Topical economic update
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Topical economic update. 2013 in a nutshell. The economy: will it, won’t it....grow? US politicians: will they, won’t they....shut down? Ben Bernanke: will he, won’t he....taper?. Our concerns for 2014 – similar to those held at the start of 2013:

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Topical economic update

Topical economic update


2013 in a nutshell

2013 in a nutshell

  • The economy: will it, won’t it....grow?

  • US politicians: will they, won’t they....shut down?

  • Ben Bernanke: will he, won’t he....taper?


Topical economic update

Our concerns for 2014 – similar to those held at the start of 2013:

  • the impact of a reduction in central bank liquidity leading to higher interest rates

  • the pace of global economic growth

  • high government deficits

  • US political deadlock and the eurozone’s stability

A stuck record?

  • Definition of a fund manager: short term pessimist, long term optimist

  • Anonymous


Topical economic update

2013 rewarded investors for taking risk: WM Total Charity Index returned 15.5%

Investors have to take on a higher degree of risk to achieve similar results

But not so bad … or is it?

To generate a 4% income:

2008: 100% in government bonds

2014: 75% allocation to equities with an income bias

To achieve the same expected return:

2007: 50% equities / 50% bonds

2014: 80% equities / 20% bonds


Strong equity performance in 2013

Strong equity performance in 2013

  • Returns largely driven by multiple expansion

Source: Kleinwort Benson, Bloomberg


Topical economic update

May 2013 versus May 2014

22 May 2013: Ben Bernanke tapering announcement that the Fed reserve may start reducing asset purchases over the next two meetings. Result of +1% onto bond yields

Risks of holding fixed income increase: move into other assets – RISK ON


Topical economic update

Tales of the unexpected

Tapering and praying

Deflation becomes the key risk to the US economy and tapering is reversed

Abegeddon

Abenomics succeeds in generating inflation, and even growth. However higher bond yields cause Japanese banks’ balance sheets to implode causing the next financial Armageddon

Roaring tiger, flying dragon

The Chinese government removes the country’s biggest tail risk by preemptively insuring all bank balance sheets against real estate toxicity

London no longer calling

The London housing bubble bursts. Everyone wonders why they didn’t see it coming…

~ not priced into markets and may cause volatility in 2014


Topical economic update

Asset class preferences

Positive on equities …

reasonable valuations and good momentum, but mindful of increasingly bullish investor sentiment

Positive on corporate bonds …

prefer high quality, cash generative corporate bonds

Negative on government bonds …

expensive by most measures BUT we invest in them to reduce volatility in multi-asset portfolios


Topical economic update

Q1 2014

Index returns Q1 2014 (%)

Lower risk assets out-performed

FTSE Govt. All Stocks 2.1%

ARC Cautious Charity Index 1.0%

FTSE World ex UK 0.7%

ARC Balanced Asset Charity Index 0.6%

ARC Steady Growth Charity Index 0.4%

FTSE All Share -0.6%

Political intervention: FTSE hit in March with budget changes

Source: Kleinwort Benson, ARC


Inflation the silent robber

Inflation – the silent robber

  • Loss of purchasing power

Average: 4.1%

Source: Barclays Equity Gilt Study (2014)


Topical economic update

The challenge ahead

No one asset class has consistently outperformed inflation

Sources: Kleinwort Benson, Bloomberg

Data from March 1988 to December 2013


Topical economic update

Getting the big decisions right

Asset class cumulative returns every five years

best

return

worst

return

  • ‘Insanity: doing the same thing over and over again and expecting different results.’

  • Albert Einstein


Topical economic update

What does this mean?

  • Ensure that you have identified the short, medium and long term pots of money by linking the

    investment policy to your strategic plans

  • Short-term noise is a distraction

  • Selecting the correct mix of asset classes is the most significant decision we make as investors

    BUT there is no one magic answer

  • ‘Why did God invent economists?

  • To make weathermen feel good about themselves.’

