Newsletter | May 2019



Investment perspective

The rebound of global equity markets was extended in April with European stocks outperforming and U.S. indices reaching new records. The MSCI World Index in local currencies gained 3.6% during the month to bring its year-to- date performance to 16%; growth stocks outperformed value ones, with the technology sector faring the best, on the back of well-received first quarter earnings. The strong demand for risky assets was also reflected by tighter credit spreads and by the weakness of the Swiss franc, which depreciated by 2.4% against the euro and the U.S. dollar. The rally of G-7 sovereign debt came to a halt as yields moved higher, even if this rise remained modest when compared to the plunge of yields over the last quarters.

Companies have been busy reporting their earnings for the first quarter and, overall, this has proved to be supportive for equity markets. With 290 out of 500 S&P 500 companies having already reported (73% of the index’s marketcap), 75% have beaten profit estimates and 52% revenue estimates. Analysts had significantly downgraded their earnings’ expectations, especially for the technology sector, so the beat rate must be seen in that context. The results of many tech giants were well received by investors, nevertheless, and companies such as Microsoft, Amazon, Facebook and Apple saw their stock prices trade up and push indices higher.

Global macroeconomic data continues to be mixed but improvements have been observed in the Eurozone and Chinese economies. Euro-area GDP for the first quarter showed a brightening picture, while the latest data in China suggest that policy measures are starting to bear fruit. The initial estimate of U.S. Q1 GDP was 3.2%, above forecasts, but it was driven by two of the more volatile components of GDP, inventories and exports. In contrast, household consumption and fixed investments only rose by 1.2% and 1.5%, respectively, signalling that U.S. GDP growth could slow in the next quarters.

The recovery of global equity markets in 2019 has been spectacular and the chart shows that the S&P 500 Index is back into record territory. After briefly dropping below 2’350 in late December, the index has rebounded by morethan 25% and erased all of its fourth quarter losses. It is interesting to note that the index has been driven by cyclical sectors, with the IT-heavy Nasdaq Composite Index up by 22%, compared to a 14% gain for the Dow Jones Index.

Investment strategy

Following the two-phase shift of our equity allocation from overweight to underweight since the beginning of the year, there have been no changes to our asset allocation in April. That means that portfolios are holding an above-average level of cash, while our fixed-income allocation is still under- weight. As a reminder, our investments across the asset class are well diversified, including unconstrained fixed-income strategies, investment-grade and high-yield bonds, senior secured loans and convertible bonds. Our cautious equity positioning reflects a macro-economic environment that is unlikely to benefit from any significant pick-up of growth, and equity markets already discounting a lot of positive news; wealso have some concerns about earnings’ expectations forthe remainder of the year in a context of slower growth.

For the majority of portfolios, we have not been exposed to gold for some time but it is obviously one amongst the many assets that we continuously monitor. Its recent price decline still leaves it some distance away from our target of around $1’200 per ounce, but we would not exclude the possibility that the precious metal could make a comeback within the portfolios at some stage.


Portfolio Activity/ News

In April, the portfolios continued to appreciate, largely the result of strong equity contributions. Fixed-income positions all ended in positive territory and added more modestcontributions to the portfolios’ performance. Within thealternative space, the trend-following strategy maintained its positive momentum to record another valuable monthly gain. U.S., European, emerging markets and Japanese equity funds all produced noteworthy returns relative to their respective benchmarks; when looking at year-to-date performances, it is reassuring to observe that a majority of our funds have produced significant alpha.

We added a new healthcare fund to our list of approved funds. This fund invests in companies active in the medical technology and healthcare services sector, but excludes drug makers. Healthcare represents 10% of global GDP and is an above-average growth sector which benefits from favorable demographics and the rise of global prosperity. Digital health, minimally invasive technologies, gene-based diagnostics and managed healthcare concepts figure amongst the principal themes that the managers will invest into. In our model portfolios, this fund has replaced a defensive global equity fund.

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Newsletter | April 2019



Investment perspective

The first quarter has ended with a well above-average quarterly gain for global equity markets, a significant contraction of credit and EM debt spreads and a plunge of sovereign debt yields. It has also seen the main central banks turn increasingly dovish in the light of growth slowdown concerns and a lack of inflation pressures. Following a 13.5% correction during last year’s fourth quarter, the MSCI World Index in local currencies has made up most of its losses thanks to a 12% year-to-date rebound. Credit spreads have also fared well, with those of U.S. and European high yield bonds tightening by 1.35% and 1.09% respectively. These trends have been primarily driven by the unwinding of excessively pessimistic sentiment, the Federal Reserve’s change of tone and optimism over a sino-american trade deal.

