Perspectivas de Inversión 2011

Executive Summary

Our preference for high-yield bonds and emerging market debt over G-7 sovereign debt and investment grade corporate bonds proved to be rewarding trades. Both of our favoured segments in the fixed-income space produced strong returns as they benefited from supportive inflows and an ongoing improvement of the credit markets. Our cautious stance towards G-7 sovereign debt was due to its unattractive risk/reward profile and the fear of a sudden trend reversal.


Our optimistic outlook on equities during 2010 was often put to the test during the year due to the negative impact of the European sovereign debt crisis and the mid-year concerns over the possibility of a double-dip recession. However, our assessment ultimately proved to be correct as companies consistently produced strong quarterly earnings and equity markets rallied from September onwards. Furthermore, the vast majority of the equity funds selected for our clients’ portfolios comfortably outperformed their respective benchmarks, bringing significant positive contributions. We had been hopeful for a good performance of Japanese equity markets, particularly due to the anticipation of a weaker yen. Unfortunately, this was prevented by the currency’s strong appreciation and it was not until November that a positive trend in Japanese equities finally emerged.


Concerning Hedge Funds, we wrote in January that hedge fund strategies would offervaluable contributions to the portfolios, in terms of performance, reduced volatility and diversification. Whilst the overall performance of Funds of Hedge Funds and certain strategies has fallen somewhat short of our more optimistic expectations, we are pleased to report that hedge fund managers have paid particular attention to the control of risk and liquidity and still managed to produce positive returns by avoiding deep draw downs. Furthermore, most of our selected single managers outperformed their peers and enhanced the performance of certain portfolios.


We had a positive view on commodities in January, as we stated that the economic recovery would gather pace. 2010 has turned out to be another good year for commodities in terms of performance due to robust industrial and financial demand. The 5% allocation to physical gold, in addition to the gold mining equity fund, produced another healthy contribution as dollar weakness and ongoing momentum trades supported the pursuit of the rally of the precious metal during most of the year.


The selection of these investment themes, added to our resolve during the more testing periods of the year, allowed the portfolios to take advantage of positive market trends throughout 2010 and to end the year with very respectable returns. It is, however, very important to highlight the impact of currency movements in 2010. For unhedged portfolios based in Swiss francs, the strong depreciation of both the Euro (- 16%) and the U.S. dollar (- 10%) meant that it was extremely challenging to be able to produce positive returns in Swiss franc terms.

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Perspectivas de Inversión 2010 | Repaso Y Previsión Semestral

Executive Summary


With nearly the first half of the year behind us, it is time to revisit our investment perspectives for 2010. In January, we expressed the view that economic and financial market conditions would become increasingly complicated and challenging; five months later, this has clearly turned out to be the case and, in that respect at least, we have not been disappointed! Market participants have had to face extreme levels of stress within the European sovereign debt markets, interbank rates creeping higher, the return of volatility and erratic political decisions affecting the capital markets.


During the same period, companies have been busy reporting strong earnings for the first quarter of 2010 and issuing overall optimistic outlook statements for the following quarters. We wrote in January that it would be important for companies not only to be able to produce good results due to the implementation of cost-cutting measures and higher margins, but also to be able to generate top line growth. This has largely been the case and has proved to be supportive of higher equity prices during the reporting season of earnings.


At the time, we also highlighted the need to observe an improvement of the labour markets in order to feel more confident that the economic recovery could become self-sustainable. On this issue, there have been mixed signals and one has to note that the economic recovery has not created many new jobs so far. In the U.S. for example, even if the economy is no longer destroying jobs, companies have been more inclined to hire temporary workers rather than take on new employees and the recent nonfarm payrolls data underlined that fact. It appears most likely that the current economic recovery will only contribute to the creation of new permanent jobs at a moderate pace and that unemployment levels will remain elevated for a long period.


The positioning of our clients’ portfolios during the first quarter enabled us to generate strong performances, as credit spreads narrowed and equity markets appreciated, reflecting the growth of earnings. Since then, the portfolios have clearly been impacted by the correction of riskier assets, but still remain in positive territory at the time of writing.


The recent sell-off in risky assets seems to be pricing in an increasing probability of a double-dip recession scenario. We do not believe that the economy is heading for another period of recession, but the increasing level of uncertainty about systemic and cyclical risks has led us to tactically reduce the sensitivity of our clients’ portfolios to risk assets. At this stage, our view is that risk perceptions have taken precedence over earnings delivery, hence our beginning of May decision to reduce the allocation to global equities.


In the next section of the document, we will review the current economic conditions through five of the key economic indicators that we observe. This will be followed by a brief overview of what took place in the financial markets over the last six months, leading us to outline our outlook and recommended asset allocation for the second half of 2010.

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Perspectivas de Inversión 2010

Executive Summary

The vast amounts of money spent by the governments on banking and fiscal stimulus packages contributed to avert a financial meltdown and conditions in the financial markets improved significantly throughout 2009. Nevertheless, some very serious issues such as the deterioration of public finances and the severe contraction of lending activity by the banking sector still need to be resolved.


2009 was characterized by a strong recovery of the prices of equities and commodities, while investment grade credit, high-yield and emerging market debt experienced a huge amount of spread contraction. 2009 also turned out to be a much better year than expected for the hedge fund industry.


In many ways, 2010 could prove to be a very challenging year for the economic environment as several conditions need to be met before one can consider the recovery to be sustainable without the help of fiscal stimulus. In particular, a solution to reduce the high levels of unemployment in the developed world needs to be found, while consumer spending without the help of government subsidies is critical.


We do not expect the major central banks to modify their monetary policies before they are convinced that the economic recovery is on a sustainable path. We assume that the current conditions within the financial markets will be maintained for at least the next two quarters and consider that they are still supportive for risk assets.


We are looking to take further advantage from our current exposures to equities and fixed- income as it appears too early to implement any major changes within the portfolios.


Equities should continue to benefit from low interest rates, strong earnings per share growth, compelling relative valuations, sceptical investor positioning and high levels of liquidity. Furthermore, we anticipate a significant increase of M&A activity, which should generate additional support for the equity markets.


Our overall outlook on fixed-income is one of caution. At this stage, we find little value in G-7 government bonds and recommend holding a limited exposure to investment-grade credit following its strong gains recorded in 2009. Our favoured fixed-income segments are high yield bonds and emerging market debt.


We view hedge funds and structured products as being genuine alternatives to traditional assets and fully expect them to play an increasingly important role in terms of de-correlation and capital preservation, especially at a time when the holding of cash is so unrewarding.

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