Elston
  • WHO WE ARE
    • About
    • Contact
    • Events
    • Press
  • WHAT WE DO
    • Portfolio Solutions >
      • Our Portfolios
      • Custom Portfolios
      • Research Portfolios
    • Fund Solutions >
      • Our Funds
      • Custom Funds
    • Index Solutions >
      • Our indices
      • Custom Indices
    • SPECIALIST STRATEGIES >
      • Liquid Real Assets
      • UK Equity Income
      • Permanent Portfolio UK
      • All Weather Portfolio UK
      • Dynamic Risk Parity
      • Gold and Precious Metals
      • Enabling Net Zero
    • Research >
      • Investment Research
      • Regulatory Research
    • CPD
  • WHO WE HELP
    • Financial Advisers
    • Discretionary Managers
    • Asset Managers
    • Asset Owners
    • 中文
  • Insights

Insights.

INFLATION IS THE ENEMY

19/5/2022

0 Comments

 
Picture
[5 min read, open as pdf]
  • How did we get here?
  • What is the impact?
  • Where do we go from here?
Markets and major economies are in a state of uncertainty in the context of rising inflation, rising interest rates and a risk to economic growth.  How did we get here? What is the impact?  Where do we go from here?
Read full article with charts
0 Comments

UK inflation and sterling pressure

18/5/2022

0 Comments

 
Picture
[5 min read, open as pdf]

  • UK inflation hits 40 year high
  • Bank of England has been behind the curve
  • Sterling under pressure – how to protect against inflation
 
Inflation hits 40 year high
UK inflation figures came out today with a print of +9.0%yy (April), from +7.0% (March) and slightly below +9.1%yy consensus estimate.
This is the highest level in 40 years, putting renewed focus on the “cost of living crisis”.  Rising energy and food costs are the primary drivers, linked to the sanctions regime and the Russia/Ukraine war.
The Bank of England has been “behind the curve” as regards to inflation risk.  A look at inflation guidance contained in recent Monetary Policy Committee (MPC) minutes shows.  Near-term inflation guidance has consistently under-estimated inflation since August 2021 – rising from “above 2%”, to 4%, 6%, 8%,, 9% and now 10%.
Read full article with charts
0 Comments

Hedging currency risk requires clear policy

5/5/2022

0 Comments

 
Picture
[5 min read, open as pdf]

  • Currency hedging approach is key to asset allocation design
  • Strategically we believe equities should be unhedged
  • Volatile Sterling distorts equity returns

Should equity returns be hedged into investor’s base currency?  We don’t think so.  From a UK perspective, part of the risk-return opportunity of global equity investing is a diversified revenue stream from multiple currencies.
Read full article as pdf
0 Comments

Blending liquid real assets with an equity/bond core

29/4/2022

0 Comments

 
Picture
[5 min read, full article in pdf]
  • Bonds fail to provide diversification or protection in inflationary regime
  • Liquid real assets can improve inflationary resilience
  • For advisers using equity/bond funds, a blended approach can help
 
In theory, through 2021 we have argued that bonds would remain under pressure against the twin pressures of rising interest rates and rising inflation.  In practice, market dislocations of 1q22 evidenced this as bonds provide no place to hide in a time of market stress, and lost both their diversification and their protection characteristics.  Indeed, the losses sustained on the bond side of a traditional multi-asset equity/bond portfolio were more extreme than the losses sustained on the equity side.  The pressure on bonds will continue so long as we are in an inflationary regime.  And that may be for the medium-term (e.g. 5 or more years based on market implied inflation rates).  This is forcing a rethink for advisers reliant on equity/bond multi-asset funds to deliver a core investment strategy for their clients.  
​
[Read full article in pdf]
Find out more about our Liquid Real Assets index strategy

0 Comments

Nowhere to hide: bonds provide no protection

8/4/2022

0 Comments

 
Picture
[5 min read, open as pdf for full article]

  • All type of bond exposure showed negative returns in 1q22
  • Rising rates and inflation means bond values remain under pressure
  • Bonds are providing neither stability nor diversification
 
Equity markets endured a triple shock in the first quarter of 2022: a dramatic steepening of the likely path of interests, multi-year high inflation levels and a horrific war unleased in Ukraine.
The traditional rational for including nominal bonds was to provide steady income, lower but positive returns, and diversification – a place of safety in periods of market stress.
In face of rising inflation and rising interest rates, nominal bonds are providing none of these portfolio functions.
Indeed in 1q22 not a single bond exposure delivered positive returns, and over 12 months only inflation-linked exposures delivered positive returns.

