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Nutmeg investor update – June 2020

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welcome to your monthly investor update I'm John Doolin and I'm the technical lead for the pot domain which means I ensure that our developers know what they need to do and how to do it if you've been watching our recent update you'll know that we're following the government's guidance on social distancing and working remotely so instead of filming the investor update at our headquarters we're doing it here on zoom' today I'm joined by James McManus our chief investment officer hi James hi Jon looking at my nutmeg portfolio it seems global stock markets had another good month in May does that mean financial markets are more stable now that's right John financial markets did have another good month on the whole and really are continuing to show resilience in the face of some significant near-term economic headwinds in fact in the month of May we've continued to see volatility fall and we've seen riskier asset classes perform really buoyed by sentiment relating to the reopening of economies but also the continued efforts of policymakers central banks and governments globally to really limit that long term damage on on economies so in terms of returns global developed markets equities returned around 4.9 percent for the month of May for once not led by the US equity markets but in fact by Japan in Europe where markets returned between six point seven percent and four point nine percent respectively UK large-cap meanwhile continued to underperform their global peers in May returning just three point three percent whilst US large caps were turned around four point seven percent for the month emerging markets again and another underperformer continuing that trend of underperformance of their develop market peers with performance of only around 26 percent for the month of May and despite the economic challenges ahead actually what we saw is that smaller companies as a whole performed well the small caps in Europe Japan in the US all outperforming their large cap peers for the month now a similar trend was also observed in in fixed income assets the riskier assets offering the greater returns government bonds at a traditional safe haven delivered very muted returns of only around 6% in the US and actually flat on the month in in the UK whilst investment where corporate bonds continue to deliver against UK corporates off investors are return of around 0.8 percent in May but as I mentioned it was really the riskier end of the fixed income spectrum that offered offered investors the greatest returns in May and that was assets such as high-yield corporate bonds which delivered returns of around 4.6 percent an emerging market sovereign debt which delivered returns of around 5.7 percent for the month there's been a lot of talk about negative interest rates here in the UK what does that mean for investors well that's correct so despite the Bank of England stating only a couple of weeks ago that it was not planning or contemplating negative interest rates in the past two weeks the governor of the Bank of England Andrew Bailey has confirmed that the bank was actively reviewing the policy implications of negative interest rates and when interest rates go negative the result is that interest payments reverse their traditional course and that is that lenders would have to pay the central bank in order to keep their reserves stood there rather than receive interest on those reserves and this also has a knock-on effect to savings and investment markets with savers faced with the prospect of having to pay banks to save their cash whilst bond investors will pay for the privilege of lending their capital to governments or corporations now interest ratings have been negative for some time in in the eurozone and in fact in some other countries such as Switzerland and Japan but the UK central bank the Bank of England has until now refused to contemplate this as a course of action however in recent weeks the the Bank of England also or the UK Treasury in fact sold 3.8 billion in negatively yielding three year government bonds so that's the first time that the UK government bonds have been sold at a negative yield and that's investors paying for the privilege of holding that debt should they hold it through to maturity so will the Bank of England go go negative on on on interest rates well we know the interest rates have a have a lagged effect on the economy and therefore policymakers will be in no rush to venture into negative rates territory should they decide or consider that that is a sensible approach particularly with with the prosit conclusion on the on the horizon in the next seven months that won't start the market talking about negative rates or at least taking existing bond yields negative if it believes that's the direct action of the policy however at the current time market expectations but only about a 20% chance of negative interest rates by the end of 2020 apart from the coronavirus crisis what other big events are influencing in financial markets at the moment well we're never certain we're certainly never short of political news stories at present and whilst the brexit negotiations continue to proceed and under the radar the familiar topic of global trade and in particular the relationship between the superpowers of the US and China is never felt from headlines this month we saw China move to enforce security laws in Hong Kong that's led to another step up in rhetoric between those partners the move to enforce no security laws essentially violates a key part of the one country two systems' arrangement that's been in place since hong kong gained its independence from the UK and that's a system that ensures that hong kong manages its affairs in all areas except national defence and foreign policy in retaliation to this the US has put in motion the process to remove the special trading status in hong kong that's a key source of its competitiveness as a trading state and something it's enjoyed since back in 1992 when the u.s.

