Investments in 2018: “A year of protests”

This year has seen turbulent markets, global political strife and even more legislation, as Mifid II came into force. Here, three industry experts look back on the year and discuss what have been the key issues investors have faced.

Macroeconomics

Julian Chillingworth, chief investment officer at Rathbone Unit Trust Management

Efforts by president Donald Trump – a self-confessed “tariff man” – left global investors wondering if American/Chinese relations would ever be “great again”.

Meanwhile, opposition to the government’s Brexit plans hurtled the UK towards a constitutional crisis. It has been a year of protest around the world, as politicians tested boundaries and events previously considered unthinkable became the norm.

New to the job, US Federal Reserve chairman Jay Powell lost no time in putting his mark on the economy, and monetary policy tightened throughout the year. The fourth rate hike of 2018 looks set to go ahead, but doubts are building around the two further hikes pencilled in for 2019. This tightening caused the president to brand Powell a “threat”.

Stirring up America’s relations with the superpower, Trump waged a trade war with China which dominated headlines throughout the year. Never known to drive economic prosperity, the trade war played havoc with commodity prices and, ultimately, would lead to a slowdown in GDP growth around the world. A successful meeting at the G20 in Argentina appeared to thaw relations between the countries and terms for a 90-day truce were agreed.

Political populism quietly rumbled on in Europe. Our own green and pleasant land endured enormous turmoil and at times it felt the only constant was Theresa May’s unwavering determination to lead proceedings.

French president Emmanuel Macron faced a grim December, with violent riots brewing even after rowing back on a proposed fuel tax hike, and Italy faced sanctions from the EU over its budget, which was labelled an unprecedented breach of spending rules.

It has been a busy year, but our focus is moving to 2019 and the possible slowdown in global growth. Recession still seems unlikely, with US growth strong and unemployment falling. Global leading indicators also suggest decent growth is continuing and stockmarkets should be supported. But with the pace of growth slowing, a more defensive stance within equities looks warranted.

Trade body calls for KIDs to be scrapped for closed-ended funds

Investment trusts

Annabel Brodie-Smith, communications director at the Association of Investment Companies

It has been a big year for the investment company industry, as it celebrated the 150th birthday of the first investment company, F&C Investment Trust. There was plenty to celebrate, as in September the industry’s assets reached an all-time high of £189bn.

This year has also seen the largest-ever launch of a UK investment company, Smithson Investment Trust, which raised £822m in October to invest in global smaller companies.

Launch activity has been healthy, with this so far being the third-best year for new issues. There were 18 investment company launches, raising £2.9bn and investing in a wide range of assets, from US equities to music royalties. This year, equity launches have seen a resurgence, with around two thirds of issues investing in equities and the remaining third in alternative assets.

It has been a tricky year for markets, with a strong rally in late spring giving way to a downturn from October onwards. The average investment company is up 1.3 per cent to the end of November, outperforming the FTSE All-Share, which is down 6 per cent. The best-performing investment company sector to the end of November was Biotechnology & Healthcare, up 16.9 per cent.

This year, a key concern for the investment company industry has been the Key Information Document. This European legislation aims to produce a standardised disclosure for investments. This is an admirable intention, but the highly misleading data in the KID is based on a flawed methodology which uses past performance to calculate future performance scenarios and a risk indicator. This has resulted in dangerous and alarming data in investment company KIDs.

Recently, the European parliament decided to delay the KID rules for Ucits funds for two years but did not suspend them for investment companies.

With the EU appearing unwilling or unable to protect investment company investors, KIDs remain a priority and we will continue to stand up for investors on this important issue next year.

How to prepare portfolios for the possibility of Brexit

Multi-asset and DFMs

John Husselbee, head of multi-asset at Liontrust

We believe the discretionary space has been increasingly dominated by three key factors. These are:

  • Suitability: There is no one-size-fits-all solution when it comes to investing;
  • Transparency: The importance of being informed when outsourcing;
  • Cost: Getting value for money from a selected manager.

In this context, we see target risk versus risk-rated as the key differentiating factor in the multi-asset universe in 2018, and ahead for 2019. Unlike risk-rated offerings, where risk mapping is backward-looking – the rating is based on how the fund has behaved in the past – target risk investing is forward-looking. This means in practice that the portfolio is risk- rather than return-based, so advisers can map portfolios more accurately to client needs.

Target risk also cuts out the risk of what we call “Fomo investing”, fear of missing out, where portfolios are constantly seeking the “next big asset class” and attempting to time their moves into markets.

Given the growing focus on suitability, transparency and cost, we believe the trend towards funds of funds and portfolios managed on a target risk basis will continue to build over the coming years.

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