The past month was marked by the steep drop of bond yields in a context of weak economic data and the announcement of even more accommodative monetary policies. PMI Manufacturing data continued to show widespreadweakness, in Europe in particular, with Germany’s number dropping to 44.1from 58.2 a year earlier; one must nevertheless point out that China’s latestmanufacturing data has started to show signs of improvement. At its last meeting, the Federal Reserve proved to be even more dovish than expected by the markets; the bank announced the end to its balance sheet reduction for 30 September and its members no longer anticipate any rate hikes this year. Furthermore, it downgraded its GDP growth outlook for 2019 from 2.3% to 2.1%. On its side, the European Central Bank had already spooked markets at the beginning of March due to its bleaker economic outlook and by the announcement of a number of measures to support the Eurozone’s economy. These more dovish stances triggered much lower bond yields, with those of 10-year Treasuries and Bunds dropping from end-February levels of 2.72% and 0.18% to 2.41% and - 0.07% respectively.

One of the most hotly debated issues in financial markets is the current shape of the U.S. yield curve. The chart above shows that it is now partially inversed, as some longer-term yields are lower than shorter-term ones. The inversion of the yield curve is seen as a forward indicator of an upcoming recession, even if there is no consensus over which terms’ spread is the most relevant. We can observe that neither the 10/2 years spread nor the 30Y/3months spread have inverted and conclude that it is still premature to get overly concerned.

Investment strategy

In March we decided to take additional profits on equities, meaning that our equity allocation has been cut this year from an initial overweight to now being slightly underweight. This decision was driven not only by the desire to protect some of the strong year-to-date portfolio performance but also by the feeling that markets might be getting carried away. A lot of positive news appears to be priced in at a time when global GDP growth is slowing and when uncertainty over corporate earnings is high. The markets also appear to be totally ignoring the risks related to a no-deal Brexit. We therefore prefer to err on the side of caution ahead of the reporting of first quarter earnings, which starts mid-April.

The first quarter has been quite exceptional in terms of performance as both equity and bond markets have rallied simultaneously. We do not believe that this situation will last and expect a decrease of the correlation between both asset classes going forward.


Portfolio Activity/ News

In March, the portfolios added to their early-year gains, with both equities and bonds contributing positively. In contrast to the previous months, the overall contribution from hedge funds was also positive. This was mainly due to the strong return recorded by the trend-following strategy, which benefited from its high exposure to long-term rates, to credit and to equities. Other strong portfolio contributors includedemerging and frontier markets’ equities, as well as bondfunds, especially those with a long duration positioning. Our underweight exposure towards the U.S. dollar represented a modest opportunity cost for portfolios denominated in euros and pounds, due to the weakness of these currencies.

During the past month, we took profits on our U.S. Small Cap fund and also on a fund investing into Swiss equities. The reasons for these transactions include strong year-to-date performance, portfolio risk management and the view that markets might be getting a little frothy in view of economic uncertainty and excessive optimism over the impact of the sino-american trade deal.


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Newsletter | March 2019


$621 billion - THE U.S. TRADE DEFICIT IN 2018, A 10-YEAR HIGH

Investment perspective

The positive trend for risk assets observed since the beginning of the year extended throughout February. The MSCI World Index in local currencies gained another 3.2%, bringing the year-to-date performance up to 11%. The spreads of credit and emerging market debt also continued to contract, with high-yield bonds now having erased most of their losses of November and December. Logically, the more defensive assets such as government debt and gold ended the month on a weaker note, with yields moving higher and the price of gold dropping back to its end 2018 level. The major currency crosses evolved within tight ranges to remain little changed so far this year.

The rising trend of equity markets was not derailed by macro-economic data that showed ongoing weakness, in Europe and China particularly. There has been, nevertheless, some signs of improvement recently, with PMIs appearing to trough and confidence indicators also rebounding. The positive sentiment within markets was supported in part by additional liquidity provided by the central banks this year, but also by more optimism over the negotiations between the U.S. and China, with Donald Trump extending the March 1stdeadline for an increase of tariffs. For obvious reasons, both countries appear intent on reaching an agreement, even if it did not immediately resolve all the issues. The end of the reporting of 4Q earnings was another factor that has proved to be overall supportive for equities, as a majority of companies were able to beat lowered expectations.