 Open as pdf for full article
​CPD Webinar Alternatives to Bonds in a Portfolio

0 Comments

Inflation revisited: lessons from the 1970s

25/3/2022

0 Comments

 
Picture
[5 min read, open as pdf]

  • Inflation should moderate in the long-term
  • Current circumstances are different to the 1970s
  • The focus should be normalising rates and supporting growth
 
In a recent CPD webinar, Elston’s Henry Cobbe interviewed Patrick Minford, Professor of Applied Economics at Cardiff University and economic adviser to Margaret Thatcher in the late 1970s and early 1980s to ask about the fight with inflation in the 1970s and any comparisons for today.
 
While it is tempting to look for similarities with the energy shock and period of sustained inflation that the UK suffered in the late 1970s and early 1980s, Professor Minford highlighted some significant differences.  The lower risk of a wage-price spiral, central bank independence and a track record of manging inflation means lower risk of inflation getting out of control in the long-term.  But the short- to medium-term remains under pressure.  In Minford’s opinion, the risk to the growth is the bigger risk: and this would be the right time for HM Treasury to worry less about debt ratios, and turn on Government spending taps.

Read full article, open as pdf
Watch the CPD webinar (50mins)

0 Comments

Alternatives to Bonds within a portfolio

18/3/2022

0 Comments

 
Picture
[5 min read, open as pdf]
  • Nominal bonds will remain under pressure
  • Explore the more resilient alternatives within the Bonds universe
  • Property, Infrastructure, Liquid Real Assets and Targeted Absolute Return funds provide alternatives outside of Bonds
 
Rising inflation and rising interest rates, means nominal bonds (such as corporate bonds, UK gilts, and global government bonds) are under pressure, and will remain so for the medium-term. 
For so long as real yields remain negative, bonds are “guaranteed” to lose capital value in real terms over time.
So what are the Alternatives to Bonds in a portfolio for UK investors?
We explore the options within this article open as pdf or full version
0 Comments

using ETFs to build-in inflation protection

11/3/2022

0 Comments

 
Picture
[5 min read, open as pdf]
​
  • Equities provide a long-term inflation hedge
  • But other asset classes provide near- and medium-term protection
  • “Owning the problem” is a useful framework for inflation hedging

Even before the Russia/Ukraine war and sanctions, Covid policy stimulus, rapidity of the post-Covid restart, supply-chain disruptions and the energy crisis have stoked up inflationary pressure and we are in for a bumpy ride.
While we are not yet past the peak, it takes years, not months, to tame inflation, so it makes sense to adapt portfolios for an inflationary regime.
To understand asset class behaviour there is not much use looking at the last 10 or 20 years.  That era has been characterised by falling interest rates and low inflation. Instead we have to go back to the history books and understand how asset classes behaved in the 1970s inflation shock and the subsequent period of rising interest rates and rising inflation.
From studying academic research on that era, we draw three key conclusions: firstly, inflation protection can be achieved by owning the assets that benefit, rather than suffer, from inflation.  Secondly, that different asset classes have different inflation-protective qualities over time.  Finally, that liquidity is key so that there is flexibility to alter and adjust your portfolio.
​
Equities: the long-term inflation hedge
Equities provide the ultimate “long-term” inflation hedge – companies that make things that you always need and have pricing power can keep pace with or beat inflation.
Within equities, studies show that a bias towards value, away from growth, outperforms during an inflationary regime.  This is because of something known as “equity duration”, which basically means that companies that deliver earnings and dividends on a “jam today” basis, are more valuable than companies that are expected to deliver earnings and dividends in the very distant future on a “jam tomorrow” basis.  You can access a Value ETF very simply by using factor-based ETFs, such as IWFV (iShares Edge MSCI World Value Factor UCITS ETF).
But given that investors are likely to have equities in their portfolios already and therefore have long-term protection in place, how do you achieve inflation-protection for the bumpy ride over the short- and medium-term?
 
