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Fund Manager Monthly Report - October 2015

27 November 2015

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

Aberdeen Asset Management (Asia) - Hugh Young

Far East

In October, the fund returned 6.78% in sterling terms, in line with the benchmark’s return of 6.79%.

Samsung Electronics was a key contributor to relative performance after the Korean conglomerate took steps to enhance shareholder value. It said it would repurchase and cancel 11.3 trillion won-worth of its shares, and grow its dividends. Subsequently, Samsung’s share price gained 24.6% in sterling terms over the month, versus the 8.8% rise in the local stockmarket.

In Japan, diaper maker Unicharm was buoyed by China’s decision to scrap its one-child policy; the mainland accounts for a large part of Unicharm’s sales. Shin-Etsu’s results were impressive, while Fanuc’s met expectations.

Elsewhere, Jardine Strategic’s shares rose along with the rally in its Indonesian subsidiary, Astra International, following fresh stimulus measures in Indonesia. For Stanchart, details of a strategic review were unveiled after the month-end, which included plans to raise £3.3 billion via a rights issue, cut costs by £2.9 billion and axe 15,000 jobs. We think management has taken the right steps to address its problems. The plan seems sensible and has a clear focus. In our past engagement, we have urged Stanchart to put its capital position beyond doubt. As such, we are supportive of the rights issue.

Conversely, the overweight to India detracted, as the domestic stockmarket underperformed the region.

Aberdeen Asset Management – Jamie Cumming

Ethical

In October, the fund rose by 5.42%, in line with the benchmark’s gain of 5.81%. Positive stock selection mitigated negative asset allocation.

At the stock level, EOG Resources boosted performance. The company’s share price rebounded after it announced a quarterly dividend and its credit rating was given a boost by Morningstar. Jones Lang LaSalle also performed well, as annual pre-tax profits surged at the commercial real estate developer. Fanuc was buoyed by an improved sales forecast, after the robot-maker’s third-quarter results met expectations.

Conversely, MTN Group detracted from performance. The company cut its full-year subscriber target owing to a decline in Nigerian customers. Its shares also came under pressure after it was fined US$5.2 billion by the Nigerian regulator, for failing to disconnect unregistered SIM cards. MTN is engaging with authorities about this issue. Both Weir Group and Wood Group continued to suffer from the ongoing commodities rout.

In October, we added to Check Point Software Technologies, Kerry Logistics and Potash Corporation of Saskatchewan, as valuations appeared attractive. Against this, we trimmed BHP Billiton, Tenaris and Zurich Insurance Group.

Artemis Investment Management – Adrian Frost & Adrian Gosden

UK & International Income

It was a much better month for equity markets with a return that dragged the year to date into positive territory. However, in the UK the day to day temperature check from the corporate sector shows that many have to work hard to overcome sluggish or declining revenues, cost pressures and volatile exchange rates. As a result we are seeing some fall short of expectations.

We too fell short of expectations as our return lagged the market, largely due to a warning from Pearson, which although not in our top 10 holdings, was sufficient to register. Market commentators have chosen their interpretation of Pearson problems. We remain of the view that they are cyclical rather than structural so we have retained our position.

An added headwind in the quarter was the recovery in oil and mining which rebounded strongly from the September lows. We anticipate that this factor may persist but have chosen not to ‘play the trend’ but rather think about the amount of capital we have deployed in a longer term context. Undoubtedly these sectors are oversold and management has been stirred into action but whether this buys time until commodities recover remains to be seen.

During the month we added to Aviva, Royal Mail and GE and sold S&N and Reckitts on valuation grounds.

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

Global Unit Trust & Global Managed

Among our largest contributors to return in October were Samsung Electronics and Microsoft. Samsung Electronics announced a meaningful capital return and also showed stability in its underlying business in its Q3 earnings release. Microsoft also reported strong quarterly earnings as the company is seeing good traction with its cloud-based products, while many of its legacy franchises are also showing healthy results.

Among the month’s biggest detractors were American Express and Serco. American Express fell after reporting earnings in late October. Investments in new growth initiatives had caused costs to grow faster than revenues, leading to declining profitability in the most recent quarter. There was no identifiable catalyst for Serco’s share price decline.

During the month we initiated a holding in Baidu and exited our positions in Novartis and Accenture. Baidu runs the dominant search engine in China. This is a highly profitable business with significant barriers to entry, giving it ample growth ahead, in our view. Shares had sold off meaningfully since the summer due to concerns about the company’s recently announced diversification plans; Baidu is entering new markets to drive consumers to offline services, such as food delivery and movie tickets, primarily through mobile apps. While we have some concerns around this new strategy, we believe the magnitude of market selloff was overblown, allowing us to acquire shares at a price that we believe fundamentally undervalued the core search business. We view Baidu’s management as good operators, and we like the company’s strong net cash balance sheet.

Accenture has been an important contributor to the strategy’s returns in recent years, as shares have nearly tripled since we took our initial position in Q2 2010. Although we continue to view Accenture as an excellent and well run business with a strong balance sheet, the share price appreciation no longer gives us a sufficient risk/reward tradeoff, so we exited our position.

Novartis has been part of the strategy since our inception in 2007. Although our investment has appreciated substantially, the recent share price appreciation closed the discount with intrinsic value, and we sold our stake in the company.

AXA Investment Managers – Richard Peirson

Balanced Managed Unit Trust & AXA Managed

Although investors continued to worry about the slowdown in Chinese growth there was noticeable support from central banks in October. The US Federal Reserve decided not to raise rates at the end of September while the People’s Bank of China cut one of its interest rates and the European Central Bank hinted that further easing was possible at its meeting in early December. After a difficult two months global equities rallied strongly in October. Japan was the best performing region, up 8%, followed by the US up 6.6%, both in sterling. In the UK larger companies outperformed smaller ones for the first time for many months, helped particularly by a short lived rally in resources stocks. Bonds lagged after recent relatively strong returns.

There were no significant changes in asset allocation in October. In the UK we sold Auto Trader, which had risen approximately 40% since its IPO earlier this year, as the valuation was beginning to look stretched on a prospective PE ratio of about 30x. We bought Worldpay, also via an IPO and added to the holding when dealings started. The company, which was capitalised at about £5bn, is a global leader in providing payment processing technology that allows merchants to accept a vast array of payment types, across multiple channels, anywhere in the world. We also bought ARM, the FTSE 100 microprocessor company, following the publication of better than expected results. They have a dominant market position for low power consumption chips used in mobile phones and tablets but also look very well positioned to benefit from the growth expected from the IoT ( internet of things). Cisco estimate that there could be over 50bn connected devices by 2020. In Japan we completed a minor reorganisation, selling five holdings and reinvesting in five new ones. Some of these transactions resulted from recent meetings with managements and others were due to relative share price performance. We maintain our preference there for smaller companies with a domestic bias.