The ECB has just announced that it would keep interest rates on hold until at least the end of the year; it will also provide another round of cheap lendingfor Eurozone banks due to start in September. This reflects the central bank’s increasing concern about the strength of the Eurozone economy as it now projects GDP growth of 1.1% this year, revised down from 1.7% previously.

The chart above shows that the Shanghai Shenzen CSI 300 Index has got off to a strong start in 2019 following last year’s 25% correction. Chinese equities figured amongst the worst performers in 2018, amidst an economic slowdown and trade tensions with the U.S. The early year rebound has been supported by strong international inflows, a series of stimulus measures taken by the Chinese leadership, additional central bank liquidity, and optimism about a trade deal as well as by valuations which had become excessively cheap.

Investment strategy

We recently reduced our overweight equity allocation to neutral as markets appeared to be overbought. The strong move of equities this year, as well as high alpha generated by some funds, have provided a good opportunity to lock in some profits. A lot of positive news has been priced in and we expect markets to take a breather at this stage, especially as the valuations of U.S. stocks are back in line with long- term averages. There is a risk that markets could focus more on concerns about future economic growth now that most companies have reported their results for the fourth quarter.

The decision of the ECB to turn even more dovish has taken the markets by surprise and, following an initial positive market reaction, the promise of more cheap funding has appeared to spook investors. Bond yields have dropped, equities are weaker and the euro has lost ground. We will be closely monitoring the behaviour of the euro due to our underweight exposure for non-USD portfolios.


Portfolio Activity/ News

The portfolios performed well in February as they continued to benefit from supportive markets for risk assets. The main contributions were provided by a wide range of funds within the equity asset class, while convertible bonds and credit also added to the performance; hedge fund strategies proved to be modest detractors, which was to be expected considering their positioning. U.S. small caps and Japanese equities were the strongest contributors, thanks to significant generation of alpha relative to their benchmarks.

During the past month, we carried out a number of transactions. Firstly, we topped up some of our existing equity positions in emerging markets and Japan. In the wake of strong gains for equity markets since the beginning of the year, we also took some profits by top-slicing some out- performing funds, investing in the U.S. and Europe in particular. Finally we added a new credit fund with a flexible approach. The manager can invest into corporate bonds in a global manner, but can also position the portfolio much more defensively when market conditions deteriorate. The fund has a very strong track-record and managed to end 2018 with a positive performance in USD.

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Newsletter | February 2019



Investment perspective

What a difference a month makes! For investors gripped by fear during the manic month of December, January provided a much-needed relief rally of risk assets. Global equity markets had their best month since October 2015, with a 7.7% gain for the MSCI World Index, and credit spreads dropped back to end-November levels, or even lower. Commodity prices also rebounded, lead by oil and industrious metals. In foreign-exchange markets, emerging markets and commodity-related currencies performed the best. In this environment, it is also worth noting the positive performance of more defensive assets, including government debt and gold.

The significant rebound of risk assets can be interpreted as un unwinding of market pessimism relative to the outlook for economic and earnings’ growththat had become extreme. The path of the Federal Reserve’s monetary policy was another concern that had been weighing on the markets during the fourth quarter; the significant early-January shift towards a more dovish stance proved to be one of the drivers of the recent rally; it also contributed to push government bond yields lower, especially as the European Central Bank adopted an increasingly more cautious tone. Some optimism on the progress of the U.S.-China negotiations on trade and structural issues also provided market support. Finally, the reporting of Q4 earnings, while not as impressive as previous quarters, has nevertheless seen markets react generally well to positive surprises.

In the meantime, macro-economic data continues to show widespread weak- ness across the Eurozone and in China, in particular in the manufacturing sector. Markit PMI Manufacturing readings dropped below the expansion level of 50 in both Germany and Italy, while the Chinese Caixin Manufacturing PMI fell further into contraction territory at a level of 48.3.