Owning the problem
Inflation-hedging can be described as “owning the problem”.  Worried about rising oil, gas and petrol prices?  Own an Energy ETP like AIGE (WisdomTree Energy ETP).  Worried about rising wheat prices?  Own an Agriculture ETP like AIGA (WisdomTree Agriculture ETP).  Worried about rising rail-fares? Own an infrastructure ETF like GIN (SPDR Morningstar Multi-Asset Global Infrastructure UCITS ETF).  Worried about rising rents? Own a property ETF like IWDP (iShares Developed Markets Property Yield UCITS ETF).  Worried about rising household bills? Own a Utilities ETF like UTIW (Lyxor MSCI World Utilities TR UCITS ETF).
By owning the assets that benefit, rather than suffer, from inflation, you can incorporate inflation-protection into your portfolio.
These assets are referred to as “liquid real assets” as their value is positively related to inflation.  They can be accessed in liquid format by using exchange traded products (ETPs) keeping your portfolio flexible to enable future adjustments as time goes on.
Interestingly, real assets respond to inflation in different ways over different time frames.  The study from the 1970s looked at the correlation of asset classes over time from the start of an inflation shock.  It found that Commodities provided near-term inflation protection for the initial five or so years of inflation shock, but then moderated as supply-side solutions came-through.  Infrastructure and Property provided medium- to long-term inflation protection but were vulnerable in the near-term to rising market risk associated with the break-out of inflation.  Inflation-linked bonds – as the name suggests – provide inflation protection, if held to maturity.  But in the short-term they can decline materially, as they are highly sensitive to increases in interest rates which are typically associated with inflation-fighting central bank policy.  So while inflation-linked bonds like INXG (iShares GBP Index-Linked Gilts UCITS ETF) reduce inflation risk, they increase interest rate risk.  By introducing some interest-rate hedging by owning assets whose interest rates go up when the Fed raises rates, like with FLOS (iShares USD Floating Rate Bond UCITS ETF GBP Hedged), this can be mitigated.

Gold
Gold is also a traditional real asset inflation-hedge: it preserves its value (purchasing power) over millennia, and is a classic “risk off” asset that can help protect a portfolio in times of market stress.  Some critics of holding physical gold argue that is produces no income and therefore has no intrinsic value or growth.  That may be so, but imagine you were a time-traveller – it’s the only money that you could use in any era going back to biblical times.  It holds its value in inflationary and even in hyperinflationary times.  From a portfolio perspective, it always makes sense to have some exposure both as a real asset, a shock-absorber and as an uncorrelated diversifier.  Physical gold tends to outperform gold miners, in the long-run, and can be accessed at lower cost.  There are plenty of low-cost physical gold ETPs to choose from.
 
Bringing it all together
We believe that a layered approach to inflation-hedging makes sense because of the different inflation-protection qualities of different asset classes over time.
Within equities this means pivoting equity exposure towards a Value/Income bias.
Within bonds, this means reducing duration and/or substituting nominal bonds with liquid real assets exposure as a potential alternative (subject to relevant risk controls).
We have incorporated a range of higher risk inflation-protective asset classes, such as commodities, gold, infrastructure and property, medium-risk like lower duration inflation-linked bonds and lower risk rate-sensitive assets, such as floating rate notes to create a diversified Liquid Real Assets Index strategy that aims to deliver exposure to inflation-protective asset classes, while delivering an overall portfolio volatility similar to Gilts.  This makes the strategy a potential alternative to traditional (nominal) bonds exposure that will continue to struggle in an inflationary regime.

Summary
For those wishing to isolate and target specific inflation-protective exposures, there is no shortage of choice for highly targeted inflation-hedging strategies.
Adapting portfolios for inflation is key to ensure resilience in an inflationary regime.  And while it may feel a bit late to get started, it’s better late than never.

​Find out more about our All-Weather Portfolio of ETFs for UK investors.
Find out more about our Permanent Portfolio of ETFs for UK investors.
See all our Research Portfolios

0 Comments

Building an all-weather portfolio with ETFs

4/3/2022

0 Comments

 
Picture
[5 min read, open as pdf]

Find out more on this topic in our upcoing CPD webinar

  • 60/40 portfolios are under pressure with rising rates and inflation
  • An Equal Risk “all-weather” portfolio provides true diversification
  • An Equal Weight “permanent” portfolio provides resilience
 
For investors with long time horizons who want an all-equity portfolio, there is no shortage of low- cost global equity ETFs.  In cricketing terms, when sunshine’s guaranteed, a grass pitch works just fine.
But when time horizons are shorter and risk control matters more – as in these uncertain times - a multi-asset approach might make better sense.  Put differently, when the weather is changeable or extreme, an all-weather pitch makes more sense.
It’s the same for investments.  In these times of market volatility, rising interest rates and inflation pressure, we explore three different types of multi-asset strategy: the 60/40 portfolio, the “Equal Risk” or all-weather portfolio, and the “Equal Weight” or Permanent Portfolio.

