Newsletter | November 2021



Investment perspective

Global equity markets performed strongly in October under the leadership of US equities. The MSCI World Index in local currencies rose by 5.4%, with the S&P 500 climbing by 6.9%, but emerging markets and Japanese equities did not take part in the rally. The Brazilian equity market was particularly weak, on concerns over excessive public spending plans, whereas Japanese equities were also under pressure ahead of October 31 general elections. It was a quite volatile month for bond markets, with early-month rises of sovereign debt yields followed by a partial unwinding, at least on the longer end of the curves; this was due in part to big swings in inflation expectations. The yields of 10-year US Treasuries rose by 6bps in October but 2-year ones ended the month 20bps higher, resulting in a much flatter curve. There was also a lot of action within the commodity markets, as energy prices extended their rally and divergent trends were observed on industrial metals.

With 82% of the S&P 500’s market cap having reported, 79% of the companies have beaten earnings’ estimates and 72% revenue estimates. Overall, third-quarter earnings are beating expectations by 10.5% and revenues by 2.9%. The results of European companies have also surprised positively, even if to a lesser degree. However, both regions are producing similar earnings per share (EPS) growth of above 35% year on year. These solid corporate results have contributed to reassure investors which had lowered their expectations ahead of this reporting season. As a result, equity markets have rebounded strongly and appear to be on a firmer footing again. The fact that profits have proved to be resilient despite rising costs, and that fewer companies than feared have warned on future profits, has definitely boosted the equity asset class.

Investment strategy

As many investors, we have been comforted by the ongoing reporting of Q3 corporate results. The portfolios’ overweight equity allocation is benefiting from the current strength of equity markets. Even if bond markets appear to increasingly disagree with the timeline of interest rate hikes by the ECB and the Federal Reserve, this has not triggered any negative reaction by equity markets so far. The Fed’s announcement following its FOMC November 2-3 meeting that it would start reducing its purchases this month was well flagged and taken in its stride by markets. Concerns over persistent high levels of inflation have not disappeared but, as long as they do not become the main drivers of markets, equities should remain the asset class of choice.

It has been interesting to observe that the price of gold has appreciated in October despite the pressure on bond yields. This likely reflects the fact that gold is considered as a good hedge against inflation in view of rising expectations. We also anticipate other positions in the portfolios such as the mining equities and the fund investing into real assets to represent good hedges against higher inflation.


Portfolio Activity/ News

October was a very positive month for the portfolios, mainly thanks to the strong performance of many equity funds. The multi-thematic fund, European small caps, frontier markets, and mining equities provided the best contributions; the European value fund also continued to perform well and we much like the way the fund is positioned. As in September, most fixed-income funds ended the month little changed. Our emerging market corporate bond fund had a negative month, however, in part due to a difficult market for Chinese corporate bonds. Other negative contributions were far and few between, but included our UK equity fund and another one investing into Japanese equities. In the alternative space, the CTA fund performed well, whereas the other strategies were mostly stable.

One of the challenges ahead of us will be the replacement of some of the portfolios’ long-only equity exposures by less directional strategies, especially as the fixed-income asset class is still very unattractive. Our search for new funds is therefore currently more focused on liquid hedge funds, with long/short credit and convertible arbitrage being some of our main interests at the moment.

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Newsletter | October 2021



Investment perspective

September confirmed its reputation for being the stock market’s worst month as global equity markets gave back some of their strong gains for the year. The MSCI World Index in local currencies dropped by 3.8% and, with the exception of Japanese equities, the drop of equity markets was widespread. Investors had to face a number of issues, including rising inflation pressures, the Fed’s more hawkish stance, the collapse of the Chinese property group, Evergrande, supply chain disruptions and concerns over the US debt ceiling negotiations. Rising bond yields were another headwind for equities as the yields of 10-year Treasuries and Bunds rose by close to 20bps. In this risk-off environment, it was not surprising for the US dollar to appreciate strongly. Finally, quickly rising energy prices also weighed on market sentiment; the price of a barrel of WTI jumbed by 9.5% during the month, with gas prices climbing at an even faster rate.