The chart above shows that the MSCI World Index nearly recovered all of its December drawdown in January. The exhaustion of selling within stressed equity markets was observed towards the end of 2018. This contributed to the early year rebound, from a starting point of extreme oversold conditions. The turnaround was helped in part by remarks from the Fed’s Chairman Jerome Powell about more flexibility in interest rate increases and about the possibility that the central bank could stop shrinking its balance sheet soon.

Investment strategy

Our assessment that the movements observed towards the end of 2018 were difficult to justify has been vindicated by the behaviour of financial markets in January. Our decision to maintain a modest overweight equity allocation at the onsetof 2019 has contributed to this year’s good start. It has also been reassuring to observe the rebound of credit markets which have recovered their December losses. Some of the market’s headwinds appear to be lifting and recession fears have decreased. At this stage however, equity markets look overbought in the short term and might need to consolidate.

Our exposure to the dollar for non-USD portfolios is under- weight as we believe that the U.S. currency is unlikely to be as well supported as last year. The much lesser impact of tax reform, a more dovish Fed, widening current account and budget deficits should all weigh on the U.S. dollar. In fact, this is one of the key factors for risk assets to be able to perform well this year.


Portfolio Activity/ News

January was a very good month for the portfolios as nearly all the underlying positions ended the month with positive returns. With only a few hedge funds recording modest drawdowns, the strong rebound of equity markets and the significant narrowing of credit spreads contributed to an above-average monthly performance. U.S. equity funds provided the best contributions, with small caps and growthstocks leading the way. One of last year’s laggards, a U.S. value fund, has also been outperforming its benchmark significantly. Emerging market equity funds were other noteworthy contributors while all the fixed-income funds ended the month with higher NAVs.

In January, we took the decision to redeem a fund investing into European Mid and Small Caps due to the decline of the size of its assets under management. We recently added a new fund which invests into Chinese equities. The Chinese market figured amongst the worst performing equity markets last year and valuations have reached levels well below long- term averages. Even if the Chinese economy continues to slow, many sectors are still offering attractive rates of growth. This market also presents a relatively low degree of correlation with other equity markets making the investment case for this region quite compelling.

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Newsletter | November 2018



Investment perspective

October lived up to its reputation of being a volatile month for equity markets reflected by the 6.9% drop of the MSCI World Index, in local currency terms. The rout was wide spread as stock markets across the world were hit by fears over slowing growth, trade wars and higher interest rates. For once, American equities failed to offer any additional resistance than the other markets and a number of technology favourites, such as Amazon and Netflix, suffered from heavy selling. The fall of the equity market showed a lot of similarity to the one that took place in late January/ early February; equities suddenly dived following a period of fast rising Treasury yields whereas safe haven assets did not benefit that much from the sell off; 10-year Treasury yields ended the month 8bps higher and the price of gold appreciated by less than 2%.

The reporting of U.S. corporate earnings for the third quarter of 2018 canhardly be blamed for the equity market’s poor behaviour even if there was some concern expressed over the forward guidance of certain companies. With more than 400 S&P 500 companies having reported, 82% have beaten profit estimates and 61% their revenue estimates; earnings growth is 27%, year-on-year, while revenue grew by nearly 9%. These results are outstanding but investors seem to have increasing doubts over next year’s earnings which are expected to grow by some 10%. European companies have also been busy reporting their quarterly results, with solid growth rates of 12% for earnings and 6% for revenue.

The stress in equity markets was not helped by the ongoing sagas represented by the tensions over trade, the Brexit negotiations and the Italian budget. For the first time, the European Commission formally rejected a member’s budget plans and yields on 10-year Italian bonds spiked to nearly 3.7% on the news, with the spread over Bunds climbing above 3.25%. In turn, the banking sector was under serious pressure with Italian banks being impacted the worst.

The behaviour of equity markets during October was well illustrated by the highly volatile semi conductor sector. The PHLX Semiconductor Index plunged by 17% between the 3rd and 29th of October on concerns about forward guidance, valuations and U.S. relations with China. The reaction of investors following the publication of results was brutal at times and triggered waves of selling due to the breach of key technical levels. Along with the global equity markets, the sector has started to rebound from its end October low, with a 10% upside move at the time of writing.