The problem with 60/40
The traditional multi-asset portfolio is the so-called “60/40” portfolio – where 60% is invested in equities, and 40% is invested in bonds.  This is the “classic” multi-asset strategy.  The idea being that you can combine higher risk and return from equities with lower risk income from bonds.  A 60/40 portfolio can be constructed with just two ETFs.  60% in a global equity ETF like SSAC (iShares MSCI ACWI UCITS ETF) or VWRP (Vanguard FTSE All-World UCITS ETF); and 40% in a bond ETF – for example AGBP (iShares Core Global Aggregate Bond UCITS ETF GBP hedged) for those wanting global bond (hedged to GBP) exposure, or IGLT (iShares Core UK Gilts UCITS ETF) for those wanting UK government bond exposure.  Or you can make it more and more granular.
But this traditional 60/40 model is under pressure, and the suggestion currently is that the 60/40 portfolio is now “dead”.  Why is this?  Well because for the last 30 years or so, we’ve lived in a world where inflation and interest rates have been trending down – which is doubly good for bonds.  But now we are now in an economic regime where both interest rates and inflation are starting to trend up – which is doubly bad for bonds. 
The other problem with 60/40, is that in times of market stress, the correlation between equities and bonds increases, meaning that bonds lack the diversifying power they may have had in the historical long-run, at a time when it is needed most.
In summary: the advantage of this approach a 60/40 portfolio is easy to construct, and is a classic “balanced” portfolio.  The disadvantage of this approach is that bonds are facing an uphill struggle for the next few years, so may not be as “balanced” as you would want.

The all-weather portfolio
The all-weather portfolio concept is that of a multi-asset portfolio that is designed to deliver resilient, consistent performance in different market regimes, or “whatever the weather”.  The term and idea was pioneered by Ray Dalio of Bridgewater Associates (which was established in 1974, shortly after Nixon took the US Dollar off the gold standard) and is designed to answer the question: “What kind of investment portfolio would you hold that would perform well across all environments, be it a devaluation or something completely different?”[1].  Dalio and Bridgewater’s all-weather portfolio assumes equal odds of any of four market regimes (rising/falling growth/inflation) prevailing at any time.  This approach created and pioneered what is also referred to as a “Risk Parity” approach to investing.
The concept of risk parity requires some additional explanation.  A classic 60/40 equity/bond allocation results in a portfolio where over 95% of overall portfolio risk comes from the equity position, and the balance comes from the bond position.  In short, the asset allocation drives portfolio risk, and while a portfolio may be balanced in terms of asset allocation, it is imbalanced in terms of risk allocation.  Risk parity reverses the maths: it means that each asset class contributes equally to the overall risk of a portfolio.  This is why it is also known as an “Equal Risk” approach.  But as risk is dynamic, not stable, the asset weights must adapt to keep the risk allocation stable.
UK investors can build their own all-weather portfolio using four to six ETFs representing broad asset classes: global equities, UK equities, gilts, property, gold and cash equivalent, depending on complexity.  In order to keep the risk allocation stable, the asset weights might need to change each month to reflect the changing risk and correlation relationships of and between those asset classes. 
In summary: the advantage of this Equal Risk approach is that a portfolio is truly diversified from a risk contribution perspective.  The disadvantage of this approach is it requires a regular change of weights to reflect changing short-term volatilities and correlations.

The Permanent Portfolio
The permanent portfolio is a concept pioneered by the late Harry Browne, a US financial adviser, in his 1999 book “Fail-Safe Investing”.  It has many adherents in both the US and the UK, but to date it is only really in the US that one can find ‘Permanent Portfolios’ on offer, something UK investors seem keen to change. 
The concept is similar to the all-weather portfolio, but in a more straightforward format.  Rather than trying to target an “Equal Risk” contribution with changing asset-class weights, the Permanent Portfolio is a simple Equal Weight approach to four main asset classes to reflect different market regimes, so that whatever the regime, the portfolio has got it covered.
Browne outlines four market regimes[2], and related asset exposure for that regime:
  1. Prosperity: growing economy, falling rates: equities (and also bonds) are best assets to hold
  2. Inflation: inflation is rising moderately, rapidly or at a runaway rate: gold is best asset to hold
  3. Tight money or recession: slowing money supply and recession: cash (or equivalent) is best asset to hold
  4. Deflation: prices decline and purchasing power of money grows: bonds are best asset to hold
An equal-weight portfolio therefore consists of 25% equities, 25% bonds, 25% gold and 25% cash (or cash equivalents to earn some interest).  Browne advocates reviewing this portfolio once per annum, and if necessary rebalancing the allocations to their strategic equal weights.
US versions of this strategy use US equities for the equity exposure and US treasuries for the bond exposure.  So what would a UK version look like?
We constructed a Permanent Portfolio for UK investors using 4 London listed ETFs: SSAC for global equities, IGLT for UK bonds, SGLN (iShares Physical Gold ETC) for gold and ERNS (iShares GBP Ultrashort Bond UCITS ETF) for cash equivalents for some additional yield over cash that will capture rising interest rates.
In summary: the advantage of this Equal Weight approach is its simplicity and low-level of maintenance required.  The disadvantage of this approach is that it disregards short-run changes in volatility and correlation that are captured in the Equal Risk approach.