Following the September FOMC meeting, Federal Reserve Chairman Jerome Powell did not announce when the US central bank would pare back its bond purchases. Powell did indicate that tapering “may soon be warranted” and markets now expect the Fed to set out its plan at its November meeting. That is likely dependent on Washington issues being resolved however, as tensions around the debt ceiling, the budget resolution and potential for a government shutdown remain high. Nevertheless the Fed’s latest stance was considered to be more hawkish as was that of the Bank of England. This pushed bond yields higher and added to the angst of equity markets during the past month. In contrast, the communication from the ECB has tended to remain more dovish and its President Christine Lagarde promised not to “overreact to the transitory supply shocks” and to “continue providing the conditions to fuel the recovery”.

Investment strategy

The summer ended on a weaker note for equity markets as the month of September erased the gains that had been rec-orded in July and August. So far, we have not made any changes to our portfolio positioning. We deem the recent movement to be a normal behaviour of equity markets after a period of strong gains with no significant drop. We observe that markets have become more nervous and more prone to sudden changes, but we still consider fundamentals to be supportive, even if further equity gains are likely to be more challenging. We will pay close attention to the upcoming earnings’ reporting season. Rising commodity prices and shipping costs are amongst the risks that could impact profit margins and companies’ outlooks will also have to be closely monitored. Our equity allocation remains overweight, but we would not hesitate to act if necessary.

Concerns over the risk of persistent inflation are rising and this has recently impacted the level of yields. As a reminder our overall duration risk is low, and our credit strategies have fulfilled our expectations so far this year; spread tightening and carried interest have more than compensated the rise of bond yields observed in 2021.


Portfolio Activity/ News

Following an extended period of positive monthly returns, September was a negative month for the portfolios, mainly due to weaker equity markets. Mining equities, European small caps, the CTA fund and a number of other equity funds were the worst detractors. A few equity funds did manage to end the month with positive performances, in particular a Euopean value fund and frontier markets’ equities. Most fixed-income funds ended the month flat, despite a trend of rising yields, as did the other alternative strategies. For non-USD portfolios, the US dollar was a positive contributor.

The European value fund was an outlier in September as its positioning enabled it to generate a positive return despite the challenging equity markets. The fund has significant exposures to financials and energy as the manager sees considerable upside for these sectors in view of record low valuations and upside inflation risks. The fund has proven to be a good portfolio diversifier due to its composition and to the manager’s longstanding conviction over higher inflationary pressures.

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Newsletter | September 2021



Investment perspective

Global equity markets extended their relentless winning run, as they recorded their seventh straight positive month in August. Despite a short mid-month wobble, equities confirmed their resilience to bad news, which included a resurgence of Covid-19 cases, concerns over the Fed’s tapering plans, the ongoing regulatory crackdown of Chinese companies, and a most dramatic withdrawal of US forces out of Afghanistan. The MSCI World Index in local currencies gained 2.5%, with the different regions posting quite comparable performances, thanks to a late-month rebound of emerging markets. G7 bond yields ended the month higher after initially dropping, with 10-year Treasuries even trading briefly below 1.20%. August was a very volatile month for commodities, with industrial metals being under severe pressure and oil prices only recovering part of their early-month losses over concerns about weaker demand.

The key event for markets in August was the much-awaited speech of the Federal Reserve’s chair, Jerome Powell, at the Jackson Hole symposium. Investors were looking for clues on when the tapering of the central bank’s monthly purchases might begin. Powell delivered a trademark speech where he soothed both equity and bond markets, which ended August on a strong note. Powell remained unclear about when tapering would begin and devoted much time to why he feels current high inflation is likely to pass. He also emphasized that the first rate increase was not linked to the scaling back of bond purchases. As a reminder, the Fed is currently buying $120 billion in monthly purchases ($80 billion in Treasuries and $40 billion of agency MBS), and tapering means that the bank’s balance sheet will continue to expand, but at a slower pace than currently.

Chinese internet companies have had a rocky ride since they reached a peak in February. A wide-ranging number of announcements have been made by the Chinese government over the recent period, with “Common Prosperity” being highlighted as its core policy objective. Key sectors including internet, education and real estate were hit particularly hard. Even if some individual companies had already come under pressure a year ago, investors have been spooked by the speed and the scope of China’s government’s latest offensive.

