Ralph Lauren Corporation.

Our biggest concerns at the moment are the risk of deflation, excess debt and slowing global growth. From a valuation perspective, European multiples are cheaper than their US counterparts and appear to have more earnings recovery potential.

From a sector perspective, the strategy maintains underweight exposure to commodity industries (and by implication to emerging markets) and to European financials. The strategy maintains large exposures to quality franchises in areas such as health care and consumer staples.

MidOcean Credit Partners – Jim Wiant

Strategic Income

The portfolio generated a positive performance in December, significantly outperforming the overall high yield market. For the month of December, the JP Morgan US High Yield Index returned -2.97%. The high yield market was impacted by lower oil prices, uncertainty leading into the initial Fed rate hike, increased stock volatility and heavy outflows from high yield retail funds.

For December, all rating categories were down with BB rated (-2.28%), B-rated (-2.39%) and CCC-rated (-5.31%). The JP Morgan US High Yield Index ended 2015 with a loss of -4.99% (+0.36% excluding commodities). The negative annual return was only the third such occurrence in the last 20 years. There was significant dispersion by ratings with BB, B and CCC-rated providing losses of -0.82%, -4.97% and -14.79% for fiscal year 2015. The yield-to-worst (YTW) for US high yield rose to 9.28% with a spread of 757bp over Treasuries. As we discussed in our November commentary, we have deliberately positioned the portfolio to diminish market risk. The portfolio has targeted investments characterized by a strong risk profile, credit metrics and business prospects while avoiding exposure to meaningful commodity risk or economic cyclicality. We have also sought to reduce potential interest rate risk by maintaining relatively short portfolio duration. This portfolio positioning held up very well during the month exhibiting significantly less volatility. We have selectively taken advantage of compelling investment entry levels and continue to maintain a cautious portfolio construction.

Orchard Street – Philip Gadsden

Property Unit Trust

The portfolio valuation as at December 31 2015 was up 0.8% month on month.

We have completed the acquisition of three garden centres for a total of £34.1m as part of a sale and lease back with Wyevale Garden Centres Ltd. Located in Leicester, Altrincham and Woking and reflecting initial yields of 5.5%, 5.25% and 5.0% respectively, the leases are each for a term of 25 years with a total annual rent of £1,933,000 subject to five- yearly indexation to RPI, capped at 4% and collared at 1%. Part of the retail area at the properties is sub-let to concession holders including Edinburgh Woollen Mills, Lakeland, Cotton Traders and Mountain Warehouse.

In addition we have completed the purchase of the Exchange Buildings in Birmingham and Wellbar Central in Newcastle for £40.4m and £40.1 respectively. The Exchange Buildings show an initial yield of 4.48% and comprises 4 retail units and a 140 bed hotel let to Premier Inn with a weighted annual unexpired lease term (WAULT) of 12.1 years. Wellbar Central is a multi-let building constructed in 2010 providing 118,000 sq ft of Grade A office space and 3,300 sq ft of retail space over two units reflecting an initial yield of 6.03%.

Asset management initiatives for the month include;

  • A regear of the lease to Apcoa Parking Ltd at St Catherine’s Walk, Carmarthen
  • Extended the lease to January 2026 for CIB Properties (Citibank) at Holyood Park House, Edinburgh and increased the rent to £506,610 in line with ERV
  • New letting at Unit 16, Lister Road Industrial Estate, Basingstoke
  • 10 year lease renewal at the 26,544 sq ft Unit R1A, Rockingham Gate, Bristol

The portfolio vacancy rate is 7.9% compared with 8.8% for IPD and the initial yield on the portfolio is 4.7% which compares with 5.0% for IPD as at December 31 2015.

Property Life and Pension funds

The portfolio valuation as at December 31 2015 was up 0.9% month on month.

We have completed the acquisition of five garden centres for a total of £56.88m as part of a sale and lease back with Wyevale Garden Centres Ltd. Located in Nantwich, Huntingdon, Braintree, Gosforth and Osterley and reflecting initial yields of 5.5%, 5.25%, 5.00%, 5.65% and 4.90% respectively, the leases are each for a term of 25 years with a total annual rent of £3,189,000 subject to five- yearly indexation to RPI, capped at 4% and collared at 1%. Part of the retail space at the properties is sub-let to concession holders including W H Smith, Edinburgh Woollen Mills, Pets Corner and Maidenhead Aquatics.