The Fund performance was encouraging in absolute terms but relative performance was disappointing. Returns from equities were mixed: relatively disappointing in the UK, Japan and Pacific ex Japan but marginally better in the US and Emerging Markets. Our cautious positioning in bonds, however, proved beneficial during the month.

The latest employment data from the US was very strong, suggesting that a rise in interests rates in December is now more likely. This caused weakness in bonds and halted the rally in equities. Company results have often disappointed recently and even after the correction during the summer months equity valuations don’t look particularly attractive. Global growth forecasts continue to be downgraded modestly, with emerging markets largely responsible. Equities remain, in our view, more attractive that government bonds taking a medium term view but the short term outlook for both looks relatively uninspiring.

AXA Investment Managers – George Luckraft

Allshare Income Unit Trust & Diversified Income

Equity markets rallied in October as some of the worries re Chinese growth calmed down. Mining and oil shares rallied after a period of sustained weakness without any improvement of the underlying tough background.

The portfolio underperformed this rally partly reversing the outperformance in the weak prior month. Senior Engineering were weak as tougher conditions in their engineering business damaged profitability while Quantum Pharma underperformed as product approvals were delayed. An underweight position in the banking sector was beneficial to performance.

During the month the holding of Close Brothers was sold while those of Castings and Starwood European were reduced.

Markets are having to deal with an increase in profit warnings which in certain cases will lead to dividend cuts. Interest rates in the US are likely to be increased in December while further Quantitative Easing is likely in Europe. This is likely to cause some volatility.

Babson Capital – Zak Summerscale

International Corporate Bond

October witnessed a strong rally for global senior secured bonds off the back of stabilising economic data from China, the U.S. Federal Reserve delaying a rise in its base rate and accommodative actions from international central banks. In particular, the European Central Bank commented that they are prepared to take further action if necessary to stave off the risk of a renewed economic slump within the Eurozone. New issuance activity within the high yield bond market remained light in October, with modest deal flow from within the U.S. high yield market. However, the year to date issuance volume from the U.S market now totals $263.4bn. In Europe, five Euro bonds and four Sterling bonds were issued totalling €2.59bn and £1.3bn respectively. This equates to a US$ equivalent of $4.9bn in European new issuance for October, which is a meaningful increase over the August and September figures. It is also worth noting that in Europe, 45% of the new issue bond volume in 2015 has been senior secured, thus continuing to provide the International Corporate Bond Fund with additional attractive investment opportunities.

Notable contributors to the portfolio during October included names such as Unitymedia, a German cable operator; and UPC Broadband, a European cable operator. Detractors over the month included names such as Murray Energy Corporation, the largest privately owned coal company in the U.S.; and TPC Group, a U.S provider of chemical and petroleum-based products.

The Telecoms, Energy and Auto sectors bounced back significantly in October, recovering from their weaker September performance. The announcement by The European Central Bank regarding further action (if necessary) also helped the global high yield market rally further in Europe, with investors continuing to deploy cash into the global high yield bond market in search of attractive yields. High yield bond funds in the U.S. reported an inflow of $7.6bn for October, representing the fourth largest monthly inflow on record. In Europe, the flows into high yield bond funds in October were also positive, reversing the trend of outflows seen during September. With the Federal Reserve indicating the U.S. rate rise getting closer, the market is likely to experience additional new issuance volumes in the near term, specifically for US$-denominated debt. This further enhances the opportunity set for the International Corporate Bond Fund which remains well-positioned to continue to generate robust risk-adjusted returns for investors.

Columbia Threadneedle – Richard Colwell, Stephen Thornber & Jim Cielinski

Strategic Managed

Global markets bounced back in October, following two months of sharp declines. In the US, a series of key corporate earnings came in above forecasts, especially in the tech sector. Data from Germany painted a downbeat picture for European economic prospects but the news was somewhat more encouraging from China, which posted GDP growth of 6.9% in the third quarter. Affected by the Fed’s recent hawkish comments, yields on 10-year UK gilts rose in October, from 1.76% to 1.92%.

The UK Growth and Income portfolio underperformed the benchmark over October. Following strong first-half results, Home Retail put out a profit warning following weaker sales figures in the first month of the quarter. Pearson also fell, on weakness, but the company’s balance sheet is stronger following its recent disposals. We are continuing to hold our position.

The Global Equity Income portfolio performed in line with its index in October. Highlights included equipment maker KLA Tencor, whose share price jumped on news that it was being acquired by chip-equipment vendor Lam Research. Theme-park operator Six Flags Entertainment also posted a record-high financial performance for the third quarter.

The Investment Grade portfolio gained in October, outperforming its benchmark over the month. Meanwhile, the US High Yield portfolio also outperformed the benchmark over the period.

EdgePoint – Tye Bousada & Geoff MacDonald

Global Equity

The Portfolio outperformed its benchmark, the MSCI World Index, in October. Contributors to performance were concentrated in the information technology, industrial and financial sectors and included Microsoft Corporation, American International Group Inc., Flowserve Corporation and Koninklijke Philips NV. Significant detractors were concentrated in health care such as Alere Inc. and Merit Medical Systems Inc.

As active investors it is important to remember that we don’t own “the market.” The market is a massive heap of companies, both good and bad. Instead, we own a small collection of businesses where we have a proprietary view of why they can be bigger in the future and where we don’t have to pay full price for that growth. AIG is a good example. AIG represents a small part of the MSCI World Index yet is a top holding in the Portfolio. We were pleased to see the activist investor Carl Icahn recently make a large investment in the company. By asking management to embark on a cost control program and taking steps to avert the Systematically Important Financial Institution (SIFI) designation by separating the life and mortgage insurance business from the core property and casualty business, we believe management will stay focused on finding the best way for AIG to maximise value for shareholders.

First State – Jonathan Asante

Global Emerging Markets

We remain defensively positioned. There are, however, small cracks in valuations that have created some interesting buying opportunities, and as a result we initiated a position in Taiwanese semiconductor company Mediatek. We visited Taiwan recently and asked people we met which companies they would most like to work for. Mediatek was consistently mentioned alongside Asustek and TSMC, two other high quality companies that we already own in the fund.