Investment strategy

The summer has turned out to be very profitable for the portfolios as equity markets have continued to grind higher, in part thanks to outstanding 2Q earnings and abundant liquidity. The Federal Reserve has opened the door to maybe begin to taper its monthly purchases before the end of the year, but markets seem relaxed about this perspective. We have maintained our overweight equity exposure, but some trimming has taken place. We also increased our allocation to alternative investments to the detriment of fixed income. We think that it makes sense to diversify the portfolios further by adding a market neutral strategy and by reducing some of the inherent asymmetrical risk of high yield bonds.

The equities of frontier markets have been one of the best contributors year-to-date. The fund we selected is outper-forming its benchmark by a wide margin. The upside for the fund’s portfolio remains very attractive as it is trading at only 9.7x 2022 earnings. The fund’s manager is forecasting 24% earnings growth for 2022 versus consensus forecasts of 7.5% for both emerging markets and for the MSCI World Index.


Portfolio Activity/ News

August was another positive month for the portfolios, mainly thanks to the strong performance of the equity asset class. European small caps, Japanese and UK equities as well as the multi-thematic and technology sector funds provided the best contributions; our European positive impact fund also made a good contribution. Within the fixed-income asset class, contributions were modest with the exception of the EM corporate debt fund which continued to perform well. The worst detractors were the mining sector fund and the Greater China fund which was impacted by the crackdown on several Chinese sectors.

In the summer, we added another alternative solution to our list of approved funds. This Event Driven fund focuses on mergers and acquisitions and mainly invests in announced deals, including non-US and smaller cap ones. The fund’s track-record has been strong and consistent, with limited drawdowns; the fund dropped by less than 5% during the March 2020 market correction. The fund was added to the model portfolio to reduce market beta as the strategy has a very low correlation to other asset classes. We also boosted the allocation to the Global Macro fund after cutting one of our European high yield positions.

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Investment Perspectives 2021 | Mid Year review & Outlook

Executive Summary

The economy is largely recovering as expected

Eighteen months after the onset of the Covid-19 pandemic, the global economy is experiencing its most robust post-recession recovery since World War II. The rebound is, however, very uneven across countries, as major economies are faring much better than many developing ones. Some countries have nearly lifted all their restrictions while others remain constrained by a resurgence of Covid-19, or by the fast spreading of the Covid-19 Delta variant. According to the World Bank, global growth is expected to accelerate to 5.6% this year, in large part thanks to the strength of the US and China. The level of global GDP in 2021 is still expected to be around 3.2% below pre-pandemic projections, despite this year’s recovery. For the remainder of the year, the outlook looks favourable for the US and for Europe but more complicated for the Asian region.

Fiscal stimulus continues to be supportive

Monetary support has reached its peak, but it is still massive, however fiscal support will continue to significantly impact economies in the years ahead. As in the case of vaccine rollouts, fiscal support has been very uneven across the different regions and the recovery is set to be unequal between countries, with developing economies forecasted to take longer to regain their pre-pandemic activity levels. Advanced economies have already benefited from much larger fiscal packages and they will continue to do so in the future. In Europe, the recovery plan is significant in size, while the different US relief bills have already amounted to more than a quarter of US GDP. An additional $1.2 trillion US infrastructure bipartisan plan is on the brink of being approved, while a separate bill designed to fund key Democrat priorities could also be pushed through the reconciliation process. All this to say that fiscal stimulus is far from being exhausted.

The second half likely to be more challenging for financial markets

Financial markets have been rewarding so far this year, mainly thanks to the contributions of equities, emerging market debt and high-yield bonds. Volatility has also been trending lower in a context of strong appetite for risk assets. The quarters ahead, however, are likely to produce more modest returns for the portfolios and the risks of higher volatility are rising. In view of elevated inflation risks and our expectations of higher bond yields, our fixed-income exposure has an overall low duration risk and a very underweight allocation to investmentgrade bonds. We still believe that it is too early to go into an overly defensive mode, hence our significant exposure to risk assets. The markets’ focus will continue to be on inflation risks and on the Federal Reserve’s communication as to how and when they will start to withdraw some of their support to the markets. Were high levels of inflation to persist, the pressure on the Fed will only keep increasing and markets could lose some of their serenity.