We have completed the purchase of the 13,000 sq ft retail property which occupies the south eastern corner of the island site let to Debenhams at 115-126 Briggate, Leeds for £2.08m.

We have completed a new 10 year lease without a break to Coty Services on the vacant 1st floor at St Georges West, Wimbledon. The annual rent payable is £624,957 and is in line with ERV. The building is now fully let.

We have exchanged contracts for new 10 year lease on the 3rd floor at Old Jewry in the City for an annual rent of £366,315 which is in line with recent lettings in the building. The property is now fully let.

We have removed the 2016 break with HSBC at Hardman Square, Manchester and completed the rent review ahead of ERV. This has resulted in an increase in valuation of £900,000.

In addition, we have completed two new leases at Unit O2, Trinity Trading Estate, Sittingbourne and Unit 2L at Albany Park, Frimley. The leases are 5 years and 10 years respectively and are in line with ERV.

The portfolio vacancy rate is 7.1% compared with 8.8% for IPD and the initial yield on the portfolio is 4.8% which compares with 5.0% for IPD as at December 31 2015.

RWC – Nick Purves

Equity Income

As 2015 comes to an end, we can reflect on what has been a turbulent year for global stock markets. Whilst at the start of the year the UK market rose on the back of European quantitative easing and the Conservative election win, it later gave back these gains as weakness in emerging markets became apparent. The more global, oil and mining heavy, FTSE 100 finished down for the year after managing to break the 7,000 barrier in early 2015, while the more domestic FTSE 250 Index was up over 11% (on a total return basis).

The best performing sector was healthcare while energy and financials detracted from performance. Both AstraZeneca and GlaxoSmithKline have had their issues this year, but there is confidence that the companies can restore growth over the coming year. Sky was also a positive contributor to performance. This caps off what has been a good year for the company which has seen continued growth in the UK, despite many thinking the market was saturated; Germany is beginning to deliver, churn rates continue to improve and ARPUs are stable.

Energy stocks performed poorly as the oil price continued to fall into the New Year. Brent oil is now $37 per barrel having started the year at $68 per barrel. This price movement puts pressure on the oil majors and has bought into question the sustainability of their generous dividends.

Old Mutual fell sharply after the South African rand fell as South African President Jacob Zuma replaced Finance Minister Nhlanhla Nene. Old Mutual has a significant exposure to South Africa and it was because of this reason that we had reduced the Fund’s exposure to the stock.

Heading into the New Year there are many unknowns facing the markets. In particular we come back to the issue that despite recent market moves, share prices look fully valued on the most reliable valuation measures. We maintain a cautious outlook, and think it is prudent to have some cash on hand to take advantage of the new opportunities that are likely to arise.

Sands Capital – David Levanson, Sunil Thakor & Perry Williams

Global Equity

We focus on the underlying fundamentals and long-term growth prospects of our businesses, not short-term stock price movements. The Global Equity portfolio is characterized by relatively low turnover, therefore positions are not frequently adjusted. As a group, our portfolio companies continue to execute and deliver solid business results.

On a relative basis, the top five contributors to performance were Ono Pharmaceutical, Whole Foods Market, BioMarin Pharmaceutical, Biogen, and Medidata Solutions. Ono Pharmaceutical is a leader in the Japanese specialty pharmaceutical industry, with a broad portfolio of approved drugs. The company’s drug Opdivo is at the forefront of a new class of treatments called cancer immunotherapies, which harness the power of the body’s own immune system to fight cancer. Over the past year, Opdivo has been approved in the US, EU, and Japan as a treatment for melanoma. More recently, the drug received broad second-line approval for lung and kidney cancer in the US as well. These launches have been ahead of our initial expectations due to strong early adoption. Opdivo is now in phase 3 trials for first-line treatment of lung cancer, kidney cancer, and melanoma, in addition to newer phase 3 programs in head and neck cancer, gastric cancer, and brain cancer. Furthermore, clinical data supporting Opdivo’s broad applicability continues to accumulate. We believe the resulting potential for expansion into additional cancer markets creates multiple layers of growth for Opdivo throughout our investment horizon and highlights the product’s potential to become a platform therapy.

