Investment Policyedwardswm.ch/wp-content/uploads/2018/12/EWM... · historical mean as a consequence...

Investment Policy

December 2018

Edwards Wealth Management AG 2

Our market view in a nutshell – December 2018

• As we approach the end of the year, most asset classes show a negative performance. The only exceptions are US stocks and short-term corporate bonds in US dollars, which are barely in positive territory. This poor result reflects investors' concern about the progressive withdrawal of the monetary stimulus, as well as the extraordinary duration of the current economic expansion in the United States, which will soon become the longest cycle that has been recorded

• Investors have been calibrating, alternatively, both higher interest rates due to the robustness of an economy approaching its maximum capacity, and the risk of an economic slowdown caused by the tightening of financial conditions, a waning impact of fiscal stimulus in the US, and a possible trade war

• However, from a valuation perspective, recent corrections in both the equity and credit markets offer one of the most attractive entry points of recent years. Obviously, these valuations depend on companies fulfilling their earnings projections. Cheap valuations can become expensive if, as is the case when the economic cycle turns, corporate profits decrease considerably

• So far, macroeconomic data show no visible sign of recession in the US. However, bond markets seem to be assessing an increasing probability of a slowdown in economic activity. This is revealed both by the current form of the yield curve and by the widening of corporate spreads

• For the coming year, the interaction between economic "hard data" (unemployment, earnings, inflation, etc.) and "soft data" (confidence and sentiment indicators) will be decisive both in the way the Federal Reserve will follow as for the investors' faith in a continuation of the current economic cycle. Given this situation, we continue to advocate a conservative approach, favoring quality stocks and bonds, short maturities and the purchase of portfolio insurance


EWM Investment Policy

From a relative valuation perspective, we like European stocks as they trade at lower multiples, and we expect profits to pick up as economic activity accelerates

A diversified commodities allocations, further help us to increase diversification and to protect the portfolios against a scenario of rising inflation

Multi-strategy / multi-manager hedge funds with daily liquidity are having a disappointing performance, particularly when compared with other less risky alternatives, like short-term corporate bonds

Investing in late-stage private equity provides access to the asset class with liquidity provision up to a certain degree

Corporate debt and High Yield currently offer the best combination of risk and return. We prefer medium maturities as the yield curve has flattened considerably and there is little term premium to compensate for taking interest rate risk

High quality debt in Euros presents a very unattractive combination of risk and return as current yields offer very little cushion to weather potential interest rates increases

In European credit we only see value in subordinated debt, asset-backed securities and short-duration high yield

Treasuries offer protection from a slowdown in growth – although this less likely with the fiscal stimulus in the US – whilst TIPS offer protection against rising inflation as a consequence of reflationary policies

We avoid Emerging Markets until there is more clarity on the new US administration trade policy, and the effects of a stronger dollar and higher financing costs for Emerging Markets are calibrated by the market

Amongst others, we favor Biotechnology and listed Real Estate

Japanese stocks are the cheapest in developed markets, but have suffered recently due to sluggish growth, and concerns about global trade Emerging markets have corrected sharply since the beginning of the year affected by a strong dollar and trade concerns. We deem the correction suffered has been excessive, and continue favoring India and Frontier Markets within EM

After the recent market corrections, valuations have improved substantially. We have therefore increased our exposure to US equities, mostly through quality and growth oriented companies

Equities

Multi-Strategy Hedge Funds

Commodities

Private Equity

Alternative Investments

Fixed Income

US Credit

European Sovereign

US Treasuries

Europe

Emerging Markets

European Credit

Sectors & Themes

Japan

Emerging Markets

US

Asset Class Rationale View

+

+

−

−

+

+

+

=

Overweight + Underweight − Neutral =

=

=

+

=

−


A (difficult) year in review

• With rising interest rates, and widening spreads, most areas in fixed-income had a negative performance this year. Only the

shortest parts of the yield curve offered positive returns

• Equity markets, one more time, showed a divergence between the US and the rest of the world

• Commodities and gold suffered from higher real interest rates and a stronger US dollar

Source: Bloomberg, as of December 7, 2018

-2.4% -1.1%

-1.8%

0.9% 0.0%

-0.3% -0.3%

-3.7% -3.8% -3.6%

2.7%

5.2%

-9.1%

-3.1%

-13.4%

-7.9%

-4.5%

-0.6% -2.1%

3.3%

-15%

-10%

-5%

0%

5%

10%

Glo

bal A

ggr.

US

Aggr.

US

Tre

asuries

US

Aggr.

1-3

Yr

EU

R A

ggr.

EU

R A

ggr.

1-3

Yr

US

Hig

h-Y

ield

EU

R H

igh-Y

ield

EM

Aggr.