We maintain a dynamic positioning of the portfolios

Our portfolio positioning remains dynamic with an overweight towards equities, a low level of cash and a fixed-income allocation which is focused on emerging market debt, high yield credit and convertible bonds. Our equity allocation is well diversified across investment styles, regions, and market capitalisations. Our assessment is that European and UK equities still offer significant catch-up potential, and we are also confident about the capacity of our Japanese equity exposures to bring worthwhile contributions to the portfolios in the quarters ahead. The main driver of credit performance will be carry as further spread compression will be limited, and we expect convertible bonds to perform better, in relative terms, than during the first semester. In the next section of the document, we will evaluate the macro environment and the prevailing financial conditions by highlighting several key indicators that we observe. Following a brief overview of the first half returns of the different asset classes, we will outline our current market outlook and asset allocation.


Table of contents


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Newsletter | June 2021



Investment perspective

In May equity markets added modest gains to the strong returns recorded during the previous months. The dispersion of performances between regions and investment styles was less pronounced than observed previously, even if growth stocks lagged again. Markets were dominated by inflation concerns and, somewhat surprisingly, equities proved to be much more volatile than bonds, even if higher levels of volatility proved fleeting. Commodity markets extended their rally, with gold prices making up all of their early-year losses and oil prices continuing to rise. In forex markets, the dollar continued to depreciate further against most currencies, with the EUR/USD parity rising by 1.7%, thus bringing it back to its end-2020 level.

Inflation data were much discussed during the past month and were also a source of market volatility, for growth stocks in particular. US headline CPI in April rose by 4.2% year-on-year, its highest level since September 2008, and well above forecasts of 3.6%. Rising inflation expectations have raised the question of whether the Federal Reserve would be forced to adjust its monetary policy sooner than currently anticipated. The Fed unveiled a new policy framework last year, whereby it would be targeting average inflation of 2% rather than a set target of 2%, as previously. This new approach allows the central bank to tolerate higher inflation temporarily, especially as its current priority is a strong job market over inflation fears. The Fed has been adamant that higher inflation would be transitory only and not structural, but it is premature to come to any definitive conclusion on this issue. Bond markets reacted very calmly to the high inflation numbers, however, and seem prepared to trust the Fed, at least for the time being. There is no doubt that it will be very challenging for the central bank to communicate any change of its monetary policy without upsetting the markets.

Investment strategy

Equity markets have continued to grind higher even if a rising number of investors appear to be having doubts about the sustainability of the rally. The main market concerns include higher inflation risks, the need for the Federal Reserve to open discussions on tapering and the fact that markets have already priced in a lot of positive news. We agree that a lack of near-term catalysts could result in some consolidation for equity markets following their strong start to the year. We have, however, been somewhat reassured by the bursting of several market bubbles and we continue to observe cheap valuations across some sectors and regions. Our allocation to equities is diversified and well suited to market rotations.

We continue to be exposed to convertible bonds. Following an outstanding performance in 2020, the asset class has been more challenged this year for several reasons, including cheaper volatility, rising interest rates, weakness of growth sectors and excessive new issuance. We are confident that the asset class remains attractive as valuations are below their long-term average, new issuance offers new thematic opportunities and it is a portfolio diversifier.


Portfolio Activity/ News

May was a positive month for the portfolios, mainly thanks to the strong performance of gold and to the value investment style. Excluding gold, the best contributions were provided by frontier markets, European and UK value, mining equities as well as emerging market corporate debt. Generally speaking, it was a quiet month for fixed-income assets which produced only marginal contributions. The worst detractors were US Growth Small Caps and one of our Japanese equity funds. So far this year, we continue to observe an outperformance of last year’s laggards while the opposite is true for the biggest alpha generators in 2020.

In the past month, we took advantage of the correction of our multi-thematic fund to boost its allocation. With its exposure to growth stocks, the fund has had a challenging start to 2021 but the medium to long term drivers of the strategy remain compelling. We also increased our mining equities position in view of attractive valuations and as a hedge against rising inflation risks.