Investment strategy

We consider the October sell off to have been more of a temporary setback than the beginning of a new bearish trend for equity markets. When we look at monetary and economic factors, market sentiment, valuations and earnings growth prospects, we do not feel it is the time to reduce our equity exposure. Investors may have become too accustomed to levels of volatility well below long-term averages and tend to overreact when markets correct. Valuations look attractive, with European equities trading back to 2013 levels (less than 13 times next twelve month earnings), and U.S. ones (15.7x NTM) dropping below the one standard deviation from their 5-year average. The contraction of these multiples this year has been significant and tends to indicate a good entry point. We expect the equity markets to benefit from the removal of a certain number of uncertainties in the near future and to end the year on a stronger note.

Our exposure towards the U.S. dollar has not changed as we continue to believe that a lot of positive news is already priced in. The market positioning is also quite long, hence the limited potential for further massive inflows. Once again, the resolution of certain issues in Europe should contribute to boost the value of the euro versus the dollar.


Portfolio Activity/ News

October was a stressful month for the portfolios with the equity sell off obviously being the main culprit for the monthly drawdown. All equity funds lost ground with Japanese, EM and U.S. equities faring the worst. To note that value and defensive stocks outperformed growth and cyclical ones, largely explaining a wide dispersion of our funds’returns. It was also somewhat reassuring to observe that frontier markets proved to be quite resilient as they registered less than half of the monthly loss of developed markets.

On a brighter note for the portfolios, the fixed-income and alternative exposures held up well, with the Global Macro, CTA and Risk Premia strategies even producing positive monthly contributions. It was quite revealing that major bond indices failed to record any gains during such a difficult period for risk assets; this highlights the challenge to build a truly diversified portfolio. Another positive contribution for non-USD portfolios was due to the stronger U.S. dollar which appreciated against the other major currencies.

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Newsletter | October 2018




Investment perspective 

Global equity markets ended September with modest gains following a weak start to the month. For once, Japanese equities were the outperformers while emerging market equities showed some signs of stabilisation, even if ending the month a little lower. A higher appetite for risk was reflected by the rise of the safest sovereign debt yields and a tightening of spreads for high-yield and emerging market bonds (- 38bps on the J.P. Morgan EMBI Global Spread Index). As to be expected in such a context, the Swiss franc and the Japanese yen depreciated against other major currencies.

The 3rd quarter performances of the main regional indices reflect the extent of the outperformance of U.S. equities so far this year. The S&P 500 returned 7.2%, its best quarter since the last quarter of 2013, whereas the Euro Stoxx 50 gained a marginal 0.1% and the MSCI EM lost 2%, in dollar terms. In spite of more expensive valuations, the U.S. equity market has been underpinned by an accelerating economy and the strong growth of earnings. The quarter was also notable for the fact that the broader U.S. market outperformed the mega cap tech stocks which had been leading the rally for some time.

As fully anticipated, the Federal Reserve raised its benchmark interest rate by 0.25% to 2.25% at its end-September meeting. This third hike in 2018 is widely expected to be followed by another 0.25% hike in December. The most recentcomments by the bank’s chairman, Jerome Powell, suggest that the Fed is far from ending its tightening cycle; Powell pointed to the fact that rates were “a long way from neutral at this point” and cited a “remarkably positive outlook”for the U.S. economy. These remarks have triggered even higher Treasury yields, with the 10-year Treasury yield trading at 3.2% at the time of writing.

The recent flare-up of Italian bond yields reflects investors’ concerns over the Italian budget and the much wider-than-expected deficits projected over the next years. 10-year borrowing costs have risen significantly this year, reaching their highest level since 2014. Considering the high Italian sovereign debt-to- GDP ratio, financial markets are concerned that the Italian government’splans could lead to a confrontation with the European Commission and also ultimately result into an even higher level of debt. This issue represents the biggest risk factor for European assets currently and largely explains the trend of the euro relative to other major currencies.


Investment strategy

During the first week of October, the financial markets have been impacted by the jump of U.S. Treasury yields in the wake of strong U.S. macro-economic data and comments from Jerome Powell, signalling a potentially more hawkish stance of the Federal Reserve. Equity markets have reacted quite negatively as they reprice the impact of higher yields on valuations. At this stage, we do not think that equities are close to losing their advantage in terms of relative valuations compared to bonds. More volatility is to be expected, but the equity asset class continues to offer a much more attractive risk/return profile. As good examples, equities listed in Japan and Europe offer price to earnings (P/E) ratios for the next twelve months of 14, a theoretical long term return of 7%, compared to a yield of 0.5% on 10-year Bunds.