We are not technology experts and we do not attempt to predict how many smartphones will be sold in China next year. Instead, we try to find company management who adopt a similarly pragmatic approach and focus on building companies where talented people want to work.

Occasionally, as is the case with Mediatek, these companies become unpopular in the short-term, providing an opportunity to buy a small position as there are still many uncertainties. We are convinced that some of the four billion or so people that do not have smartphones, or the three in four who do not have PCs, will one day become connected to the digital world. As a result, we believe that the patient investor will be rewarded over the long-term.

First State – Jonathan Asante

Worldwide Opportunities

We have sold our position in Coca-Cola which has been held in the fund since its inception. We have a great deal of respect for the company and its management team, but we are increasingly concerned about its competitive position longer-term as customers, particularly in developed markets, become more health conscious.

This view contrasts with that of Warren Buffett, the CEO of Berkshire Hathaway, who has publically supported Coca-Cola and its place in a balanced diet. However, this has not prevented us from adding to Berkshire Hathaway over the month. We believe that Berkshire’s privately held operating businesses are of a very high-quality and ones which we would be interested investing in directly if we had the opportunity, particularly given the valuation of the holding company.

Berkshire Hathaway’s valuation may be partially explained by concerns about the CEO’s age and the succession. Given that these businesses are all run independently with their own experienced management teams, we do not worry that a change in CEO would derail operations. Berkshire has made public comments regarding the succession for over a decade, and we trust the CEO and board to select a well-qualified candidate. This is so important that the CEO’s son will have the sole job as chairman to ensure that, whoever is picked, he (or she) maintains the culture of a company which has generated astonishing returns over five decades.

Invesco Perpetual – Paul Read & Paul Causer

Corporate Bond

The high yield bond sector bounced back strongly through October with data from Merrill Lynch showing the sector had its best monthly return since 2012. Much of this strong performance was attributable to an expectation that further monetary stimulus would be provided by the European Central Bank (ECB). The rally slowed toward the end of the month after the October statement on monetary policy by the US Federal Open Market Committee was more hawkish than expected. Bond issuance picked up with Barclays estimating €3.0bn in new issues, which compares to €1.9bn last month and €2.9bn in October 2014. There was also some pockets of volatility associated with specific companies. Data from Merrill Lynch showed the European currency high yield bond market returning 2.8%, with BB bonds returning 2.8%. CCC and below bonds returned 4.3%. Euro investment grade corporate bonds returned 1.4%. All returns shown 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 increased exposure to hybrid bonds where we thought the risk and reward balance had become more favourable.

In a busier month of bond trading, we participated in new issues of BHP Billiton 6.5% 22/10/77 (Metal Producer), Rothesay 8.0% 30/10/25 (Insurance), Stonegate 5.75% 15/04/19 (Leisure) and Western Power 3.625% 06/11/23 (Utility).

J O Hambro – John Wood

UK & General Progressive

The portfolio's underperformance in September was due to negative sector exposure effects, chiefly our large overweight position in industrials, as well as the portfolio's high cash balance in a month when global stock markets rebounded from the third quarter's weakness. Stock picking was helpful, with Sage Group adding value.

We repeat our message of last month, and indeed of the last couple of years: the financial system today is as broken as it was in 2007/8. The global economy has been on steroids, the sellers of the steroid have been the world’s central banks and that steroid is debt. The global stock of debt is higher today than at any point in history, and the world economy has never been more sensitive to an upward change in interest rates as it is today. This fact could soon become particularly relevant. While "the unreliable boyfriend" Governor Carney has seemingly again pushed back the timetable for rate rises in the UK, recent strong US jobs data could usher in the start of higher interest rates in the US from December.

Regardless of whether a rate rise in the US heralds the start of a great unwind or not 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 our clients well over the long term.

Loomis Sayles – Ken Buntrock

Investment Grade Corporate Bond

Following several months of widening corporate bond spreads, US IG corporates (IG) had a strong month of October. Spreads tightened by 10 bps leading to solid excess return versus governments during the period. The decision by the Fed in mid-September to delay the first rate hike given global growth concerns, the slowdown in China, and weak commodities, provided strong support to the market. The value proposition became significantly more attractive, and remains so in our view, with levels testing wides outside of recessionary periods. Euro IG corporates performed strongly during October as well, with spreads tightening by 15 bps, leading to a stellar monthly excess return of 1.08%. The Euro IG corporate market continues to benefit from a supportive ECB, as well as from lagging other developed credit markets terms of the credit cycle. Despite weaker economies and lower yields, we continue to evaluate specific bottom-up opportunities. UK IG also performed strongly during October posting an excess return versus gilts of 0.95% on 10 bps of spread tightening.

After falling below 2.0% in early and mid-October, the ten-year U.S. Treasury yield has ascended once more, to stand at 2.23% as we write this (November 4). Global risk appetite staged an impressive October recovery from its August-September slump, with big gains in nearly every risk asset. The rallies in equities and emerging market local currencies were particularly notable. Credit also performed strongly. There appears to be more than short-covering at work in the markets. The global PMI, probably the world’s single most important summary indicator of world economic momentum, staged a significant rise in October, aided by improvements in India, Japan, China and several EU countries. The laggard was the United States.

We continue to expect a modest recovery in global growth in 2016, led by U.S. and European consumers, and aided by a stabilizing China. Inflation has probably bottomed on a 12-month basis, just from base effects, but we see inflationary pressures as muted for another year. This should give us a range-bound Treasury market, with only modestly higher yields. The Fed is expected to tighten in December. The hike seems priced into markets now, and we see little danger to risk asset performance. This seems an ideal environment for credit outperformance.

Positions in EUR, USD, and IG credit added value. Select high yield and emerging market exposures also lifted results as well. Bonds issued by GE, VMED, AGN, and ALLY were some of the notable strong performers. Select Insurance and Energy names lagged on idiosyncratic factors.

Magellan – Hamish Douglass

International Equity

During the month, we added a new position in CVS Caremark.

CVS is the largest vertically integrated pharmacy healthcare provider in the US operating a network of more than 7,800 pharmacies, 1,000 health clinics and 38 mail order pharmacies. It is also the second largest Pharmacy Benefit Manager with a national network of nearly 70,000 pharmacies processing over 1.8 billion prescriptions for 70 million health plan members in 2014. CVS management has an excellent track record on the utilisation of free cash flow and returns for shareholders are aligned with incentive structures. CVS also has low business risk compared to its peers with no single client representing more than 10% of revenues.