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Newsletter | May 2021



Investment perspective

Equity markets posted strong performances in April as long-term Treasury yields retreated and first-quarter earnings largely beat analysts’ estimates, on both sides of the Atlantic. US stocks outperformed, whereas Japanese equities ended the month lower. In a reversal of the trends observed in March, long-term US Treasury yields declined while those of Bunds moved higher; 10-year Treasury yields dropped by 11bps to end April at 1.63% while same-maturity Bunds saw their yields rise by 9bps to - 0.20%. This tighter yield spread was one of the drivers for the strong appreciation of the euro against the US dollar, with a monthly gain of 2.5%. The best performing assets, by a wide margin, were commodities, including a rebound of gold prices.

With 85% of the S&P 500’s market cap having reported, 86% of the companies have beaten earnings’ estimates and 74% revenue estimates. These beat numbers are well above historical averages and also reflect a higher-than-expected year-on-year rebound. This trend is well entrenched and analysts have continued to upgrade their estimates for the next quarter and for the whole of 2021. At a time when valuations are stretched, it was comforting for markets that results did not disappoint as a lot of positive news has already been discounted. The numbers announced by the mega-cap companies were also very noticeable as they spectacularly surpassed expectations. Alphabet, Amazon, Facebook and Apple were some of the stockmarket’s giants whIch outperformed during the month, on the back of these publications.

As expected, the meetings of the ECB and the Federal Reserve did not result in any negative surprises for the markets. The ECB has effectively increased the pace of its asset purchases and it also refrained from discussing a possible phasing out of its stimulus during its April meeting. On its side, the Federal Reserve reaffirmed its ongoing commitment to a very accommodative policy and indicated that it was too soon to consider curbing its assets’ purchases.

Investment strategy

We did not change the composition of our model portfolios in April, which enabled them to benefit from the extension of the equity rally as well as from tighter credit spreads. The positive trend for risky assets continues to be supported by strong earnings’ growth and economic data which has been increasingly pointing towards a more synchronized economic rebound in the months ahead. In the current environment, we continue to believe that cyclicals, small caps and value stocks should perform well. Even if year-to-date returns of most equity markets have been strong, and valuations have remained expensive, this should not preclude further gains as the market continues to present pockets of value.

We consider that it is premature to adjust our fixed-income allocation as we continue to favour emerging market debt, high yield credit and convertible bonds. Our investment grade exposure remains very underweight and we will wait until long-term yields have become more attractive before considering an increase of this market segment.


Portfolio Activity/ News

April was a strong month for the portfolios, mainly thanks to the equity asset class; other positive contributions were produced by gold, alternatives, convertible bonds, credit and emerging market corporate debt. The best contributions were provided by small caps in the US and in Europe, US growth equities, UK equities, a Medtech fund as well as the mining equities’ fund into which we recently invested.

The number of detractors was very limited; they included two bond funds with a long duration as well as Japanese equities. The weaker US dollar was also a detractor for non-USD portfolios, but our underweight exposure helped to limit the negative impact of its depreciation during April.

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Newsletter | April 2021



Investment perspective

Equity markets performed well in March despite the headwind represented by rising long-term Treasury yields. European equities outperformed, with the Euro Stoxx 50 climbing by 7.8%, whereas emerging markets struggled as the prices of Chinese mega-caps continued to slide. US Treasury yields extended their early year rise, in contrast to those of Bunds; 10-year Treasury yields increased by 34bps to end the month at 1.74% while same-maturity Bunds saw their yields drop by 3bps. The Fed’s lack of action diverged significantly from the more pro-active stance of the ECB. March was also a strong month for the dollar which benefited from the widening interest rate differential and the faster growth prospects for the US economy.

Even if developed equity markets ended the month with strong returns, it wasn’t all plain sailing. Growth stocks got off to a poor start as the Fed’s chair, Jerome Powell, failed to alleviate fears over rising yields and higher inflation expectations. He tended to downplay the rise in yields as he did not consider it to be “disorderly” and did not provide any indication that the central bank would be pushing back against the ongoing trend. Powell also insisted that he sees inflation pressures as being transitory and that the Fed would be patient before starting to hike rates. On its side, the ECB took a different approach as it stepped up the weekly pace of its emergency bond-buying programme to its highest level for over three months. This action contributed to rein in the rise of Eurozone bond yields and reassure investors of the bank’s ongoing support.