The top five relative detractors from performance were Baidu, CP All, Kansas City Southern, ARM Holdings, and Naspers. Kansas City Southern’s (KSU) freight rail network connects the Midwestern and Southeastern United States, and extends across the border to key industrial cities and seaports in Mexico. Over the past year, we believe KSU’s business results have been under pressure for two primary reasons: (1) coal volumes transported over the company’s network have been under pressure due to ongoing commodity price volatility, and (2) KSU experienced service disruptions in Mexico and on the border as rail demand exceeded the company’s capacity. The company demonstrated incremental improvements on both fronts in its most recent quarterly results. First, we believe KSU’s commodity carload weakness throughout the year was driven by underlying customer cyclicality, which is not only temporary, but also does not represent a broader shift in competitive dynamics. KSU’s weekly carload figures have been improving, which we believe indicates the worst is behind the company. Second, KSU has made significant investments in crews, equipment, and yards, which we believe are beginning to positively affect business results. While Mexico has not fully recovered—short-term auto carloads are suffering as a few large customers retool their production—we believe the long-term opportunity is compelling and expect KSU to capture nearly 100 percent share of new auto production coming out of Mexico.

There were no purchases or sales during December.

Schroders – Kevin Murphy & Nick Kirrage

Managed Growth Unit Trust & Schroder Managed

Global equity markets performed poorly in December as risk appetite waned. The European Central Bank stopped short of expanding its quantitative easing programme, a decision which disappointed the market and weighed particularly heavily on European equities. The Federal Reserve announced its much-anticipated ‘lift off’ in US interest rates, increasing the main policy rate for the first time since 2006. The UK equity market was negatively impacted by renewed weakness in the oil price. Mining shares fell amid further questions about the sustainability of balance sheets in a weak commodity price environment. However, domestically focused mid and small-cap companies performed relatively strongly as expectations for the first rise in UK base rates moved out, following dovish minutes from the Bank of England’s rate-setting meeting.

The fund’s UK equity holdings underperformed the FTSE All-Share over the month. Weak sentiment toward commodities further adversely affected our holdings in miners Anglo American and Lonmin. Tesco fell amid reports of poor sales while department store operator Debenhams also fell following negative comment regarding the risk of its online sales cannibalising store sales. On the positive side, electricity generation business Drax reacted well to news that the European Commission ruled a plan by rival RWE to switch one of its coal-burning power plants to wood pellets can qualify for UK subsidies. This was taken as positive for Drax’s own biomass power generation operations.

Schroders – Mike Hodgson

Multi Asset

Investor focus was once again trained on central bank policy in December as the Federal Reserve announced a much-anticipated 25 bps interest rate hike and the European Central Bank extended the timetable for QE.

Investors were largely disappointed by the ECB’s announcement and this contributed to the poor performance of the European equity market where the MSCI EMU fell -5.7% over the month. The S&P 500 Index retreated by -1.6%, led lower by weakness in the resource sectors, and in particular the oil companies as the price of crude weakened markedly.

Oil price weakness also weighed on the UK equity market, where the FTSE-All Share recorded a total return of -1.3%

Japanese equities ended the month in negative territory with the Topix delivering -2%, despite better-than-expected data releases in line with the overall negative performance of equity markets during the month it is not surprising to find that the equity exposure (gained through TRS) had a negative contribution to returns. Given the reduced exposure to equity markets in the volatility target strategy, losses were mitigated. While the downward movement in equity markets increased the value of the put option overlay, the passage of time had an offsetting impact and thus the put overlay did not significantly impact the portfolio’s performance.

Schroders – Mike Hodgson

Strategic Income

Despite the overall negative performance of global equity markets the mandate broadly remained flat during the month given the impact of FX exposure and the call overwriting strategy Investor focus was once again trained on central bank policy in December as the Federal Reserve announced a much-anticipated 25 bps interest rate hike and the European Central Bank extended the timetable for QE. The reaction to these announcements and impact of lower oil prices were significant contributors to the negative performance global equity markets posted during the month (when measured in local currency terms).

Unlike previous months where high equity markets have tended to underperform wider markets, in November high dividend equity securities have slightly outperformed the rest of the market. In a month when GBP has weakened versus a range of currencies (notably the US Dollar), global equity portfolios where FX risk is unhedged such as this have benefited from unhedged the FX exposure.

