 [5 min read, open as pdf]
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
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We take a brief look at the performance update for our Liquid Real Assets Index. Exposure to Energy and broader commodities, as well as Gold & Precious Metals is supporting performance. The strategy is keeping pace with inflation, and outperforming gilts in the long-run and year-to-date, with similar level of volatility. Gilts are now underperforming inflation since index inception (Dec-17). Full updates are provided quarterly. 
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  [3 min read, open as pdf]
Monthly update Commodities was the top performing asset class in February, returning +6.83% in GBP terms, on inflation fears and energy crisis- exacerbated by political risk resulting from Russia’s invasion of Ukraine. Fears of the first European land war since the 1990s also drove demand for Gold as a safe-haven asset and inflation hedge. Our Gold & Precious Metals index – a composite of predominantly gold, but also silver, platinum and palladium – increased +5.65% MTD in GBP terms. Within equities, UK equities continued to outperform US and global equities owing to the inherent value bias. Our Liquid Real Assets index returned +1.21% for the month, compared to Gilts -1.44%. Within the multi-asset space, our “Equal Risk” or Risk Parity Index returned +0.27%, compared to -1.32% for a traditional 60/40 portfolio. US & UK 10 year yields closed at 1.87% and 1.42% respectively US & UK 5 year market-implied Break Even Inflation Rates closed at 3.19% and 4.52% respectively. Our granular asset-level report is updated in our Quarterly Review and Outlook after each March, June, September and December quarter end. Market performance The month-end market performance snapshot is summarised in the chart below. For latest commentary, please refer to our Insights and weekly Friday Insights email.  [5 min read, full article in pdf]
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.  [3 min read, open as pdf]
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. Read the article in full as pdf Watch the CPD webinar on this topic  [3 min read, open as pdf for full article]
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. Open as pdf for full article  [3min read, open as pdf]
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.  [3 min, open as pdf]
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. [Read as full article]  [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.
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  [7 min read, open as open as pdf]
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  [7 min read, open as pdf]
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  [5 min read, open as pdf]
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 
Geopolitical risk: a European war? Despite a flurry of urgent diplomatic activity in the last three weeks, the risk of a proxy or even direct war between NATO and Russia over Ukraine is real and worrying. We explore the context, summarise the diplomatic efforts and outline four potential scenarios. Full report available to Clients or on request Image shows 2010 Presidential election voting results Image author attribution: By Vasyl` Babych - Own work, CC BY 3.0, https://commons.wikimedia.org/w/index.php?curid=11453740  [3 min read, open as pdf]
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:
Read the full article Watch the CPD webinar: Diversifying income risk Find out more  [3 min read, open as pdf]
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:
See full report in pdf Attend our 2022 Outlook webinar  [3 min read, open as pdf]
UK cost of living surges Pent up demand, disrupted supply chains and an energy crisis are hitting UK consumers hard. This is becoming a problem that is as political as it is economic. A deeper look and understanding of inflation within different segments of the CPI basket is informative. Get the full article as pdf Watch our Focus on Inflation CISI-accredited CPD webinar  [3 min read, open pdf for full report with charts]
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  [3 min read, open as pdf]
Sustained recovery in risk assets 2021 saw a sustained recovery in risk assets, with the exception of Emerging Markets. Listed Private Equity was the top performing exposure returning +43.08% in GBP terms. Regionally, US equities remained the strongest performing market +30.06%. Real assets to the fore 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. Our Liquid Real Assets Index (ticker ELSLRA Index) – which combines higher risk real assets and lower risk rate-sensitive assets to deliver volatility similar to bonds – returned +7.98%, whilst UK Gilts declined -5.16%. UK equity income strength Within UK equity market segments, UK Equity Income outperformed all other segments as inflation fears made income-generative, value-oriented shares relatively more attractive. UK Equity Income, represented by our Freedom Smart Beta UK Dividend Index (ticker ELSUKI Index), returned +20.77%, whilst UK Large Cap returned +19.68% and UK Core returned +18.44%. UK Small Cap was the weakest UK segment, returning +14.70% for the year. Read as pdf Register for our Quarterly Investment Outlook on 26 January 2022 |
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