The Volkswagen Group presented its technology roadmap for batteries and charging up to 2030 during its first Power Day on March 15. The company will invest into six EV Battery “Gigafactories” which will be established by the end of the decade. It will also pursue the expansion of the public fast-charging net-work globally to make the electric car attractive and more viable as it ramps up its production of electric vehicles. The prices of Volkswagen preferred and ordinary shares rocketed following these announcements, rising by 44% and 60% respectively during the month of March.

Investment strategy

We remain committed to our overweight equity allocation. The rise of bond yields appears to have paused and strong economic data is supporting our positive economic outlook for the quarters ahead. We still consider the equity asset class to offer the best risk/reward and we are positioned accordingly. Our fixed income allocation, focused on the more dynamic segments of the market, has proven to be very resilient in view of the rising bond yields; emerging market debt, high yield, convertible bonds and senior secured loans represent our key exposures in this asset class. We also view the recent appreciation of the dollar as temporary and the dollar allocation for non-USD portfolios is still underweight. Despite a disappointing performance of gold prices since the beginning of the year we continue to hold a position in the precious metal as a source of diversification and as a hedge against the more extreme market risks.

In March we increased our equity exposure by adding a new equity fund investing into mining equities. This investment allows the portfolios to be more exposed to the commodity space, with a special focus on speciality metals. The demand for metals such as cobalt and lithium as well as industrial metals such as copper should remain sustained, as it is driven by transformative changes of the global economy and huge infrastructure investments.


Portfolio Activity/ News

March was a positive month for the portfolios thanks to the performance of most equity positions. The best contributions were provided by both Value and Growth equity funds as the rally broadened across different investment styles. Additional contributions were provided by the aternative strategies whereas the China equity fund had a disappointing month, as did an EM fund investing according to a Growth approach. Our long duration bond fund also ended the month with a modest negative performance due to the impact of rising long-term Treasury yields.

We approved three new funds during the past month. The first one invests into a range of mining equities, including both gold and speciality metals’ miners, in particular those needed for the improvement of battery technology, for the production of electric vehicles and for the decarbonisation of the economy. This strategy fully integrates a wide range of ESG considerations as part of its investment process. The other two funds invest according to an “Impact” approach. Their objective is to invest into companies that provide solutions to the current challenges faced by the planet, as defined by the United Nations’ 17 Sustainable Development Goals (SDGs). These funds invest across environmental and societal themes, including the circular bio-economy, the transition to less wasteful economies as well as fairer ones. Both funds are run by leading asset managers which benefit from a high level of expertise and extensive resources in this domain. At a time when a lot of “greenwashing” is taking place in the industry of finance, it is even more critical to select these types of investments most diligently.

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Newsletter | March 2021



Investment perspective

Equity markets performed well in February even if they did end the month off their highs due to the negative impact of fast-rising bond yields. European equities outperformed US and EM ones, in large part thanks to a powerful rotation out of last year’s winners into value and cyclical stocks. The rise of bond yields gathered steam during the month in reason of higher inflation expectations; with US yields climbing at a faster pace, the dollar appreciated. In this environment, gold prices were under constant downwards pressure as they dropped by more than 6% for the month. Other commodities, however, continued to benefit from expectations for a strong economic recovery and for a solid demand related to infrastructure projects. Oil prices rose by close to 18% and industrial metals such as copper, zinc and aluminum rocketed.

The factor rotation was very much in evidence during the past month. Last year’s unloved sectors, financials and energy in particular, have been the winners so far in 2021 to the detriment of growth stocks and long duration assets. The rapid rise of long-term bond yields has had a disproportionate impact on highly valued stocks while the steepening of the yield curve has contributed to the rebound of the financial sector. Small caps have also outperformed large ones, at times significantly; in the US, the Russell 2000 Value index was up by 14.9% at the end of February, compared to a modest gain of 1.5% for the S&P 500. With the strong rise of commodity prices, these market trends are to be expected ahead of a cyclical economic rebound.