We believe the stock to be significantly undervalued. Since 2007, CVS has generated annualised revenue and EBIT growth in the high single digits and should continue to benefit from the strong growth of the US healthcare market. The introduction of the Affordable Care Act (Obamacare) more patients eligible for Medicare and Medicaid or purchase private health insurance via an exchange, should be favourable.

There were no material differences arising from trading during the month.

On 31 October 2015, the portfolio held investments in 25 companies, with the top-ten investments representing 46.6% of the portfolio’s total assets. The portfolio held 14.8% 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 a 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 +4.3% in sterling terms, before fees, this compares with a benchmark return of +5.9%, giving relative performance of -1.6%.

In sterling terms, the largest contributors were Microsoft (+1.2%), PayPal (+0.6%) and Visa (+0.5%) while the largest detractors were Yum! Brands (-0.6%), IBM (-0.2%) and Target (-0.1%).

In sector terms, Information Technology (+4.2%), Financials (+0.2%) and HealthCare (+0.1%) contributed positively while Consumer Discretionary (-0.2%) detracted.

Geographically speaking, Australia (-0.1%) and the United Kingdom (-0.1%) detracted from performance. The United States (+3.9%), Germany (+0.2%), the Netherlands (+0.2%) and France (+0.1%) were positive contributors this month.

October is always a busy month with many companies reporting quarterly results. These results announcements are the primary reason for relative price performance of stocks in the month.

Microsoft was the top performer this month. The stock reached a 15 year share price high after management announced strong results ahead of market expectations. This was largely driven by the triple digit growth of its cloud business. Similarly in the IT sector, Intel reported results above consensus and the stock performed well.

The performance of our investments in payment processing companies PayPal and Visa was also favourable. Likewise, Lowe’s and Home Depot contributed positively to performance as both companies continue to benefit from the US housing market recovery.

Yum! Brands was the top detractor this month. The stock fell 17% after the company released its third quarter earnings results but importantly downgraded its guidance for 2015. This was due to a sharp deterioration in trading at its Pizza Hut Casual Dining chain, which took investors by surprise. It added to concerns about its exposure to China’s slowing economic growth. This announcement was followed swiftly by the announcement of activist Keith Meister (Corvex) joining its Board and then its decision to split the company, separating its China operation into a Master Franchisee by end 2016. This was received positively and the stock recovered slightly towards the end of the month.

Majedie – James de Uphaugh

UK Growth & UK & General Progressive

Your portfolios slightly underperformed a rising market during October, returning 3.5% vs 4.7% for the FTSE All-Share.

The early part of October saw significant relief for commodity shares after September’s rout. This rally was led by the oil price and the more leveraged miners, as with signs of stabilisation in China’s economic data the market came round to thinking that share prices may have bottomed. Our energy holdings in BP and Tullow oil, as well as miner Lonmin all benefitted from this.

The lead detractor was our UK Smaller Companies portfolio, which suffered along with its index after a strong run. Additionally, change of management at the top unsettled investors at Barclays, and a profit warning at Pearson was unsurprisingly not well received. Whilst a disappointing 2016 outlook for its US education business was announced, we believe the new Finance Director is going to tackle Pearson’s cost base and IT systems more aggressively than his predecessor, so we feel there is still a lot to go for. Serco suffered from weak sentiment too. This is a complex company, with a diverse range of government outsource contracts. New management have set renegotiating troublesome contracts and refocusing on fewer areas of expertise with the help of a rights issue earlier in the year, which we took up. We continue to feel that there is more encouraging news around the corner.

More widely, some of our mid cap stocks rerated (one of the benefits of capacity limiting strategies is that we can retain meaningful stakes in such companies). These businesses tend to be more sensitive to the pulse of the UK economy, and are therefore riding a tide of positive sentiment; electronics distributor Electrocomponents and IT services provider FDM Group are two such examples.

Majedie – Chris Reid

UK Income

The SJP UK Income Fund returned 1.9% during the month, below the FTSE All Share of 4.7%.

The early part of October saw significant relief for commodity shares after September’s rout. This rally was led by the oil price and more leveraged miners, as the market feels that they may have bottomed. As a result, while last month we reported that not holding the likes of BP and Glencore protected the portfolio, this was exactly the reverse situation in October, although our holdings in miners Rio Tinto and Vedanta were accretive. The current prices for both oil and commodity prices is most likely “wrong”, but it is not clear to market participants what the right prices are and until that point is reached performance versus a resource heavy benchmark is likely to be volatile.

In addition to the volatile resource backdrop, the Fund’s underperformance in October is primarily due to two stock specific issues. Pearson announced a Q3 sales decline, with disappointing book returns in the US, in particular, and a disappointing 2016 outlook for its US education business, which has seen five years of essentially zero growth. We believe the new Finance Director is going to tackle Pearson’s cost base and IT systems more aggressively than his predecessor, so we feel there is a lot to go for, albeit we are doing some more work to check that we haven’t missed anything crucial. Chemring too announced a profit warning, due in the main to the deferral of a Middle East ammunition contract into the forthcoming financial year. Management have opted to do a rights issue, which surprised us as we had observed that the business had traded through the worst period of its indebtedness. We are likely to participate in the rights issue, as CHG now trades at an undemanding valuation, and while the rights issue has disappointed us, it should not obscure the improved margins achieved.

We have retained our large weighting in General Financials, which performed well over the period. We are maintaining our mining exposure at around 12% - buying on share price weakness and reducing on strength - and looking more to the US for stocks that have breakout growth strategies, as we believe such opportunities are at a discount to their peers in the UK.

Manulife – Paul Boyne & Doug McGraw

Global Equity Income

Global equity markets recovered as investors became more optimistic following a difficult third quarter. Investors digested talk of further stimulus from the European Central Bank, a rate cut in China and softer economic data potentially delaying a U.S. Federal Reserve Board (“Fed”) interest rate hike. A recovery in the price of oil and diminished concern about the negative impact of China’s economic slowdown also added to investor optimism.

Stock selection in the consumer staples and industrials sectors contributed to performance. Individual contributors included Koninklijke Philips N.V., Microsoft Corporation and McDonald’s Corporation. Stock selection in the consumer discretionary and financials sectors detracted from performance. Individual detractors included Pearson PLC, SES SA and Samsonite International SA. We established a small position in Kohl’s Corporation.

We believe U.S. equity markets have slightly above-average valuations on earnings but are highly valued on a cyclically adjusted price-earning basis. European multiples appear cheaper than their U.S. counterparts, in our view, and may have more earnings recovery potential, although much of this is sourced in structurally challenged industries. We remain cautious of excess debt and continue to focus on companies with what we believe to be sustainable cash flow streams.