  • David Rosenberg, former Chief Economist at Merrill Lynch


Topical economic update

And finally …

Consider how your charity would stand up to questioning over its ethical policy:

  • reputational risk

  • transparency

  • appropriateness

  • Charity law

Comic Relief invests millions in controversial tobacco, chemical and arms firms

The Mirror

Wonga row: Archbishop of Canterbury ‘embarrassed’ over Church funds

BBC News

No laughing matter: Comic Relief invested in tobacco, alcohol and arms firms

Independent

Church has yet to shed its Wonga investment

The Times


Topical economic update

Important regulatory information

The information in this publication is provided for information purposes only and does not take into account the investment objective, the financial situation or the individual needs of any particular person. It is not an offer to buy or sell any particular security or investment. This publication does not constitute advice. All potential investors should seek and obtain advice specific to their circumstances from a qualified financial adviser before making investment decisions. The value of investments, and the income from them, may fall as well as rise and the investor may not get back the amount initially invested. Past performance does not guarantee future performance. Fluctuations in exchange rates may cause the value of investments denominated in currencies other than sterling to fall or rise. The effects of charges and an investor’s personal tax circumstances may reduce any returns. Tax treatment depends on an investor’s individual circumstances and may be subject to change.

Kleinwort Benson does not provide tax advice. Investors should seek and obtain tax advice specific to their circumstances from a qualified tax professional.

This publication is a financial promotion. It has been approved and issued in the United Kingdom by Kleinwort Benson Bank Limited. Kleinwort Benson is the brand name of Kleinwort Benson Bank Limited. Kleinwort Benson is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority, reference number 119269 and is a member of the London Stock Exchange. Kleinwort Benson is a company incorporated in England and Wales with company number 2056420.

Kleinwort Benson is the brand name of Kleinwort Benson (Channel Islands) Investment Management Limited which is a company incorporated in Jersey with company number 13270. Registered Office Kleinwort Benson House Wests Centre St Helier Jersey JE4 8PQ. It is regulated by the Jersey Financial Services Commission, the Guernsey Financial Services Commission for the conduct of investment business and is also regulated by the South African Financial Services Board as a licensed Financial Service Provider. Telephone calls may be recorded.

Kleinwort Benson is the brand name for Kleinwort Benson (Channel Islands) Limited which is a company incorporated in Guernsey with company number 52103. It is regulated by the Guernsey Financial Services Commission for Banking and Investment Services. Kleinwort Benson places all client deposits with a spread of approved counterparties and other parts of the Kleinwort Benson Group. As such their financial standing is linked to that of the Kleinwort Benson Group. Depositors should form their own view of the financial standing of the Bank and the Group based upon publicly available information. Kleinwort Benson is a participant in the Guernsey Banking Deposit Compensation Scheme. The Scheme offers protection for ‘qualifying deposits’ up to £50,000.00 subject to certain limitations. The maximum total amount of compensation is capped at £100,000,000.00 in any 5 year period. Full details are available on the Scheme’s website www.dcs.gg or on request. Kleinwort Benson is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority in respect of UK regulated mortgage activities and its firm reference number is 310344. Registered Office Dorey Court Admiral Park St Peter Port Guernsey GY1 2HT. Telephone number +44 (0) 1481 727111. Telephone calls may be recorded.

Kleinwort Benson is the registered trading name of Kleinwort Benson Bank (Isle of Man) Limited company number 07856C. Registered Office St George’s Court Upper Church Street Douglas Isle of Man IM1 1EE. It is licensed by the Isle of Man Financial Supervision Commission and is a participant in the Isle of Man Depositors’ Compensation Scheme as set out in the Depositors’ Compensation Regulations 2010. Kleinwort Benson places all client deposits with a spread of approved counterparties and other parts of the Kleinwort Benson Group. As such their financial standing is linked to that of the Kleinwort Benson Group. Depositors’ should form their own view of the financial standing of the Bank and the Group based upon publicly available information. Latest Report and Accounts are available at www.kleinwortbenson.com. Kleinwort Benson Bank (Isle of Man) Limited is a subsidiary of Kleinwort Benson Channel Islands Holdings Limited, incorporated in Guernsey, the ultimate parent of which is RHJ International SA which is listed on the Brussels Stock Exchange. Telephone calls may be recorded.


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