How do they all compare?
Obviously the strategies vary from each other.  To evaluate performance, we have created research portfolios for both these strategies. What becomes apparent is that the outperformance of these low-cost, equal-risk and equal-weight all-weather and permanent portfolios looks relatively attractive when set against many more complex (and expensive) “all-weather” absolute return funds.

Find out more about our All-Weather Portfolio of ETFs for UK investors.
Find out more about our Permanent Portfolio of ETFs for UK investors.
See all our Research Portfolios
Attend our CPD webinar on this topic

[1] https://www.bridgewater.com/research-and-insights/the-all-weather-story
[2] Harry Browne, Fail-Safe Investing, (1999) Rule #11 Build a bullet-proof portfolio for protection (pp.38-49)
0 Comments

The rotation to Value has room to run

3/3/2022

0 Comments

 
Picture
[5 min read, open as pdf]

  • The late 2020 rotation to Value has been rewarded
  • Factor tilts align to economic cycle and inflation regime
  • Despite strong relative performance, Value-factor equities have room to run
 
The “great rotation” to Value began towards the end of 2020 as inflation fears came into focus.  It has been rewarded.

Since Dec 2020, the MSCI World Value factor has delivered +21.43% returns to 25th February 2022 compared to +7.70% return for Growth factor and +14.78% for the parent MSCI World index (a traditional market-cap based index), all in GBP terms.

If we look back further at relative performance since end 2007 to 25-Feb-22, we can see that Value’s underperformance relative to Growth is still material.

Over that period, Growth returned +369% (11.54%pa), compared to +179% (7.52%pa) for Value, and +268% (9.63%pa) for traditional market-cap based world equities, in GBP terms.
​
On this basis, the re-rating of Value, relative to Growth, has room to run in the face of a persistent inflationary regime.

Read full article with charts
Watch our CISI-accredited CPD on an Introduction to Factor Investing
0 Comments

Liquidity matters in fund selection

1/3/2022

0 Comments

 
Picture
​
  • Understanding liquidity risk is key to fund selection
  • We contrast liquidity profile of different fund formats and strategies
  • Active funds require most scrutiny as holdings are idiosyncratic
 
Whereas there is no shortage of analysis on the risk and return of active and index-tracking funds alike, there is less detailed analysis on liquidity risk.  Liquidity risk is a key aspect of Product Governance for advisers, and liquidity problems have been the underlying reasons for gatings (the suspension of client dealings) of high-profile funds in equity, bond and property asset-classes.
We explore the importance of liquidity in fund selection, and considerations when contrasting formats, strategies and evaluation metrics.

For retail investors, access and liquidity are essential.  We strongly believe that when building portfolios for retail investors, there should be a strong preference towards highly liquid funds, so that – simply – investors can get their money back if they need it.

This is why in portfolios we designed for wealth managers and advisers in 2016, we advocated to use property security ETFs, rather than property funds, which was subsequently vindicated by the Brexit-related gatings in 2016 and 2020.

This is why we advocated – in 2019 – that investors were concerned about bond liquidity, they should stick to Bond ETFs. This was based on insights we learned from the yield spike in 2017 that saw liquidity in high-yield bonds dry up, and highlighted the same issues as property funds faced.

This is why we advocated – in 2020 – that when constructing alternative asset class exposures within portfolios, advisers would be safest to stick with liquid versions of those alternative asset exposures.

And finally, this is why, when it comes to looking at active equity funds, we study the liquidity profile (redemption horizon) so carefully.  We want to help advisers we work with to “avoid” the next Woodford – not just from a performance perspective, but from a liquidity perspective too.

As we move from an era of accommodative liquidity (quantitative easing) to a gradual reduction in liquidity (quantitative tightening), understanding the liquidity profile of funds and portfolios is key.
This is more than a box tick for product governance.  It is an essential protection of client best interests.

