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:
A stuck record?
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
Source: Kleinwort Benson, Bloomberg
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
Tapering and praying
Deflation becomes the key risk to the US economy and tapering is reversed
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
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
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
Source: Barclays Equity Gilt Study (2014)
No one asset class has consistently outperformed inflation
Sources: Kleinwort Benson, Bloomberg
Data from March 1988 to December 2013
Asset class cumulative returns every five years
investment policy to your strategic plans
BUT there is no one magic answer
Consider how your charity would stand up to questioning over its ethical policy:
Comic Relief invests millions in controversial tobacco, chemical and arms firms
Wonga row: Archbishop of Canterbury ‘embarrassed’ over Church funds
No laughing matter: Comic Relief invested in tobacco, alcohol and arms firms
Church has yet to shed its Wonga investment
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