The swearing-in of former ECB President, Mario Draghi, as the new Italian prime minister was well received by investors, unsurprisingly. The 10-year BTP-Bund yields’ spread dropped to a low of 0.9% from a high of 1.22% in January. His appointment will contribute to reduce the level of risks within the eurozone in view of Italy’s massive debt burden.

Investment strategy

We do not believe that the rise of bond yields represents a major threat for equities at this stage. Even if the ECB and the Federal Reserve have failed to fully reassure investors about their commitment to push back against higher yields, their policies will remain very accommodative. Higher bond yields are reflective of optimism about the outlook in anticipation of the reopening of economies. A stabilisation of yields would support risky assets, and this remains our preferred scenario. We therefore maintain our overweight equity exposure and our overall low duration fixed income positioning. Our invest-ment grade debt allocation is very underweight, and we do not expect to increase it in the near term, as we continue to favour the more dynamic segments of the market.

The ongoing rotation towards pro-cyclical stocks is likely to be extended in the current market environment. Even if the rollout of vaccines across Europe has disappointed, other countries have been faring better and markets continue to look beyond the current headwinds. The recent strength of the US dollar is also more likely to fade and our positioning for non-USD denominated portfolios is still underweight.


Portfolio Activity/ News

February was a positive month for the portfolios, mainly thanks to the performance of equity positions. The best contributions were provided by equity funds investing according to a Value approach across a number of regions, including frontier markets. All alternative strategies also contributed positively to the return of the portfolios. Growth equity funds, Chinese equities and bond funds with longer duration proved to be the main detractors. Finally, the stronger US dollar boosted the performance of EUR and CHF denominated portfolios.

The recent period has shown that markets have become increasingly prone to sudden trend reversals. It is therefore illusory to believe that one can continuously react to these shifts by adjusting the portfolios’ positioning. That is why we have a broad diversification across regions, investment styles and market capitalisations. As an illustration, we maintained our exposure to value funds and to frontier markets last year despite their significant underperformance at the time. Over the last quarters, value funds have been performing strongly whereas our frontier markets fund has had a solid start to 2021. This results in large part to its exposure to Vietnam, which is up by over 31% YTD at the time of writing.

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Newsletter | February 2021



Investment perspective

Equity markets got off to a good start in 2021 but ended January on a much weaker note. This weakness resulted mainly from concerns over the rollout of vaccines and from hedge funds slashing their exposures in a wave of volatility. The MSCI World Index in local currencies dropped by 0.8%, with Asian markets outperforming under the leadership of mega-caps such as Tencent, Alibaba or TSMC. Government bond markets also ended in negative territory; the yields of 10-year Treasuries climbed from 0.92% to 1.07% as markets priced in higher US federal spending and inflation expectations. This was triggered by the Democrats’ win of both remaining Senate seats in the January 5th Georgia run-off. With 50 senators on both sides of the aisle, the deciding vote of Vice-President Kamala Harris gives the smallest of majorities to the Democrats, boosting their chances of passing larger fiscal stimulus.

The 4Q 2020 earnings season is in full swing and 65% of the S&P 500's market cap have reported their results, at the time of writing. Earnings have surpassed estimates by 18.5% in aggregate, with 81% of companies beating analysts’ projections. Revenues have also beaten estimates by an average of 3.2%, with 74% of companies announcing positive surprises. These results did not represent such a strong support for equity markets, however. Many companies beating both on revenues and earnings underperformed the market, surprisingly. This muted reaction was likely due to cautious outlooks amid an economic environment which still remains uncertain.

The late-month underperformance of European equities can be explained, in part, by the negative developments relative to Covid-19. A disappointing start to the vaccination rollout, tighter restrictions and vaccine supply issues all contributed to dampen optimism over the reopening of economies.

Investment strategy

Our core scenario targets a strong economic rebound from the second quarter onwards and we have positioned the portfolios accordingly. Our equity allocation is overweight, and our fixed income exposure is focused on the dynamic segments of the market. We like emerging market debt, high yield credit and convertible bonds, whilst investment grade bonds are heavily underweight. Hedge funds and gold are the main portfolio diversifiers, and the level of cash is low. For non-USD portfolios, the dollar exposure is underweight.