As rising yields impact negatively the returns of fixed-income assets, we continue to hold an underweight sovereign debt and investment-grade bonds allocation. Our preferences for the asset class are towards senior secured loans, convertible bonds and flexible strategies with the capacity to actively manage both duration and market risks.


Portfolio Activity/ News

September was a mixed month for the portfolios. The best contribution by far was provided by Japanese equities while EM equities and the trend-following CTA strategy were the worst detractors, the latter mainly due to an extended long position in interest rates. We maintain our positive outlook on Japanese equities due to a combination of attractive valuations, shareholder-friendly measures, low investor positioning and solid earnings’ growth. To a certain extent,the Japanese market also displays a lesser correlation to other developed equity markets.

In September, we took the decision to redeem a European Credit Fund because of the fund’s decreasing size of assets.This exit, for a risk management purpose, is unfortunately inopportune from an investment perspective. The strategy of the fund included the hedging of duration risk, matching our assessment that sovereign yields should continue to keep on rising gradually. At the portfolios’ level, it is however also important to point out that our overall level of duration risk across the fixed-income exposure is low.


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Newsletter | September 2018



Investment perspective 

August was a mixed month for global equity markets as the MSCI World Local Currency Index’s 1.1% gain was only the result of higher U.S. equity prices; in contrast, the Euro Stoxx 50 Index lost 3.8%, the Topix 1% and the MSCI EM Index 2.9%, in dollar terms, due to concerns about the ongoing trade dispute and the stress in emerging markets. This higher aversion to risk was also reflected by the significant strength of the Swiss franc, which appreciated by 2.9% against the euro, and by lower yields on U.S. Treasuries and Bunds. Emerging market bonds were badly impacted by EM currency weakness, with the J.P. Morgan EMBI Global Spread Index widening by 46bps to 400bps.

U.S. equities have continued to outperform and appear to be living in a world of their own. They are so far proving to be largely immune from the threat of a commercial war between the United States and its main trading partners and are benefiting from the acceleration of the domestic economy’s growth. The reporting of the second quarter’s corporate earnings has been outstanding, with revenue and earnings growing significantly and above analysts’ expectations. Growth stocks remain the drivers of U.S. equity performance with the technology sector and small caps leading the rally.

Turkey and Argentina continue to make negative headlines as they try to regain the confidence of financial markets. Despite their differences, both countries have seen inflation spiral out of control and investors question the independence of their central banks. Argentina has attempted to support its currency by dipping into its reserves, by seeking financial help from the IMF and by raising interest rates up to 60%, but to no avail so far. Turkey has taken a different route by not raising rates and by blaming external forces for their current plight, obviously not a response likely to reassure investors.

The chart shows that the ongoing depreciation of emerging market currencies accelerated during August with the J.P. Morgan EM Currency Index dropping by more than 6%. Since its mid-February peak, the index has lost over 16%, led by the collapse of the Turkish lira and the Argentine peso. Since the end of 2017, the peso has depreciated by 50% vs. the U.S. dollar and the lira by 42%. Other currencies hurt by heavy losses include the Brazilian real (-18%), the South African rand (-16%) and the Russian ruble (- 15%). While all emerging markets assets have seen their values drop, the currencies have suffered the most due to the unwinding of an early-year overweight positioning.

Investment strategy

The ongoing turbulence in emerging markets is weighing on market sentiment, especially as the risks of contagion are increasingly mentioned, even if not justified. Tensions over trade persist, despite the recent agreement between the U.S. and Mexico, and there has been no progress between the United States and China or Europe. This means that the tug- of-war between a strong economic and corporate framework and negative headline news is back. We are sticking to our positioning and are keeping a modest overweight allocation into equities as we believe that the supportive fundamentals will prevail, helping markets that have underperformed to make up some lost ground.

2018 is proving to be a very challenging year for portfolios, with rising U.S. yields, wider credit spreads and weak equity markets outside of the U.S. It is therefore reassuring to note that our active fund managers have fared very well relative to their benchmarks. The debate over active and passive management is ongoing, and far from concluded, but we are convinced that the selection of good active managers truly adds a lot of value to the portfolios.


