Expert Investment Solutions Insights

In this podcast, Henry Cobbe explores behavioural biases in an interview with Investor's Chronicle.
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[5 min read, full article in pdf]

• Russia/Ukrainian conflict unleashes a European tragedy
• What does it mean for markets
• Focus on energy supply and associated risk to growth and inflation

 
This war unleashes a European tragedy.  In this insight, we outline what this far larger war means for Ukraine and Europe, how it could potentially stop, the impact on markets – with a focus on energy supply and associated risks to growth and inflation – and finally on portfolio positioning.

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• Private market managers continue to deliver a return premium
• Owning managers’ shares provides liquid access
• Growing levels of forecast AUM in private markets fuels growth

Evaluating private market performance
Estimating the “illiquidity premium” of private markets versus public markets is complex and cannot be done using public data.
As an alternative we focus on the returns premium of private market managers to public markets.
By comparing the performance of listed private market managers (whose shares are publicly traded) to a mainstream public markets benchmark, we can get a picture of the liquid return premium of the sector as a whole, relative to public markets.

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Watch the CPD webinar on this topic

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• This is ahead of 5.4%yy survey estimate…
• … and an increase from 5.4%yy last month
• Represents a new 30-year high

 
Latest UK inflation figure
The latest UK inflation came in at 5.5%yy for January 2022, compared to 5.4%yy survey estimate.  This is up from 5.4%yy last month and is above expectations.
Higher prices of energy, clothing, housing and transport all contributed to the highest UK inflation rate in 30 years. Inflation pressure is continuing broadening and expected to peak in April when the rise in tax and price cap for energy bills takes effect.
In the chart below we show how UK inflation has consistently surprised on the upside.

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• Value bias has made UK equities more attractive recently
• Within UK equities, strategies with an income-bias has outperformed
• “Smart-Beta” means a rules-based approach for constructing an index

 
Value/Income bias for inflation protection
In our 2022 outlook, we explained why inflation will remain hotter for longer and will settle above pre-pandemic levels.  Within equities, we outlined our rationale for being overweight Value-factor equities with an Income bias to shorten equity duration.  This built on our May 2021 view on UK equity income providing a helpful inflation hedge.

The rapidity and severity of market movements against the prospect of faster-than-expected inflation and greater-than-expected interest rate tightening have only served to reinforce these views, as reflected by performance.

Whereas world equities have struggled year to date, UK equities have been a relative bright spot.  Within UK equity index exposures, indices that focus on dividends (with an inherent value bias), over size (market cap) have delivered best results.
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Our Smart-Beta UK Dividend Index [ticker ELSUKI Index] has delivered positive returns YTD ahead of more mainstream UK equity indices, driving the absolute and relative returns of the VT Munro Smart-Beta UK Fund, which is benchmarked to this index[1].

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[1] Note & Commercial Interest Disclosure: Elston Indices is the benchmark administrator for the Freedom Smart-Beta UK Dividend Index, to be renamed the Elston Smart-Beta UK Dividend Index with effect from 1st March 2022.  The VT Munro Smart-Beta UK Fund is benchmarked to this index.

[3 min, open as pdf]

• This is ahead of 7.3%yy survey estimate…
• … and an increase from 7.0%yy last month
• Represents the highest level in 40 years

Latest US inflation figure
The latest US inflation came in at 7.5%yy for January 2022, compared to 7.3%yy survey estimate.  This is up from 7.0%yy last month, and is above expectations.
Energy prices jumped by 27% compared to January 2021. Higher prices of accommodation and food also contributed to the highest US inflation rate in 40 years. Inflation pressure is continuing broadening as global supply failed to catch up with demand. 
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In our 2022 outlook, we explained why inflation will remain hotter for longer and will settle above pre-pandemic levels.  Advisers should consider how to adapt portfolios for inflation across each asset class – equities, bonds and alternatives.  Research demonstrates how different asset classes exhibit different degrees of inflation protection over different time-frames.  Equities therefore provide a long-term inflation hedge.

• Short- to Medium-term:    rate-sensitive assets, commodities

• Medium- to Long-term:     real estate, equities and inflation-linked
• Long-term                             equities

In this article, we explore how to adapt portfolios for inflation within and across each asset class: Equities, Bonds and Alternatives.

For full article, read as pdf