Register you interest in receiving our liquidity analysis white-paper (for UK advisers only)

Register for our CPD webinar on Liquidty Risk and Fund Selection

0 Comments

UK value/income bias delivers performance in uncertain times

14/2/2022

0 Comments

 
Picture
 [3min read, open as pdf]
  • 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.
​
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].

Read full article as pdf

[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.
0 Comments

Adapting portfolios for inflation

4/2/2022

0 Comments

 
Picture
[5 min read, open as pdf]

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
0 Comments

equity income: value provides resilience

28/1/2022

0 Comments

 
Picture
[7 min read, open as open as pdf]
  • Equity Income total returns are underpinned by dividends
  • Equity income has a value-bias, which typically translates to outperformance in an inflationary regime
  • “Shorter-duration” equity income exposures make more sense with rising rates/ inflation

​Year to date performance
The dispersion between styles and segments within equities is pronounced in the UK.
Given recent market stress over the prospect of a rising interest rate environment, inflationary pressure, and geopolitical tensions, year-to-date performance underscores the relative resilience of equities with a Value/Income bias relative to other UK equity segments and world equities.
Year to date, world equities are down -5.93%, the FTSE All Share is flat at -0.55%.  UK Small Caps are down -8.49%, the FTSE 100 is +1.14% and UK Equity Income (Freedom Smart-Beta UK Dividend Index) is +3.97%.
This is because returns are underpinned by dividend income as well as exposure to energy and financials which benefit respectively from a high oil price/rising rate environment.

​Read in full as pdf
0 Comments

A rough start to the year

24/1/2022

0 Comments

 
Picture
[7 min read,  open as pdf]
  • Markets are repricing three key market risks, and facing a fourth
  • More hawkish Fed posture, tech-sector fundamentals and energy/inflation pressure cloud the outlook
  • Real risk of a Russia/NATO war
 
What happened this week
Equity market performance has taken a tumble, speculative assets have taken a fall.  Why is this, and what has changed?

We explore the three market risks and the fourth geopolitical risks  - the probability of each has increased materially and simultaneously.

Read full report as pdf



0 Comments

Bitcoin: the first trillion dollar wipe out

21/1/2022

0 Comments

 
Picture
[5 min read, open as pdf]
  • Bitcoin is not an appropriate asset for retail portfolios
  • It is an instrument for speculation, with no intrinsic value
  • Understanding a bubble is possible.  Timing its end is not.
 
A great technology, an inappropriate asset
In discussions with financial advisers, our position has consistently been that whilst blockchain is undoubtedly a breakthrough technology, Bitcoin is not an appropriate asset for retail investors’ portfolios.

​Read the full report in pdf
0 Comments

DIVERSIFYING INCOME GENERATION

14/1/2022

0 Comments

 
Picture
[3 min read, open as pdf]

  • Income from bonds can’t keep up with inflation
  • Multi-asset income enables a diversified income stream
  • Balance required between additional yield and higher level of risk

Through the looking glass: a curiouser new paradigm
Traditionally you bought bonds for income, and equity for risk.
Ironically, now it’s the other way round.
The past decade or more has been a challenging period for income investors.  Global quantitative easing programmes were launched in response to the global financial crisis of 2008.  Further stimulus was prompted as part of the fight against the effects of the COVID pandemic.  These policy interventions have suppressed yields for over a decade.
Furthermore, inflation is now surging and is likely to settle at higher levels than pre-Covid.  This further undermines the ability of bonds to generate a real income.
The prospect of rising rates limits the appeal of longer-dated higher yielding bonds owing to the higher duration risk (the decline in a bond’s value, linked to rises in interest rates).
In the last two years, we have had an extensive period of disruption and change: the pandemic lock-downs, the policy response (stimulus), the economic restart, supply chain disruption, energy crisis, inflation break-out and interest rate cycle “lift off”.  As a result, we are living in a “curiouser new paradigm” of:
  1. negative real yields;
  2. the prospect of rising rates
  3. uncertainty in the equity markets
Where next for income investors in this new paradigm?

Read the full article
Watch the CPD webinar: Diversifying income risk
Find out more
0 Comments

2022 outlook: key themes

11/1/2022

0 Comments

 
Picture

[3 min read,  open as pdf]
​
  • Adapting portfolios for inflation
  • Income generation in a negative real yield world
  • Positioning portfolios for climate transition
 
2021 in review
Our 2021 market roundup summarises another strong year for markets in almost all asset classes except for Bonds which remain under pressure as interest rates are expected to rise and inflation ticks up.
Listed private equity (shares in private equity managers) performed best at +43.08%yy in GBP terms.  US was the best performing region at +30.06%.
Real asset exposures, such as Water, Commodities and Timber continued to rally in face of rising inflation risk, returning +32.81%, +28.22% and +17.66% respectively.