Oldfield Partners – Richard Oldfield

High Octane

The main outperformers in October were E.ON (+24% in local currency terms), Samsung Electronics (+21%), Barrick Gold (+20%), Microsoft (+19%), and Kansai Electric Power (+17%). The main underperformers were Tesco (up marginally in local currency terms), Kyocera (+1%), Eni (+6%), Rio Tinto (+7%), and Lukoil (+7%).

E.ON’s strong performance followed the confirmation, contrary to earlier rumours, that the German government considered the current provisions by utility companies for the costs of decommissioning nuclear reactors appropriate.

Samsung announced a substantial shareholder return policy that was well ahead of investor expectations. Samsung will pay out 30-50% of its annual free cash flow to shareholders over the next three years in dividends and share buybacks, and announced a $10 billion share buyback with cancellation of the shares bought (about 6% of the total outstanding). This was everything and more that investors could have hoped for.

In September an odd feature was that in a month when cyclical concerns were paramount the outperformers included some of our more cyclically exposed companies - Rio Tinto and oil companies. The paradox was maintained in October when, in a month in which fears abated, Rio Tinto, Lukoil and Eni were among the poorest performers. Nonetheless, the recovery indicates that market sentiment has returned to a position of somewhat fragile equanimity.

Fragile equanimity is, we feel, just about right. There was a great deal of pessimism by the end of September. A Financial Times headline reported that “gloom stalks” the IMF finance ministers’ meeting. This seemed overdoing it when the IMF’s forecast for world growth next year is still over 3% they may be right or wrong, but 3.1% is not a gloom-stalked forecast. We continue to feel that this sort of growth rate is plausible given the apparent strength of the consumer economy in the US (for example, employment, cars and houses), Europe (cars) and even Japan (employment).

Two phrases elsewhere in the Financial Times on the day of the IMF report, in a leading article, sum up both the case for equanimity about economies and the fragility: “through history the alarm sounds much more frequently than any emergency develops... The underlying cause for optimism remains the same.” “In the background is a fear that policymakers lack the ammunition to fight off another shock.… Monetary policy is ‘largely played out’”. While fragility makes for volatility in markets, we feel that the case for moderate equanimity is strong enough for us not to disregard the message provided by the valuations of stocks in our global portfolios: a message that medium-term returns from these holdings, many of them in more cyclical areas which have been pummelled in the last few months, are likely to be good.

Orchard Street – Chris Bartram

Property Unit Trust

The portfolio valuation as at 31st October 2015 was up 0.5% month on month.

We have completed a new 10 year lease to Paperchase on Unit 24 at St Catherine’s Walk Shopping Centre in Carmarthen. Competition for the space resulted in an agreed rent of £77.25 psf which is 10% above ERV. The shopping centre continues to trade well and is fully let.

At Lister Road Industrial Estate in Basingstoke we have completed a new 5 year lease on Unit 16. The rent payable on the 2,440 sq ft unit is ahead of ERV and has resulted in a valuation uplift.

The portfolio vacancy rate is 4.8% compared with 9.4% for IPD and the initial yield on the portfolio is 4.8% which compares with 5.1% for IPD.

Property Life and Pension funds

The portfolio valuation as at 31 October 2015 was up 0.5% month on month.

We have completed a new 10 year lease to Paperchase on Unit 24 at St Catherine’s Walk Shopping Centre in Carmarthen. Competition for the space resulted in an agreed rent of £77.25 psf which is 10% above ERV. The shopping centre continues to trade well and is fully let.

Also in Wales, we have completed a new 5 year lease to Magic Wrap Ltd on Unit 18 at The Brewery Quarter, Cardiff. Being centrally located and near to the Millennium Stadium this leisure outlet has recently benefited from increased trade and footfall resulting the Rugby World Cup.

The portfolio vacancy rate is 7.7% compared with 9.4% for IPD and the initial yield on the portfolio is 5.0% which compares with 5.1% for IPD as at 31st October 2015.

RWC – Nick Purves

Equity Income

October was another month dominated by central bankers, with the ECB hinting at additional stimulus, China unexpectedly cutting its lending rate and the Fed warning that a rate hike in December was still a possibility.

Following the sharp declines in markets in August, equity markets across the globe have rebounded strongly. The FTSE All Share Total Return Index rose 4.7% during the month, and the more global FTSE 100 outperformed the more domestically focused FTSE 250. Oil & gas and basic resources were the best performing sectors, while banks and media were the weakest.

The Fund performed well during October, rising in-line with the benchmark. Following a long period of weakness, the oil majors all performed well despite oil prices remaining flat over the month. Sky performed well following results as it announced continuing positive subscriber numbers; analysts had feared these would have been hurt following the loss of Champions League Football to rival BT. Unilever was also a positive contributor following a strong set of results with all business lines beating expectations, and organic growth well ahead of consensus forecasts. Retailer Next was another good performer, with the share price heading back towards the highs of the year.

AstraZeneca was a detractor from performance, and has been weak all year. Despite this, there are signs that the company’s pipeline is improving and the number of potential new drugs in late stage development has increased markedly over the last few years.

We remain concerned that the global economy is slowing quite sharply at a time when central bank actions have pushed valuations to high levels. Although we cannot know whether another recession is around the corner, the economic data has been uniformly poor over recent months. This would not in itself create an issue if it was adequately factored into valuations, however today we can confidently assert that for many companies this is absolutely not the case. Accordingly we think it is correct to take a defensive stance and have some cash on hand to take advantage of better opportunities that may come along.

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 Growth 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 Alibaba, Baidu, Regeneron Pharmaceuticals, LinkedIn, and Facebook. Facebook continues to develop tools for its ecosystem of marketers and developers. The company is positioning itself as the “identity layer” that sits between the user and other mobile Internet applications by enabling user identity verification. This extends Facebook’s reach outside of its own apps (e.g., Facebook, Instagram, Messenger, and WhatsApp) and increases the breadth of user data collected by the company. As a result, Facebook is able to build a more complete profile of individual users, making it a more valuable partner to marketers and developers. We expect third-party application integration with Facebook will help sustain the company’s already high user engagement rates, while solid relationships with marketers should facilitate continued advertising revenue growth. In addition to its core business, Facebook continues to develop its messaging applications, Instagram, and Oculus, the virtual reality company it acquired in 2014. Our current model includes little revenue from the messaging applications or Oculus, and we think our estimates for Instagram could prove to be conservative. As a result, Facebook has the potential for meaningful upside optionality and we believe its valuation is quite rational.