The overall negative market performance meant that selling upside growth potential had a positive impact on monthly returns. While the performance for the equity portfolio was negative, it was not of a large magnitude and volatility remained low. As such the manager has not activated the downside risk management overlay

Select Equity – George Loening & Chad Clark

Worldwide Opportunities

Global equity markets were mostly flat in December, concluding a modestly positive 2015. Consistent with regional and sector performance throughout the year, developed markets and defensive sectors outperformed emerging markets and more cyclical sectors including Materials and Energy. For the month of December 2015, the Sub-Account returned -0.4% on a net basis versus a +0.3% return for the MSCI ACWI. The account’s cash levels decreased by over 1% during the month, finishing the year at 8.0% of assets. For the year, the Sub-Account gained +6.8% net vs. a +3.3% gain for the MSCI ACWI.

The top three contributors in the month were Misumi Group, a Japanese global distributor of customized factory automation components; Thermo Fisher Scientific, the largest global distributor and manufacturer of laboratory equipment and supplies; and Dentsply International, the largest global manufacturer of dental products. The largest detractors in the month were Kirby, a US operator of inland barge services with modest exposure to the oil services industry; Canadian Pacific Railway, a large owner of railway tracks in the US and Canada; and Wolseley, the world’s largest distributor of plumbing and heating products. All three suffered from a deterioration in market sentiment for industrial companies, particularly those that serve customers in the commodities value chain. During the month we took advantage of share price weakness to add to our sizeable position in Signet Jewelers, the largest US jewelry retailer. Operating under the Kay and Jared brands, Signet is enjoying both solid same-store-sales growth and significantly improved profitability following the acquisition of Zales, its largest US competitor.

The outlook for global growth is incrementally more precarious today than it was six months ago but not nearly as much as the violent swings in the market suggest. Against this backdrop, we are committing capital only to our highest-conviction ideas, investing in companies with predictable cash flow engines and proven abilities to make their own luck. Fortunately, many of these companies’ stock prices have fallen along with the global equity markets, so we remain enthusiastic yet cautious.

S.W. Mitchell Capital – Stuart Mitchell

Greater European Progressive Unit Trust & Greater European

Looking back over 2015, we can make two major observations. Firstly, the companies that we were invested in generally developed as we might have expected.

Unsurprisingly, our growth companies managed to exceed, or at least meet, our forecasts. Most notably, Eurofins substantially increased their long term earnings guidance, both on the back of continued vigorous organic growth as well as anticipated future acquisitions. SAP, Axel Springer, Essilor and Amadeus also managed to somewhat exceed our expectations.

Our telecom investments also significantly exceeded our forecasts, with price deflation easing even more rapidly than we anticipated. The industry was further excited by the news that Bouygues Telecom could be split between the three other French telecom operators.

Amongst our more ‘cyclical’ investments, the UK housebuilders managed to exceed even our highly optimistic expectations. IAG also generated very creditable results. Our financial investments, however, marginally disappointed. Whilst all our holdings met our earnings expectations, the composition was somewhat different to what we had anticipated. On the one hand, lending growth was a little disappointing, although on the other hand, cost cutting and other revenues, notably asset management, tended to surprise.

Our second major observation was that whilst we performed well in 2015 we had hoped to outperform even more significantly.

As you know, we sold most of our investments with significant emerging market, principally Chinese and Brazilian, interests back in 2012 when we felt that expectations had become overly enthusiastic. Whilst local sales growth slowed as significantly as we had analysed for these companies, the impact was masked by the significant weakness of the Euro which, most importantly, boosted US and UK revenues in Euro terms. Many of these shares performed consequentially somewhat better than we had anticipated.

We invested in Carrefour, Dassault Aviation and Orpea over the year. These purchases were funded by sales of our investments in Air France, Banco Santander, Eiffage, RWE and Sayr.

Against a background of gradual economic recovery across the Eurozone and growing uncertainty about the economic outlook for the emerging world, we continue to find the best opportunities in the more domestically orientated areas of the market.