($)

Subord

inate

d D

ebt

S&

P 5

00

Nasdaq

Euro

Sto

xx 5

0

Nik

kei 2

25

Em

erg

ing M

ark

ets

S&

P G

SC

I

Bre

nt C

rude

Gold

HF

RI F

oF

Dolla

r In

dex


Looking forward into 2019

• From a valuation perspective, the suppression of volatility engineered by central banks since the financial crisis can still be

felt in a number of indicators, like corporate spreads

• Only equity markets seem to be more attractively valued, particularly if low interest rates are not to revert to their

historical mean as a consequence of structural factors (demographics, globalization and technological disruption)

Source: PIMCO and Bloomberg as of December 5, 2018

14.0%

2.5%

345

143

15.1

18.4%

3.7%

468

171

16.7

24.3%

4.7%

645

215

18.5

59.9%

6.7%

1,891

575

26.7

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Volatility

10 Yr UST

HY Spreads

IG Spreads

S&P 500 P/E

Percentile 1 Percentile 2 Percentile 3 Percentile 4

11.42

118

239

1.5%

9.5%

Current

16.9

174

423

3.12%

18.1%


Rising investor anxiety about the economic cycle

• Investors have been calibrating, alternatively, both higher interest rates due to the robustness of an economy approaching

its maximum capacity, and the risk of an economic slowdown

• In this interplay, corporate earnings, inflation and growth data will be key to determine the future direction of equity markets

Source: Bloomberg

2.3%

2.5%

2.7%

2.9%

3.1%

3.3%

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

2,500

2,600

2,700

2,800

2,900

3,000

S&P 500 10 Yr US Treasury Yield


Where is the neutral rate?

• Financial conditions have tightened to levels close to its historical average, despite the still low levels of interest rates from

a historical perspective

• This complicates further the task of the Federal Reserve, as the risk of a policy mistake has considerably increased since

the lift-off in 2015

Source: Bloomberg

1

2

3

4

5

6

7

8

9

1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

98

99

100

101

102

103

104

105

GS US Financial Conditions Index (lhs)


First cracks in credit are emerging

• US High Yield spreads, which have remained relatively immune to stock market volatility bouts, have widened significantly in

November. European High Yield have fared significantly worse, and spreads are now approaching levels close to the 2015

sell-off

• As we consider credit markets to be one of the best leading indicators of a recession, this is an indicator to monitor more

closely in the future

Source: Bloomberg

2%

3%

4%

5%

6%

7%

2015 2016 2017 2018

4%

5%

6%

7%

8%

9%

10%

11%

US High Yield - Yield-to-Worst (lhs) European High Yield - Yield-to-Worst (rhs)


Leverage remains an area of concern

• Concerns about credit markets are compounded because of the increase of financial leverage experienced by the corporate

sector in the US since the financial crisis

• However, debt affordability is relatively ample at current interest rate levels, and there is no immediate “debt maturity wall”

that needs to be refinanced

Source: Bloomberg

40

60

80

100

120

140

160

180

20

30

40

50

60

70

80

1952 1957 1962 1967 1972 1977 1982 1987 1992 1997 2002 2007 2012 2017

Total Credit to Non-Financial Corporations (US) Total Credit to Non-Financial Sector (US)


No signs of recession, but turns are sharp

• Despite the unease observed in credit markets, the main leading indicators continue pointing to a continuation of the current

economic expansion

• However, it is important to be cautious and remain vigilant, as the deterioration in economic conditions can be very sudden

Source: Bloomberg

3%

4%

5%

6%

7%

8%

9%

10%

11%

1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

30

35

40

45

50

55

60

65

ISM Manufacturing PMI (lhs) US Unemployment Rate (rhs)


Dollar strength to remain

• As long as dollar-denominated bonds continue yielding significantly more than those of the major currencies, the US dollar will

remain strong

• Although a large part of the increase in interest rate differentials was priced in at the onset of the Fed normalization

process, the latter has become more pronounced than initially anticipated by the market

Source: Bloomberg

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

2014 2015 2016 2017 2018

75

80

85

90

95

100

105

U.S. Dollar Index (lhs)


Model portfolio evolution

Source: Bloomberg as of December 1, 2018 * Fund publishes monthly NAV with a 1 month of delay

-20% -15% -10% -5% 0% 5% 10% 15%

Partners Group Global Value*

Amura Absolute Return

Polar Capital Funds Japan

Henderson Global Property Equities

Pictet Indian Equities

Bonus Certificate SX5E

Wellington Global Quality Growth Portfolio

Schroder ISF - Global Convertible Bond

GAM Star Credit Opportunities

Oddo Compass Euro Credit Short Duration USDh

M&G Global Floating Rate High Yield Fund

iShares USD Short Duration Corporate Bond

iShares $ TIPS

Ytd Last Month


Investment scenarios D

rive

rs

Mar

ket

imp

act

Pro

bab

ility

• Global economic slowdown caused by political accidents or policy errors (Trade war with China, EU breakup, a too aggressive Fed, etc.)

