This review is based on information and commentary provided by Columbia Threadneedle Investments.
Investment returns from higher risk investments were weak and volatile during 2018. Returns from global equities (as measured by the MSCI All-Country World index) were -7.2% in local currency terms; this was dampened as the pound weakened against overseas currencies resulting in a slightly improved return of -3.3%.
UK corporate bonds generally held up better, whilst core government bonds had mixed fortunes: US Treasury and UK Gilt yields rose while German Bund yields fell.
With the persistent political uncertainty throughout most of 2018, investors tended to prefer to focus on the still-robust corporate and macro (where capital is spread over various assets, markets and countries) investments. This was especially prominent in the US, where tax cuts boosted an already-strong economy.
From the autumn onwards, however, markets were increasingly rattled by a range of factors. In addition to an overarching concern about tightening monetary conditions, these included rising political uncertainty in Europe and in the US, President Trump’s tariff war against China and other US trading partners, and, related to the latter, evidence of economic deceleration in the eurozone and China. Higher risk investments suffered in this environment and had a very weak final quarter.
The US Federal Reserve raised rates four times over the year but further rate rises in 2019 are unlikely. In December the European Central Bank finally ended its quantitative easing bond-buying programme, though any interest rate hikes still appear some way off. Despite ongoing Brexit uncertainty, the Bank of England raised rates once, in August, as the economy picked up after a weather-hit first quarter.
Equities in Europe, Asia and Japan all suffered double-digit losses in local terms, and the UK and emerging markets were not far behind. US equities fell less heavily over the year, due in part to earlier optimism about the tax cuts and very strong US corporate earnings.
In 2018 the fund underperformed against its benchmark. Asset allocation accounted for most of the underperformance with poor stock selection also contributing.
At the start of March the diversification of the fund was improved by adding exposure to emerging market equities, high yield bonds and a multi-asset portfolio whilst reducing investment in gilts and UK equities. This move aligned the asset mix of the RNPFN funds with the LVFS funds.
The strategy of the asset manager to purchase shares in high quality companies that were expected to grow faltered in the last quarter. The value of these shares fell whilst the shares of lower risk companies fared much better. This impacted all the overseas equity asset classes.
UK equities outperformed the FTSE All Share. Relative gains were driven by favourable stock selection, with investments in communication services, technology and consumer staples (such as food and household goods) adding the most value.
These figures show the investment return (before tax and charges) on the with-profits fund each calendar year for the last five years
| Year | Investment return |
|---|---|
| Year to 31 December 2014 | 11.2% |
| Year to 31 December 2015 | 2.2% |
| Year to 31 December 2016 | 13.3% |
| Year to 31 December 2017 | 6.5% |
| Year to 31 December 2018 | -2.8% |
| Year | Investment return |
|---|---|
| Year to 31 December 2014 | 11.2% |
| Year to 31 December 2015 | 2.2% |
| Year to 31 December 2016 | 13.3% |
| Year to 31 December 2017 | 6.5% |
| Year to 31 December 2018 | -2.8% |
This outlook is based on information and commentary provided by Columbia Threadneedle Investments
Recent years have seen prices consistently rising, this is often known as a ‘bull market’. Although this cycle won’t continue indefinitely it does not appear that the end is imminent. The warning signs which would suggest a sharp turnaround are not all flashing red. Instead it looks as though this market will continue to extend and redefine, with low interest rates, low inflation and ongoing moderate growth.
Over 2019 US growth should slow as the impact of fiscal stimulus reduces. Inflation should remain under control and equity valuations continue to be fair, leaving a generally reasonable environment for investors.
The expectation is that global equity markets will make gentle positive progress, corporate profits will continue growing, companies will behave in an equity-friendly way with their valuations remaining supportive.
While 2018 was not a great year for bonds, 2019 looks set to produce more attractive outcomes for those who can navigate highly divergent monetary policy and credit cycles.
We are watchful of the amount of debt among US companies, compared to European. However, there should be opportunities for returns within specific industries and regions. The energy, telecoms, and food and beverage industries have previously increased borrowing but now have a number of companies reducing their debt levels.