Banks constitute 21% of the fund. We still believe that the market has failed to appreciate the benefits of rising financial margins coupled with draconian cost cutting and easing regulatory pressures. More recently, we have been pleasantly surprised by the Bank of England’s very welcome announcement that there will be ‘no Basel 4’. We have focused on the strongest retail banking franchises such as Lloyds and Intesa where we believe that returns should rather rapidly return to pre-crisis levels. We are also invested in Banco Popular and Commerzbank which are in the process of disposing of significant amounts non-performing assets in order to refocus on industry leading core businesses.

Companies from the periphery of Europe make-up a further 18% of our investments. On a recovery basis, for example, the Italian media group Mediaset and the Spanish bank Banco Popular represent great value.

Telecom companies represent 12% of the fund including investments in the telecom groups Orange, Deutsche Telekom and Telecom Italia. Recent quarterly results announcements have been very supportive. At the same time, speculation of further industry consolidation remains rife.

Our favourite growth companies, such as Orpea and Eurofins make up the remainder of the fund.

S.W. Mitchell Capital – Stuart Mitchell

Continental European

Looking back over 2015, we can make two major observations. Firstly, the companies that we were invested in generally developed as we might have expected.

Unsurprisingly, our growth companies managed to exceed, or at least meet, our forecasts. Most notably, Eurofins substantially increased their long term earnings guidance, both on the back of continued vigorous organic growth as well as anticipated future acquisitions. SAP, Axel Springer, Essilor and Amadeus also managed to somewhat exceed our expectations.

Our telecom investments also significantly beat our forecasts with price deflation easing even more rapidly than we anticipated. The industry was further excited by the news that Bouygues Telecom could be split between the three other French telecom operators.

Our financial investments, however, marginally disappointed. Whilst all our holdings met our earnings expectations, the composition was somewhat different to what we had anticipated. On the one hand, lending growth was a little disappointing, although on the other hand, cost cutting and other revenues, notably asset management, tended to surprise.

Our second major observation was that whilst we performed reasonably well in 2015 we had hoped to outperform significantly.

As you know, we sold most of our investments with significant emerging market, principally Chinese and Brazilian, interests back in 2012 when we felt that expectations had become overly enthusiastic. Whilst local sales growth slowed as significantly as we had analysed for these companies, the impact was masked by the significant weakness of the Euro which, most importantly, boosted US and UK revenues in Euro terms.  Many of these shares performed consequentially somewhat better than we had anticipated.

We invested in Airbus, Carrefour, Dassault Aviation, Orpea and SEB over the year. These purchases were funded by sales of our investments in Air France, Banco Santander, Eiffage, RWE and Sayr.

Against a background of gradual economic recovery across the Eurozone and growing uncertainty about the economic outlook for the emerging world, we continue to find the best opportunities in the more domestically orientated areas of the market.

Companies from the periphery of Europe make-up 23% of our investments. On a recovery basis, for example, the Italian media group Mediaset and the Spanish bank Banco Popular represent great value.

Telecom companies represent 17% of the fund including investments in the telecom groups Orange, Deutsche Telekom and Telecom Italia. Recent quarterly results announcements have been very supportive. At the same time, speculation of further industry consolidation remains rife.

Banks constitute 17% of the fund. We still believe that the market has failed to appreciate the benefits of rising financial margins coupled with draconian cost cutting and easing regulatory pressures. More recently, we have been pleasantly surprised by the Bank of England’s very welcome announcement that there will be ‘no Basel 4’. We have focused on the strongest retail banking franchises such as BNP and Intesa where we believe that returns should rather rapidly return to pre-crisis levels. We are also invested in Banco Popular and Commerzbank which are in the process of disposing of significant amounts non-performing assets in order to refocus on industry leading core businesses.

Our favourite growth companies, such as Orpea and Eurofins make up the remainder of the fund.

Tweedy, Browne – William Browne, Tom Shrager, John Spears & Robert Wyckoff

Global Equity

Global equities finished the month of December roughly flat after having previously regained much of the ground they had lost in the August and early September correction. The same held for the SJP portfolioat Tweedy, Browne.

We faced continued weakness during the month in the stock prices of our oil & gas holdings (including Total, Royal Dutch, Conoco, and Cenovus) in light of continued volatility in oil prices. A number of our insurance stocks and industrial holdings were also down for the month including SCOR, Zurich Insurance, ABB and Siemens. In contrast, our bank stocks held up fairly well during the month as did our pharmaceutical holdings including Glaxo, J&J, and Roche. We also had solid results in General Electric, BBA Aviation and Verizon.