The top five relative detractors from performance were Illumina, Kansas City Southern, Fast Retailing, Whole Foods Market, and Biogen. Illumina is the global leader in genomic sequencing technology with an estimated 80 percent share of installed instruments. The company preannounced lower than expected third quarter earnings in early October, however, our long-term outlook for the business remains intact. Illumina principally earns revenue by selling sequencing instruments, as well as consumable reagents used during the operation of those instruments. Because the company’s instruments are high-cost, infrequent purchases for its customers, revenue growth for this segment can vary from quarter to quarter. While instrument sales slowed during the quarter, we do not think this signals a decline in the use of sequencing, as sales of consumables were strong. As the installed base of Illumina’s technology grows, we believe recurring consumables revenue will become the primary driver of the business over the long term.

During October, we purchased Edwards Lifesciences and Whole Foods Market, and sold FMC Technologies and Royal Vopak.

Edwards Lifesciences is a medical device company engaged in the design, development, manufacture, and marketing of products for advanced cardiovascular disease. Edwards pioneered the development of artificial heart valves used to treat aortic stenosis, a disease characterized by a progressive hardening and dysfunction of the aortic valve, which is a life-threatening condition. The company’s continual innovation has enabled it to gain leading market share in both trans-catheter and surgical valves for aortic stenosis. We expect trans-catheter aortic valve replacement (TAVR) to gain market share as minimally-invasive procedures gradually displace open-heart surgery as the standard of care. We believe the rise of minimally-invasive surgery is a major secular trend in healthcare as it improves patients’ recovery times and provides savings to the broader healthcare system, relative to open surgery. Over the long term, we believe the growing adoption of TAVR will be the primary driver of Edwards’s growth. Additionally, we believe Edwards’s expertise in minimally-invasive valve replacement provides optionality to explore other potential structural heart dysfunctions, particularly mitral valve replacement. Given the growing market for TAVR and our expectation that Edwards will remain a leading supplier of the equipment necessary for this procedure, we expect earnings per share growth of 20 percent per year over the next five years.

Whole Foods Market is a leading retailer of natural and organic foods. We believe the company’s culture of innovation, employee empowerment, and customer-first focus is helping it transform grocery shopping from a mundane chore to an enjoyable activity. By disrupting the supermarket status quo, we think Whole Foods can take share among natural and organic grocers, a segment that is growing at double-digit rates. The company’s scale and institutional knowledge grant it a strong cost advantage in sourcing high-quality organic groceries. We expect Whole Foods will continue to make long-term investments to offer lower prices and broaden its customer base, which should allow it to take full advantage of the growth opportunity in front of it, namely the potential to double or even triple its store base. Over the next five years we think Whole Foods can deliver high-teens annualized earnings growth, with the possibility of continued growth thereafter.

We sold FMC Technologies because we no longer believe the company’s fundamentals are strong enough to insulate it from negative sentiment and commodity price cycles, two factors that can have an outsized impact on the business results of energy companies. With an unconstrained mandate to own what we think are the 30 to 40 best growth businesses we can find in the world, we believe clients are better served when we invest in businesses that are stronger fits with our criteria and have the ability to sustain above-average growth, without meaningful downside risk from exogenous influences. While FMC remains, in our view, a clear leader in the energy sector, we have come to the conclusion that its linkage to commodity prices makes its long-term growth profile less attractive relative other businesses in our global opportunity set.

As the world’s largest provider of storage for liquid bulk cargo (e.g., petroleum, chemicals, and liquid natural gas), Royal Vopak’s business is inextricably linked to demand for energy. While its leadership and competitive positioning remain intact, we no longer believe its business fundamentals are strong enough to generate above-average growth in a sector that is often challenged by cyclical headwinds. With an unconstrained mandate to own what we think are the 30 to 40 best growth businesses we can find in the world, we believe clients are better served when we invest in businesses that are stronger fits with our criteria and do not face meaningful downside risk from exogenous influences. We no longer view Vopak as one of these businesses.

Schroders – Kevin Murphy & Nick Kirrage

Managed Growth & Schroder Managed

Global markets recovered in October, after their poor showing in September. Speculation about central bank policy helped the improvement in risk appetite, as investors welcomed stimulus measures from the Chinese authorities and predicted more to come from Europe and Japan. In the US, better-than-feared earnings aided the S&P 500’s strong performance. Eurozone equities also performed well, and stockmarket gains accelerated after the European Central Bank president Mario Draghi suggested that it could expand its quantitative easing (QE) programme and lower the deposit rate, perhaps as soon as December. UK equities rebounded too, although disappointing third-quarter earnings results from the oil and gas sector weighed on the FTSE All-Share index, which lagged other equity markets.

Within the fund’s UK Equity portfolio, Home Retail Group, which owns the Argos and Homebase chains, performed poorly following a profit warning related to uncertainty over Christmas trading and increased investment in Argos. Business education group Pearson also lagged after it reduced 2015 profit guidance, citing challenging market conditions. On the positive side, the market welcomed news that the chief executive of high street retailer Debenhams planned to step down. Within financials, Life insurer Aviva issued a reassuring third-quarter update, following its acquisition of Friends Life earlier in the year.

Select Equity – George Loening & Chad Clark

Worldwide Opportunities

After a very challenging Q3, global equity markets rebounded in October. Asia and EM markets advanced following better than expected Q3 China GDP, while Europe was bolstered by hopes of further ECB stimulus. Japan was the best performing region, followed by the US market, which experienced its largest monthly gain in four years. Cyclical and lower-quality companies led the rally, with defensive sectors lagging in the month.

For the month of October 2015, the Sub-Account returned +7.9% on a net basis versus a +5.8% return for the MSCI ACWI during the month. The account’s cash levels did not change meaningfully, finishing October at 9.0% of assets.

The top three contributors in the month were Dentsply, the largest global manufacturer of dental products; Misumi Group, a Japanese global distributor of customized factory automation components; and AIA, Asia’s oldest and largest life insurer. Dentsply shares surged +20% in USD in the month as management made a compelling case to investors that the recently announced merger with Sirona Dental (another of Select Equity’s favorite businesses) would ultimately create significant value for shareholders. Both Misumi and AIA benefited from a recovery in sentiment for equities exposed in any way to China after falling in sympathy with that country’s equity markets in August & September. The largest detractors in the month were Harley Davidson, the largest manufacturer of heavyweight motorcycles; IDEXX Laboratories, the largest supplier and distributor of veterinarian testing equipment; and Publicis Groupe, a global advertising and marketing agency. All three top detractors reported disappointing earnings during the month.

