February 2010
NEWS
Alan Beaney joined the Investment team in September 2009. Alan was previously Head of Investment at Principal Investment Management. With more than 25 years investment experience, Alan’s knowledge of the industry will be of significant benefit to RCBIM and its clients.
PERFORMANCE
The performance of our three largest clients is as follows. Our two largest ethically managed charities have outperformed their benchmarks during the total period of RCBIM’s management:
WM calculates Charity No 1 to the end of 2009 returned 258% against its benchmark of 177% since 1994.
WM calculates Charity No 2 to the end of 2009 returned 57% against its benchmark of 47% since 1999.
The Marlborough Quantock UK Growth Fund remains one of the leading UK equity funds since its inception in 1996, returning 222% against its benchmark of 114%. In 2009 it returned 50.8% compared to 30.3% for its benchmark. *
INVESTMENT OUTLOOK
The UK economy faces several headwinds to its recovery. The Government’s action has meant the budget deficit has swelled to over 12% of GDP. This implies gilt issuance of over £200bn p.a. and significant public spending cuts and tax increases after the General Election. Consumer spending will be inhibited by continuing rising unemployment and the recent reversal of the cut in VAT. Since the crisis of September 2008 sterling has fallen 13% against the euro and 14% against the dollar as low interest rates look certain to persist for a long time. Over the last three years sterling has devalued by 33% against the euro and 22% against the dollar. This devaluation should help exports and import substitution, a luxury not afforded to Greece and Ireland.
Having peaked at 6.3% last October, LIBOR has dropped close to the present base rate of 0.5%. Hence debt is relatively cheap again and the banking system is working. Bank of America, Citicorp and Wells Fargo were the last US banks to leave the Troubled Asset Relief Program. BNP Paribas, ING and SocGen in Europe and Lloyds in the UK have started to repay their governments.
Fortunately, the UK economy only accounts for 33% of the UK equity market, while emerging markets, where long term growth is almost certain to be more vigorous, accounts for 20%.
Recent concerns over the state of the UK’s finances, highlighted by the Budget Statement, have caused ten year gilt yields to rise sharply to 3.9% compared with an equity yield of 3.3%. Cazenove expects dividend growth of 8%, 9% and 13% over the next three years. Hence, the gilt yield still looks unattractive with huge issuance to come. The yield on cash will be derisory for the foreseeable future. Yields of 5-6% on good quality corporate bonds have some attractions, although there are plenty of opportunities to buy.
From here we expect reasonably good returns from the UK equity market following a decade when it fell 20%. As ever progress will be erratic. The current setback caused by monetary tightening in China and the worldwide attempts to change the habits of banks and bankers is entirely healthy.
* Source: Marlborough Fund Managers. Performance to 1 January 2010. Benchmark: Morningstar UK All Companies. Ranked 8/111 since inception.
Past performance is not necessarily a guide to future performance. The value of investments and the income from them can go down as well as up and investors may not get back the amounts originally invested.
LATEST FUND REPORTS
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