2022 outlook
We are continuing in this “curiouser, through-the-looking glass” world.  Traditionally you bought bonds for income, and equity for risk.  Now it’s the other way round.
Only equities provide income yields that have the potential to keep ahead of inflation.  Bonds carry increasing risk of loss in real terms as inflation and interest rates rise.
Real yields, which are bond yields less the inflation rate, are negative making traditional Bonds which aren’t linked to inflation highly unattractive.  Bonds that are linked to inflation are highly sensitive to rising interest rates (called duration risk), so are not attractive either.
How to navigate markets in this context?
The big three themes for the year ahead are, in our view:
  1. Adapting portfolios for inflation
  2. Income generation in a negative real yield world
  3. Positioning portfolios for climate transition
We explore each in turn, as well as reviewing updated Capital Market Assumptions for expected returns from different asset classes.

See full report in pdf
Attend our 2022 Outlook webinar
0 Comments

Liquid real assets delivers on objectives in 2021

7/1/2022

0 Comments

 
Picture
[3 min read, open pdf for full report with charts]

  • Inflation is on the rise
  • Delivering real asset exposure, with bond-like volatility
  • Real assets have the potential to keep ahead of inflation
 
Inflation on the rise
With inflation on the rise – and potentially interest rates too – nominal bonds are likely to remain under pressure.  Whilst “real assets” – such as property, infrastructure and gold – have potential to preserve value in inflationary regimes, how can a switch from bonds to real assets be made without materially up-risking portfolios?  This was the challenge we addressed in the design of our Liquid Real Assets index.
Our Liquid Real Assets Index was developed to combine exposure to higher risk-return real asset exposures, with lower risk-return interest rate-sensitive assets, to deliver a real asset return exposure for inflation protection, in liquid format, with bond-like volatility to keep risk budgets in check.  Given the rising inflationary pressures both in the US and in the UK, we take stock on the index performance year-to-date and are glad to say it’s “doing what it says on the tin.

Find out more about the Elston Liquid Real Assets Index
Watch the introductory webinar
View the year-end index factsheet
0 Comments

Managing interest rate risk with Floating Rate Notes

26/11/2021

0 Comments

 
Picture
[5 min read, open as pdf]

  • Interest rate rises are on the cards
  • FRNs offer protection against interest rate risk
  • What to look for when investing in FRNs

Interest rates expected to rise
As the run up in inflation looks more persistent, than transitory, there is growing likelihood that Central Banks will raise interest rates in response.
​
Following an extended “lower for longer” near-Zero Interest Rate Policy following the 2008 Global Financial Crisis and the 2020 COVID Crisis, the market futures-implied expectations for the Fed Funds rate, points to a “take off” in 2022 in response to rising inflation, following COVID-related policy support, to an expected 1.01% interest rate level in Dec-23[1], from 0.88% last quarter.

Fig.1. Fed Funds Rate and implied expectations
Picture
Source: Elston research, Bloomberg data

The potential for increased interest rate volatility, as rate hike expectations increase, means that investors that are seeking to dampen interest rate sensitivity (“duration”) are allocating to shorter-duration exposures, such as ultrashort-duration bonds, and also to Floating Rate Notes (FRNs).
 
What is a Floating Rate Note?
Floating Rate Notes receive interest payments that are directly linked to changes in near-term interest rates and can therefore provide a degree of protection against interest rate risk, when interest rates are rising.

Issued for the most part by corporations, FRNs pay a periodic coupon – typically quarterly – that resets periodically in line with short-term interest rates.

This could be expressed as a premium or “spread” over a currency’s short-term risk-free rate, such as (in the UK) the 3 month SONIA rate (Sterling Overnight Index Average, and prior to that GBP LIBOR) in the UK, or (in the US) the 3 month SOFR (Secured Overnight Funding Rate, and prior to that USD LIBOR).  These indices overnight borrowing rates between financial institutions. 

The size of the premium or spread reflects the creditworthiness of the issuer: the higher the spread, the greater the rewarded risk for owning that security, and typically stays the same for the life of the bond and is based on the issuer’s credit risk as deemed by the market.