From our perspective, 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. Lower energy prices will benefit consumers eventually, but the pain inflicted on the Energy, Materials and Industrials sectors is far more concentrated and immediate. We continue to believe that QE will ultimately be shown to have caused the very deflation it was intended to prevent. 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.

State Street – Mihaly Domjan, Nick Pidgeon & Jennifer Yazdanpahani

Money Market

As expected, the Bank of England’s Monetary Policy Committee kept the bank rate on hold at 0.50% at its meeting on 8 October. Members once again voted 8-1 to keep rates unchanged and the minutes of the meeting continued to highlight the downside risks to global activity. The minutes also suggest that the Bank is less confident that its inflation target will be sustainably met within the next two years and that it anticipates deflation again in the coming months. However, CPI’s move into negative territory, from zero in August to -0.1% in September, induced by falling petrol prices, probably came sooner than expected. Inflation last turned negative in April, when it fell to -0.1% for one month.

Following October’s dovish meeting of the European Central Bank’s Governing Council, Eonia swap yields fell after President Draghi signalled that policymakers had moved much closer towards further easing monetary policy. Draghi made it clear that the ECB’s Asset Purchase Programme could be adjusted in several ways. In addition, the Governing Council discussed the possibility of cutting the deposit rate. These changes could be announced at the ECB Council meeting in December. In contrast, at its meeting in October, the US Federal Reserve Open Market Committee (FOMC) signalled a December hike could be back on the cards. After keeping rates on hold in September, the Fed’s October statement supported a December lift-off, as a continuation of modestly positive activity data, but no acceleration, was perceived to be adequate for most FOMC members to conclude that it is time to begin raising rates.

After the FOMC meeting, market expectations for the timing of a UK rate hike were moved forward to the fourth quarter of 2016 from the first quarter of 2017. Previously, the Bank of England had maintained a scenario around the August Inflation Report script, inferring that the first Bank rate hike would be required in the first quarter of 2016. More recently, Bank Governor Mark Carney made comments that alluded to the growing downside risks facing the economy, which could signal that the Bank’s policy guidance will be more dovish in November’s Inflation Report. The current market pricing may now be more aligned with the central bank’s views, fitting with tweaked policy guidance around a first rate hike.

In terms of the data released during the month, retail sales exceeded expectations, with a 1.9% month-on-month (and 6.5% year-on-year) gain in September attributed to special rebates on beverages around the Rugby World Cup and the inclusion of the late August bank holiday weekend. The ONS reported that real GDP in the third quarter, up 0.5% quarter on quarter and 2.3% year on year, was slightly below consensus, reflecting weakness in manufacturing and construction but steady growth in services output. The unemployment rate fell by more than expected, reaching a new post-recession low of 5.4% (versus an expected 5.5%). This was offset by softer pay growth, with average earnings excluding bonuses at 2.8% year on year in August from 2.9% year on year in July, versus 3.0% consensus. Overall, the latest UK data alleviates near-term pressure on the Bank of England to raise interest rates any time soon.

Sterling money market fixings were little changed in October. The Libor curve out to three months remained unchanged while six-month fixings declined one basis point and the 12-month fixing fell three basis points before recovering after longer-dated yields rose in line with rate hike expectations. At the fund level, the weighted average maturity fell to the low 40-day range with most investments kept to a lower maturity.

The fund continued to focus on diversification by both geographical location and sector, whilst maintaining high credit quality.

S.W. Mitchell Capital – Stuart Mitchell

Greater European Progressive Unit Trust & Greater European

We purchased a new position in the French retirement home group Orpea, which currently manages some 68,000 beds in 690 facilities across 9 countries. The company is now the leading European operator, with 51% of beds located outside their home French market, following a series of significant acquisitions including SilverCare and Celenus Klinikum in Germany, Senevita in Switzerland and SeneCura in Austria. The company boasts a strong track record with revenues growing by 15 times over the past 13 years. Impressively, organic sales growth has varied between 6 and 15 percent throughout the last decade. The long term growth opportunity remains compelling as the number of ‘over-80 year olds’ is forecasted to rise dramatically in the future. In Germany (15% of beds), most notably, the amount of ‘dependents’ is expected to double to 5m over the next 35 years. The industry, furthermore, is regulated across much of Europe helping to moderate the supply of new homes. France, for example, employs a 15 year license system. New licenses have been flat over the last 5 years as the government has sought to control state spending. Much of the state and charitable provision of care in France is also thought to be of very poor quality and in need of replacement. In the shorter term, revenues should grow by some 5% organically over the next few years as recently constructed homes come on stream. Profits, furthermore, should grow more quickly as recent acquisitions are integrated into the group. Trading on some 23 times prospective earnings the share appears reasonable value with profits expected to grow by over 15% per annum over the next few years. We also sold our investment in Air France as the restructuring programme is proving to be even more difficult to implement than we expected.

We continue to have a positive outlook for European equities. As we have written previously, it has been difficult, as a stock-picker, to link together the China-panic in August and September with what we have heard from our numerous company visits on the ground. Whilst we have been acutely aware of a slow-down in the Chinese economy for over the past two years, we haven’t been able to observe any real evidence that the deterioration has begun to dangerously accelerate. We should also remind ourselves, furthermore, that China only accounts for 4% of Eurozone exports. The United Kingdom and United States are much more important trading partners making-up 7% of Eurozone exports respectively. Indeed, Germany, the most China-exposed of the major European economies continues to experience a buoyant 10% growth in factory orders. As you know, we sold most of our China-exposed investments as far back as 2012, believing that the market had overly optimistic growth expectations. Of much greater importance is the accelerating recovery in domestic demand that we have repeatedly pointed out over the past few quarters. Our company visits coupled with the limited number of third quarter results that we have seen so far appear to confirm this view. Notable highlights include strong results from the telecom operators, Carrefour, Commerzbank, SEB and, of course, the British housebuilders.