We were fairly significant net buyers for the month establishing a new position in Emerson Electric, the noted electrical equipment and systems company. At purchase, Emerson was trading at a little over 13 times forward earnings and paid a 4.1% dividend yield. It has increased its dividend consecutively for the last 58 years. We also added to a number of pre-existing positions including ABB, BAE, DBS Group, G4S, Glaxo, IBM, Roche, and Zurich Insurance. We also sold the modest position we had in Bangkok Bank and our remaining shares in Cenovus, the Canadian oil sands company.

With equity valuations at high levels, the prospects for economic growth around the globe quite modest, and increasing geopolitical tensions, the volatility experienced late last summer could very possibly be with us for some time. If that indeed becomes the case, we should be in a position to take meaningful advantage in the weeks and months ahead.

Twenty Four Asset Management – Gary Kirk

Diversified Bond

Despite cutting the deposit rate to -30bp and extending its asset purchase programme, the market was disappointed by the extent of ECB actions which set a weak tone for the month.

In the US the FOMC hiked rates, accompanied by dovish rhetoric, which did little to stem the significant outflows from US high yield funds. In Spain, the election failed to produce a conclusive result which added to political uncertainty in the periphery. Finally, to finish off a challenging period, the Bank of Portugal astonished markets by transferring 5/52 senior bonds out of Novo Banco, all ranked pari passu, back to the bad bank, Banco Espirito Santo, breaking market protocols and inflicting big losses on bond holders; legal action is almost certain to follow.

Unsurprisingly, given the market turmoil, no major bond sectors managed to post a positive month; US HY was the worst performer at -2.3%, US Treasuries were best at -0.2%, Gilts posted -1.1% and European HY was -2.4%.

In terms of performance, the fund struggled in the difficult conditions and also had exposure to Novo Banco and posted a negative 1.23% for the month.

Twenty Four Asset Management – Gary Kirk

Strategic Income

Despite cutting the deposit rate to -30bp and extending its asset purchase programme, the market was disappointed by the extent of ECB actions which set a weak tone for the month.

In the US the FOMC hiked rates, accompanied by dovish rhetoric, which did little to stem the significant outflows from US high yield funds. In Spain, the election failed to produce a conclusive result which added to political uncertainty in the periphery. Finally, to finish off a challenging period, the Bank of Portugal astonished markets by transferring 5/52 senior bonds out of Novo Banco, all ranked pari passu, back to the bad bank, Banco Espirito Santo, breaking market protocols and inflicting big losses on bond holders; legal action is almost certain to follow.

Unsurprisingly, given the market turmoil, no major bond sectors managed to post a positive month; US HY was the worst performer at -2.3%, US Treasuries were best at -0.2%, Gilts posted -1.1% and European HY was -2.4%.

In terms of performance, the fund struggled in the difficult conditions and also had exposure to Novo Banco and posted a negative 1.19% for the month.

Wasatch Advisors – Ajay Krishnan & Roger Edgley

Emerging Market Equity

Emerging-market equities were narrowly mixed in December. Both the portfolio and its benchmark were little-changed overall, with advancing stocks roughly in balance with decliners.

Medytox, Inc., a Korean company, was our top contributor to portfolio performance for the month. Medytox develops injectable neurotoxins for cosmetic applications and for the treatment of muscular disorders. The company’s stock price rose on continued optimism about its alternative to BOTOX® cosmetic for reducing wrinkles and aging of the face. Already the market leader in Japan, Taiwan and Thailand, Medytox is well-positioned in our view for growth in other international markets as well.

Our greatest detractor from performance was C.P.ALL Public Co. Ltd., which operates 7-Eleven convenience stores in Thailand. The company’s stock price slid approximately 14% during December on news that several of its executives had been fined in connection with an insider-trading incident that took place in 2013. Although none of the executives were criminally charged, and the company’s auditors and independent directors determined it was “appropriate for the individuals to continue in the businesses,” our investment discipline motivated us to liquidate the portfolio’s position. Wasatch seeks to invest only in high-quality, well-run businesses with ethical management teams and strong corporate governance.

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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