How can FRNs benefit investors?
Floating Rate Notes are a lower-risk way of putting cash to work and provide a useful direct hedge against interest rate fluctuations.  When incorporated into a bond portfolio, they can help bring down duration given their reduced sensitivity to interest rate changes, as well as provide a return pattern that is directly and positively correlated with changes in interest rates.

Compared to nominal bonds, such as Corporate Bonds and UK Gilts, FRNs’ yield can increase as/when interest rates increase.

Relative to money market funds, FRNs may provide some additional yield pick-up, as well as very short <1 year duration.

Key considerations when investing in FRNs
Portfolio investors can access FRNs through funds and ETFs.  Key considerations when investing in FRNs include, but are not limited to:
  1. What is the benchmark rate: which set of interest rates will drive FRN returns.  For example, a SOFR-based rate reflects US interest rate changes, a SONIA-based rate reflects UK interest rate changes?
  2. What are the key risk parameters: for example, credit quality/spread, effective duration and liquidity profile of the underlying assets 
  3. What scope is there for hedging returns to an investor’s base currency either outwith the fund or within the funds (for example currency using a hedged share class) 
 
Summary
The expected timing of interest rate “lift off” in the US and UK will change as markets adapt to evolving growth and inflation outlook during the post-COVID recovery, and in response to the risk of further disruption from new virus variants.  However, as interest rate rises become more likely, and incorporating an allocation to Floating Rate Notes for protection against interest rate risk makes sense within the bond allocation.

Watch the CPD Webinar: The Quest for Yield
​
[1] Data as at last quarter end
0 Comments
<<Previous

    ELSTON RESEARCH

    insights inform solutions

    Get our weekly newsletter

    Categories

    All
    All Weather Portfolio
    Alternative Assets
    Alternative Strategies
    Bonds
    Business Practice
    Equity Income
    Equity Sectors
    ESG
    ETFs
    Evidence-Based Investing
    Factor Investing
    Gold & Precious Metals
    Guide To Investing
    Index Investing
    Inflation
    Macro
    MULTI ASSET
    Multi Asset Income
    Net Zero
    Permanent Portfolio
    Portfolio Construction
    Private Markets
    Real Assets
    Retirement Investing
    Risk Parity
    Value Factor

    Archives

    May 2022
    April 2022
    March 2022
    February 2022
    January 2022
    December 2021
    November 2021
    October 2021
    September 2021
    August 2021
    July 2021
    June 2021
    May 2021
    April 2021
    March 2021
    February 2021
    January 2021
    December 2020
    November 2020
    October 2020
    September 2020
    August 2020
    July 2020
    June 2020
    May 2020
    April 2020
    March 2020
    February 2020
    January 2020
    December 2019
    November 2019
    September 2019
    June 2019
    April 2019
    February 2019
    January 2019
    December 2018
    November 2018
    October 2018
    September 2018
    August 2018
    July 2018
    June 2018
    May 2018
    April 2018
    March 2018
    February 2018
    January 2018
    December 2017
    November 2017
    October 2017
    July 2017
    May 2017
    March 2017
    February 2017
    January 2017
    November 2016
    October 2016
    September 2016
    July 2016
    June 2016
    May 2016
    February 2016
    January 2016

    RSS Feed

Company

Home
About
Terms of Use
​​​Contact
​
​Events
​
Press

Solutions

​​Insights
​​​Research Service
​Research Library
Portfolio Analytics
​Our Portfolios
Custom Portfolios
​Retirement Portfolio
Our Funds
Custom Funds
​Retirement Funds
Our Indices
​Custom Indices
Retirement Indices

Services

CIRP Development
Regulatory Research
​
​​CPD

By client type:
For Advisers
For Discretionary Managers
​For Asset Managers
For Asset Owners


© COPYRIGHT 2012-21. ALL RIGHTS RESERVED.
  • WHO WE ARE
    • About
    • Contact
    • Events
    • Press
  • WHAT WE DO
    • Portfolio Solutions >
      • Our Portfolios
      • Custom Portfolios
      • Research Portfolios
    • Fund Solutions >
      • Our Funds
      • Custom Funds
    • Index Solutions >
      • Our indices
      • Custom Indices
    • SPECIALIST STRATEGIES >
      • Liquid Real Assets
      • UK Equity Income
      • Permanent Portfolio UK
      • All Weather Portfolio UK
      • Dynamic Risk Parity
      • Gold and Precious Metals
      • Enabling Net Zero
    • Research >
      • Investment Research
      • Regulatory Research
    • CPD
  • WHO WE HELP
    • Financial Advisers
    • Discretionary Managers
    • Asset Managers
    • Asset Owners
    • 中文
  • Insights