S.W. Mitchell Capital – Stuart Mitchell

Continental European

We purchased a new position in the French retirement home group Orpea, which currently manages some 68,000 beds in 690 facilities across 9 countries. The company is now the leading European operator, with 51% of beds located outside their home French market, following a series of significant acquisitions including SilverCare and Celenus Klinikum in Germany, Senevita in Switzerland and SeneCura in Austria. The company boasts a strong track record with revenues growing by 15 times over the past 13 years. Impressively, organic sales growth has varied between 6 and 15 percent throughout the last decade. The long term growth opportunity remains compelling as the number of ‘over-80 year olds’ is forecasted to rise dramatically in the future. In Germany (15% of beds), most notably, the amount of ‘dependents’ is expected to double to 5m over the next 35 years. The industry, furthermore, is regulated across much f Europe helping to moderate the supply of new homes. France, for example, employs a 15 year license system. New licenses have been flat over the last 5 years as the government has sought to control state spending. Much of the state and charitable provision of care in France is also thought to be of very poor quality and in need of replacement. In the shorter term, revenues should grow by some 5% organically over the next few years as recently constructed homes come on stream. Profits, furthermore, should grow more quickly as recent acquisitions are integrated into the group. Trading on some 23 times prospective earnings the share appears reasonable value with profits expected to grow by over 15% per annum over the next few years.

We also sold our investment in Air France as the restructuring programme is proving to be even more difficult to implement than we expected. We also sold our holding in Sacyr following the sale of their most attractive asset Testa.

We continue to have a positive outlook for European equities. As we have written previously, it has been difficult, as a stock-picker, to link together the China-panic in August and September with what we have heard from our numerous company visits on the ground. Whilst we have been acutely aware of a slow-down in the Chinese economy for over the past two years, we haven’t been able to observe any real evidence that the deterioration has begun to dangerously accelerate. We should also remind ourselves, furthermore, that China only accounts for 4% of Eurozone exports. The United Kingdom and United States are much more important trading partners making-up 7% of Eurozone exports respectively. Indeed, Germany, the most China-exposed of the major European economies continues to experience a buoyant 10% growth in factory orders. As you know, we sold most of our China-exposed investments as far back as 2012, believing that the market had overly optimistic growth expectations. Of much greater importance is the accelerating recovery in domestic demand that we have repeatedly pointed out over the past few quarters. Our company visits coupled with the limited number of third quarter results that we have seen so far appear to confirm this view. Notable highlights include strong results from the telecom operators, Carrefour, SEB and, of course, the British housebuilders. At the same time, the Eurozone moves ever closer to normalisation. Many investors have struggled to accept how deeply companies and governments have restructured at the periphery of Europe. Just look, for example, at the 40% reduction in costs that IAG achieved at Iberia. At the same time, German wage growth is beginning to accelerate quite quickly. The recent 3.4% pay award struck by employers and the highly influential IG Metall trade union is the highest since 2007. In fact, a significant proportion of peripheral Europe’s productivity gap with Germany has now been eliminated over the past few years. Closer to the core, furthermore, Matteo Renzi and Francois Hollande are beginning to make real progress with reform. 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. As you might expect, we continue to find the best opportunities in the more domestically orientated areas of the market.

Companies from the periphery of Europe make-up 24% 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 17% of the fund. 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 BNP and Intesa where we believe that returns should rather rapidly return to pre-crisis levels.

Telecom companies represent 16% of the fund including investments in the telecom groups Orange, Deutsche Telekom and Telecom Italia. Our favourite growth companies, such as Legrand and Eurofins make up the remainder of the fund.

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

Global Equity

In October, global equity markets regained much of the ground they lost in August and September as the late summer correction proved to be short-lived. The same held for the SJP account, which finished the month up nicely.

All but five of the 44 companies in the portfolio had a positive return for the month, with the strongest gains coming from the portfolio’s financial and industrial holdings, including Standard Chartered, Zurich

Insurance, Siemens, and Illinois Tool Works, among a host of others. In contrast, Pearson, which had a poor revenue and earnings report mid-month, the Daily Mail, Cenovus, IBM and BBA Aviation all finished in the red for the month.

Portfolio activity was quite modest. We added to the portfolio’s position in HSBC and trimmed our position in BBA Aviation. Bargains were once again hard to come by during the month; however, should we revisit the market instability of August and early September, we remain well positioned to take meaningful advantage.

Wasatch Advisors – Ajay Krishnan & Roger Edgley

Emerging Market Equity

Emerging-market equities posted solid gains in October following five consecutive months of losses. From May 1 through September 30, 2015, the MSCI Emerging Markets Index had lost about -22%, as slowing economic growth in China raised concerns about the global economy.

India was one of the countries whose stocks held up well during the recent downturn. India’s weak trade linkage with China left it somewhat insulated from China’s economic woes. Also, as a significant importer of commodities, India is benefiting from lower prices for oil and other natural resources. Our focus on what we believe are high-quality, long-duration businesses helped the portfolio’s Indian holdings gain +3.8% from May through September, compared with a loss of about -2.4% for the Indian positions in the Index.

As investor risk appetite returned in October, those trends reversed; Indian stocks declined slightly, and the portfolio’s Indian holdings underperformed their counterparts in the Index. Going forward, we believe India remains well-positioned for a more-challenging investment environment. In coming months, we anticipate increasing the portfolio’s investments in India. Our upcoming research trip, scheduled for November, is aimed at finding additional Indian companies with long-term growth prospects we consider attractive.

Wellington – Haluk Soykan

Gilts

Gilt yields rose over October; most significantly at the 30-year and 10-year points of the curve, which rose by 17 and 16 bps respectively, while 2-years rose by a more moderate 7 bps. Gilts rallied early in the month when Governor Carney’s negative rhetoric and MPC minutes signalling a weak UK inflation outlook eased pressure on the BoE to tighten policy. However, yields later rose to a six-week high at the end of October when the Fed announced that it was potentially still on course for a rate hike this year, which ignited speculation that the BoE would follow its lead. Monetary policy divergence was in focus over the month as global government bond yields and currencies diverged, while credit spreads generally tightened. The UK saw positive data releases, with industrial production rebounding from July’s drop, led by the gas extraction and transportation equipment components, and home prices rising in line with expectations in September. US GDP softened by 2.4% in the third quarter, yet housing remained a bright spot with increases seen in home prices, housing starts, homebuilder confidence and existing home sales. In Europe, unemployment fell to its lowest level in three years and inflation picked up slightly, although still remained well below the ECB’s target level, likely prompting further easing this year.

For the month of October the Portfolio outperformed the benchmark by 1bp, returning -0.44% and the benchmark -0.45%.

The UK economy continues to be characterised by an unbalanced mix – housing and consumption gains, combined with widening twin (current account and fiscal) deficits and improving, but still weak, productivity. In contrast to the euro area, the UK consumer has rising employment and nominal wages supporting disposable income. Better nominal wages, employment, housing, and low CPI mean the consumer is underpinned by better disposable income.

There has been little domestic inflation and a slight loss of cyclical momentum in short term growth. Overall BoE rhetoric is that there is no urgency to hike, but it reserves the option to hike earlier if needed.

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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