Within the equity allocation, we have a broad diversification across regions, investment styles and market capitalisations. Equity markets are increasingly skittish and last year proved that even well-entrenched trends can reverse on a dime. That is why we remain allocated to both Growth and Value styles, with Value benefiting from depressed valuations, both on a relative and an absolute basis. From a regional perspec-tive, we have reinforced our China exposure and continue to favour emerging and Japanese markets. Finally, we are still exposed to Frontier markets which offer significant catch-up potential in view of low valuations and solid fundamentals.


Portfolio Activity/ News

January ended up being slightly negative for the portfolios in spite of a good start to the year. The number of contributors and detractors was split down the middle. The main equity contributions were provided by Chinese equities, US Small Caps, the multi-thematic fund and emerging markets; value funds were the main equity detractors. In the fixed income allocation, high yield and emerging market debt generated gains whereas investment grade funds detracted from the performance.

After a long hiatus, we have reinitiated a position in UK equities. We had neutralized our exposure to UK assets in view of elevated political uncertainty following the Brexit vote. This has proven to be a wise decision as UK equities have underperformed significantly over the last years. The UK is now, however, the most underweight region globally by asset allocators; the discount of UK equity market valuations relative to the rest of the world is also close to record levels. These factors are just some of the reasons that could trigger a catch-up of the UK equities in the year ahead. We have invested into a fund that we have known for a long time; its strategy is based on a value approach and on active management.

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Investment Perspectives 2021

Executive Summary

2020 was one of the most dramatic years for financial markets

The past year has been a rollercoaster ride for investors as the fastest equity market correction in history was followed by a swift and relentless rally. Equity markets have proven to be very resilient and very forwardlooking as they quickly priced in a strong rebound of earnings for 2021. This has been reflected by a significant re-rating of valuations which leave little room for any disappointments related to the publication of profits in the year ahead.

The Federal Reserve intervened decisively to address the severe dislocations observed in the bond markets, a key element to re-establish confidence. In addition to purchasing Treasuries and investment-grade corporate bonds, the Fed also committed to buy high-yield bonds for the first time ever. Once markets had stabilised, another strong trend was for the US dollar to depreciate against most currencies. The market broadly expects this behaviour to be extended into 2021.

Policy makers did their job in 2020

Central bankers and governments reacted promptly and decisively to support the economy and to limit the damage caused by the pandemic on businesses and households. Record-breaking aid packages and unprecedented support for financial markets were announced. The Federal Reserve slashed its benchmark interest rate to zero and committed to an unlimited expansion of its bond purchasing programs. The ECB also ramped up its asset purchase program and has recently announced an additional increase of €500 billion to a total of €1.85 trillion until March 2022.

The overall size of fiscal action globally has also been unprecedented, at about $12 trillion, close to 12% of global GDP, according to the International Monetary Fund. With economic activity being restricted by governments, their main objective was to prevent massive unemployment and to help businesses to survive the pandemic-induced shutdowns.

A successful rollout of COVID-19 vaccines is key for a strong economic rebound in 2021

The outlook for 2021 is for a strong rebound of GDP growth, + 5.2% according to the IMF, following a year when global GDP is estimated to have dropped by around 5%, the worst peacetime recession. Unprecedented fiscal actions and the rollout of vaccines are expected to significantly boost economic activity, even if some sectors are unlikely to be able to return to pre-COVID-19 levels of activity. Governments will also need to provide the framework for a successful and strong immunization programme by regaining public trust, which has been dented by the management of the crisis.

Current market conditions are supportive for risky assets despite rich valuations

We believe that the positive trends currently prevailing in financial markets should extend into 2021. Despite high valuations, we expect equities to benefit from a strong rebound of earnings in the coming quarters and the portfolios are positioned accordingly. High yield credit and emerging market debt are our favourite bond segments whereas our dollar exposure remains underweight. We are wary of a broad market consensus on the various asset classes as history has shown that the markets’ base case scenario is often derailed by unforeseen events.


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