Portfolio Activity/ News

August was a positive month for the portfolios. The best contributions by far were provided by U.S. equity funds, while convertible bonds and the CTA strategy contributed more modestly. Our recent recommendation to invest into a U.S. small cap growth fund has proved to be very timely as the fund produced a very strong return during the past month. Emerging and frontier markets were the worst detractors along with a Global Macro fund. For portfolios denominated in euros, the appreciation of the dollar also boosted their performance.

In August, our main investment decision was to reduce our exposure to the dollar following its steep appreciation early in the month. We believe that a lot of good news has already been priced into the greenback and observed that market positioning had become extended. We also added a new Japanese fund focused on companies with high growth potential as well as a European fund currently positioned in a defensive manner and exposed to out of favour sectors.


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Newsletter | August 2018



Investment perspective 

July was a strong month for global equity markets as the MSCI World Local Currency Index gained 3.1%, with positive performances recorded across most regions. Concerns about the trade war took a back seat as investors focused on the supportive reporting of second quarter earnings, especially in the U.S. This higher appetite for risk assets was also reflected by the rise of sovereign debt yields, with that of the 10-year U.S. Treasury note moving back close to 3%, and gold continuing to drift lower.

The reporting of U.S. corporate earnings for the second quarter of 2018 is well advanced with more than 400 S&P 500 companies having reported. 84% of companies have beaten profit estimates and 71% revenue estimates; earnings growth is 25%, year-on-year, while revenue grew by 10%. These results can be qualified as exceptional, even if the share prices of some of the large IT names took a hit following some disappointments; Facebook, Netflix and Intel figured amongst the companies punished by the markets. The fact that this did not derail the advance of U.S. equities reflects some form of rotation into lagging sectors such as industrials, financials and consumer staples. In Europe, sales and earnings numbers were also positive, even if a much lower percentage of companies have managed to beat the estimates of analysts.

The strong momentum of the U.S. economy was confirmed by the 4.1% growth rate of GDP during the second quarter, putting it on track for average annual growth of over 3%. The economy benefited from solid consumption and business investment growth as well as from a temporary surge in exports. Effectively, exporters of soybeans rushed to get their produce into China ahead of the imposition of tariffs at the beginning of July.

The chart shows that the Chinese yuan has depreciated significantly since the middle of June. In contrast to the surprise devaluation against the U.S. dollar in August 2015, which had rocked the markets at the time, the recent slidehas had a more subdued effect. Even if the yuan’s latest depreciation hascoincided with the rise of trade tensions between the U.S. and China, it would appear to be more the result of market forces than a deliberate devaluation; nevertheless, a weaker currency will help to cushion the impact of U.S. tariffs on Chinese exports. From the current level, it is likely that China will seek to stabilize its currency and to avoid depleting its FX reserves.

Investment strategy

The ongoing publication of companies’ results for the secondquarter has reinforced our positive outlook on equities for the second half of the year. Within a context of solid global economic growth and of valuations at reasonable levels, we would expect equities to end the year at higher levels unless the ubiquitous trade war concerns were to become a reality. A favourable resolution of the escalating tariff threats would most likely enable the equities of emerging markets to make up some of their year-to-date underperformance. We are positioned accordingly and remain hopeful that some kind of trade agreement will eventually be concluded.

As a reminder, our allocation into debt instruments is under- weight with credit risk favoured over duration risk. Our core scenario is for the yields on G-7 sovereign debt to continue rising gradually, hence our preference for senior secured loans and unconstrained strategies. Finally, the exposure to the dollar for non-USD portfolios has been maintained at neutral as a way of hedging some of the downside risks.


Portfolio Activity/ News

Thanks to the strong performance of global equity markets, July was a positive month for the portfolios. The best contributions were provided by equity funds across different regions. Fixed-income funds also contributed positively as a result of the tightening of credit spreads. The overall contribution of hedge funds was negative, largely due to the trend-following CTA strategy being hit by its leveraged long exposure to rates. FX contribution was marginal as the major parities barely changed on a monthly basis.

Towards the end of June, we trimmed some of the best perfoming positions, including funds exposed to U.S. growth stocks as well as a Japanese fund well ahead of its reference benchmark. The resulting cash was deployed into a fund investing into U.S. small cap growth stocks. The key objective of the fund’s strategy is to identify companies undergoing positive dynamic change and the manager will look to capitalize on this change before it is recognized by the market. This approach has allowed the fund to generate an outstanding track-record with an ongoing bias towards the healthcare and technology sectors.


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