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5 min read 28 Apr 22
Global inflationary fears and Russia’s invasion of Ukraine were the two themes that dominated global financial markets during the quarter.
Rising inflation expectations weighed heavily on both bonds and shares in most major markets, as investors fretted over the impact of higher prices on consumers and businesses and anticipated a much faster pace of interest rate rises from the world’s major central banks.
The conflict between Russia and Ukraine acted as another catalyst for commodity price rises. The added geopolitical uncertainty weighed heavily on many emerging markets, particularly those closest to the conflict zone. However, some markets further afield, such as in Latin America, and notable oil-producing nations performed well. Assets that are traditionally seen as safer bets, such as the US dollar and gold also benefited.
The yields on government bonds in the UK, US and Europe rose sharply throughout the quarter (prompting notable losses for many bond investors).
It has been a tough quarter, for all multi asset teams as there have been very few hiding places in global markets, although overall returns have recovered in recent weeks albeit they are still negative year to date.
Total returns from equity portfolios have been negative. In relative terms, regions with higher commodity exposure, UK and South Africa fared better. There have been some pockets of good news as M&G (Lux) Europe ex UK Fund (+1.9%), M&G North American Value Fund (+6.1%) generated positive returns in the Active portfolios.
Chinese equities continue to struggle with the M&G ACS China Value Partners down -15.4%.
It was another solid quarter for listed alternatives (+1.3%) and property (+1.5%). This will have favoured the Active portfolios, that hold property and have slightly higher exposure to alternatives.
It was a particularly tough quarter for some of our fixed income holdings as central banks started raising rates and events in Ukraine piled more pressure on.
The only holding to produce a positive return was the M&G Credit Income Investment Trust (+1.7%). Although this is a relatively small part of the overall portfolios.
All other holdings were well into negative territory. For example, one of the larger holdings, the M&G Strategic Corporate Bond Fund returned -5.3% although this was ahead of the iShares Corporate Bond Index (held in the Passives) at -6.4%.
Source of fund performance date - BlackRock Aladdin M&G T&IO portfolio managers as at 31 March 2022
The chart shows the annualised performance of each fund in the LF Prudential Risk Managed Active and Passive range over 3 months and 1 year. Outperformance relative to the comparator benchmark for each fund is indicated by the green boxes.
Past performance is not a reliable indicator of future performance.
Source and date – FE, total return bid-bid month end (31 March 2022) performance table
from UK Investment Association universe.
During the quarter, and as part of the continual evolution of portfolios some exposure to the M&G European Small Cap Fund was added to both the Active and Passive portfolios.
The two US small cap managers originally selected to run life fund mandates, Earnest Partners and Granahan, were also added to the Active portfolios. The Passive funds use Russell futures for their US Small Cap exposure.
Finally, the portfolio management team reduced the overweight positioning to US, European, UK and Emerging Market equities – remaining underweight UK/European credit. The small diversifying overweight to Alternatives remains.
Full holdings are shown at the end of this note.
It would be nice to be able to paint a picture of a more positive outlook for 2022 but the likelihood is that the conflict in Ukraine will rumble on for some time and whilst equity markets have recovered in recent weeks any signs of escalation could well see fragile sentiment shaken again.
Central banks have been keen to provide clear forward guidance, in order to navigate a path out of the uncertainty facing markets, while governments face a challenging balancing act of reducing huge budget deficits in the wake of the pandemic support packages, while providing support to those most in need from the increasing cost of living.
The market continues to grapple with the additional pain the Russia-Ukraine conflict will have on inflation and supply chains, and whether it is enough to slow economic growth sufficiently to further impact financial asset valuations.
To finish on a more positive note, current markets may prove to be fertile ground for active managers, across all asset classes, with the potential to invest at attractive valuations in many cases.
Portfolio holdings as at 31.3.2022
LF Prudential Risk Managed Active
*Actively managed fund
LF Prudential Risk Managed Passive
*Actively managed fund
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