Passed a policy to treat the territory as a separate entity to china once the control of hong kong would be passed back to china from the UK five years later in 1997 so a very long standing special status and this means that hong kong could no longer be recognized as a unique custom territory and that's a bit of a problem for hong kong it's the world's third largest financial center it's the world's eighth largest exporter and importer globally and it really brings that that country into the wider US and China trades about something it's avoided in by by virtue of its special status so far but I think the key here is that both sides really have much to lose you know two thirds of China's foreign direct investment goes into the country via Hong Kong but Hong Kong is the largest trade surplus contributor to the United States and the US consular himself estimate that over fourteen hundred US firms have operations in Hong Kong whilst the amount of US foreign direct investment in Hong Kong is total more than 82 billion as of 2017 so you know this is really another significant escalation in the trade disagreement between the two nations and whilst the special status hasn't been revoked yet investors are beginning to fear that with a US election on the horizon there's much room for increased escalation in the fallout between the two particularly in the in the fallout post coded 19 closer to home you know European nations have actually appeared to be making much greater progress on it on further support packages for the for the EU economy the European Commission built on some Franco and German plans that were announced a number of weeks ago and announced last week a proposed 750 billion euro recovery fund worth around 5.7 billion seven percent of au GDP over four years and this is where the European Commission will raise funds externally in public markets and distribute these via grants to the most affected sectors and regions within the EU you know this is really symbolic it really raises the prospect of a response that's funded at a common level as part of the EU budgetary expenditure and and despite the fact that the funding would not be available actually until 2021 you know it's really a significant symbolic move I would serve to counter a lot of the recent euro skepticism within the EU that said however of course there is the the familiar sticking point that we're likely to incur here and that is that all all 27 EU governments will need to agree on the plan for it to take effect and there are of course several northern European states who have been less favorable on the idea of debt funded at a common level in the past so it still has some stages to go and until we see that passed into legislation but a really important and symbolic step has been put forward in the past week so how did the nutmeg fully manage portfolios performed during a month given the strong performance we've seen in financial markets in May all pool players finished the month in positive territory so returns and the fully management flows range from around foot 9 in lower risk portfolios through to around 4.6 in the highest risk pool player so the strong performance of the month means that the typical nutmeg medium-risk fully manageable player is now recovered over 60% of the market losses that were incurred in in February and March volatility given everything that's happened lately have you made any changes to the Nutmeg fully managed portfolios well we have made a number of strategic adjustments through the month in order to keep the portfolio's in line with our medium term investment view but also to manage risk in the near term and the first was really within our government bond exposure and here we reduced our exposure to the longest maturity US government bonds and these are assets that have performed very well in the challenging market conditions that we had so far year today and through to the end of April they're delivered performance of about 24% year-to-date so very positive returns but with so much fiscal expansion so much government spending underway that fiscal expansion really gaining significant momentum in the u.s.

The fiscal risks for long with surety bonds have been rising and so we can't broadly the same position in players in terms of duration that's interest rate sensitivity but we reduced our exposure to those longer-dated securities that have a greater exposure to fiscal risk and therefore you know we've backed some of the performance that they've delivered so far this year the second change in portfolios we made this month was another adjustment to ball players to manage risk and to rebalance an asset that has been quite successful thus far and now is that we trimmed our over weigh-in in Nasdaq stocks so in those poor players that own them you know Nasdaq is the high growth index in the US this position again is performed very well well relatively since we increased our exposure to this asset back in March you know given the strong performance and recognizing the increased risk of crowding into these companies from other investors we've rebound some of this position into a globally focused socially responsible strategy and we've also trimmed our us exposure in employers that don't hold Nasdaq directly again just rebalancing a small positive portion of the position given the performance of the US market relative to its global peers and the concentration of investors in the US US market so we remain overweight the US will remain overweight the technology sector but really recognizing the risk/reward dynamics are changing and taking some risk off the table and into the latter part of the month and then finally we shifted some of our European exposure in particular our EMU European monetary union exposure to to a socially responsible focused approach in Europe and and this is a theme that we've been embedding for the medium term in our portfolio so this is a approach that offers greater exposure to companies with stronger environmental social and government's alignment and it avoids exposure to those companies undertaking controversial activities and our own office of potentially lower carbon intensity which in turn of course lowers the carbon intensity of the the overall portfolio so if following these changes that make fully manageable players have on average around about a 15 percent exposure across the board to SR I theme within their respective equity allocations this month's customer question came to us during one of our recent webcasts a viewer with the username AC asked does not make have a view on the crypto market and would you see that as a potential expansion area for nutmegs offering in the future thanks the question I think for those who don't know much about crypto currencies and crypto currencies are a form of digital payment and they use a decentralized currency they come in in lots of different forms each for their own unique characteristics but some of the most popular of Bitcoin in eutherian and they're amongst the most widely known and it may be that you've heard of those yourself the Kiska these assets are relatively new you know they've been invented in the past 10 years they they lack the track record that many other investment assets have and they're typically quite difficult for investors to analyze and value because of that you know in fact much of the perceived value of crypto currencies really relates to their potential future use rather than their current commercial use and there is little in the way of fundamentals to analyze and and we don't truly understand how they might perform in different stages of the economic cycle because quite simply they just haven't been around and and haven't been through those different stages of the economic or business cycles yet they're also yet to receive regulatory support and to really be integrated into global payment systems in a way that legitimizes their use so we kiss of these reasons and for further issues you know also around fraud in custody and security cryptocurrencies tend to be quite volatile they tend to exhibit quite high volatility versus traditional investment asset classes such as such as equities or bonds and so currently they're not regulated by the financial services conduct authority and due to their their relative lack of liquidity that the narrow access to the market that we have when we want to transact in them and the typically high volatility that they embody we don't consider them to be to be part of the suitable universe for nutmeg pool players at the current time you know as the market matures as we move towards greater transparency and greater accountability in that sector we may revisit revisit that decision to include them in our pool players but I think for the foreseeable future for that for the reasons I've mentioned we don't envisage including those in nutmeg portfolios and I don't envisage that many mainstream investors will see them as as a component part of multi asset portfolios in the near future thanks James thanks John and thank you for joining us we know this is a very difficult time and understand that lots of our customers have questions feel free to contact us for your email social or the comments section below and we'll do our best to answer your queries in the meantime our best wishes to you your families friends and colleagues we look forward to seeing you again next month you

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