• Deflationary scenario due to a combination of low growth and structural factors, although the rise of protectionism would be inflationary

• The Fed will have to reverse curse, which would be complicated if inflation is rising

Scenario 1 Recession by political/policy accident

• Correction in credit due to a rise in defaults and a widening of corporate spreads

• Correction in equities due to lower projected earnings, though low rates will offer support

• Sovereign and IG credit to profit due to flight to quality and the continuation of an ultra-loose monetary policy globally

• USD neutral to weak as flight to quality is counterbalanced by low interest rates

• Commodities will fall

40%

• The fiscal stimulus in the US provides a short-term impulse to the global economy, but not enough to attain a higher growth trajectory

• Inflation, particularly in the US will pick-up, but remains subdued globally due to structural factors (demographics, low aggregated demand, deleveraging)

• The Fed will continue its normalization path

Scenario 2 Goldilocks

• Equities appreciate moderately, with Europe and Japan catching up with the US

• Credit spreads remain stable as the credit cycle is further elongated

• Sovereigns suffer as monetary policy is progressively normalized

• USD appreciate moderately due to higher interest rate differentials

• Commodity prices will rise in the short-term, normalizing once the impulse vanishes

30%

• Growth concerns dissipate, with economic activity accelerating in US, Europe and Japan

• Inflation in the US increases, as a consequence of president Trump’s fiscal stimulus, and pulls other developed economies off deflation

• The Fed will have to step up the pace of rate increases and/or reduce balance sheet

Scenario 3 New regime

• Impact on equities will depend on how much real economic growth is sustained, and how accommodative the Fed remains

• Sovereign and IG bonds will face steep losses due to higher rates, particularly if long-term inflation expectations rise

• Corporate credit will correct moderately if inflation comes together with higher growth

• The USD will appreciate, particularly against those currencies facing deflation

• Commodities will gain from higher inflation

30%

Other risks Trade wars, Spread of populist political parties, China slowdown, Terrorism

Short-term catalyzers Fiscal stimulus in the US, improvement in macro-data globally, lower geopolitical tensions


EWM Model Portfolio Balanced USD

Cash Fixed Income Equity Alternative Inv. Commodities

USD 100%

USD

Asset Allocation Currency Allocation

2%

48%

39%

3% 8%

Cash 2%

US Treasuries 3%

Short-Term IG 14%

Convertibles2 6%

Sub. Debt2 8%

HY Europe 3%

HY US 3% HY Floating

3% TIPS 5% MBS

3%

Growth 4%

Volatility 16%

India 3%

Biotechnology 3%

Real Estate 3%

Japan 3%

Frontier Markets 3%

US Quality 4%

Diversified 3%

Multi-Strategy 5%

Private Equity 3%


EWM Investment Profiles

Strategic Asset Allocation

Alternative Investments

Commodities

Equities

Fixed Income

Cash

Conservative

3%

5%

64%

64%

24%

26%

2%

2%

5%

5%

Balanced

2%

5%

48%

43%

38%

39%

3%

4%

8%

10%

Growth

1%

5%

30%

22%

54%

52%

4%

6%

10%

15%


EWM Model Portfolio – Asset Allocation evolution

0%

10%

20%

30%

40%

50%

60%

2015 2016 2017 2018

Cash Fixed Income Equities Commodities Alternatives


EWM Model Portfolio – VaR evolution

0%

1%

2%

3%

4%

5%

6%

7%

0%

2%

4%

6%

8%

10%

12%

14%

2015 2016 2017 2018

1Y VaR 99% MWM Balanced (lhs) 1Y Std. Dev MWM Balanced (rhs)

1Y Std. Dev Benchmark (rhs)


EWM Model Portfolio – Peer comparison

• Total Return (Ytd1): 5th out of 15

• Standard Deviation (1 year1): 1st out of 15

• Downside Risk (1 year1): 1st out of 15

• Sharp Ratio (1 year1): n/a

1 As of December 3, 2018

Source: Bloomberg

-12%

-8%

-4%

0%

4%

8%

Dec 17 Jan 18 Feb 18 Mar 18 Apr 18 May 18 Jun 18 Jul 18 Aug 18 Sep 18 Oct 18 Nov 18 Janus Balanced Fund Invesco Balanced Risk Allocation Fund

Investec Global Strategic Managed Fund Templeton Global Income Fund

UBS Global Allocation PIMCO Global Multi-Asset Fund

UBAM Multifunds Allocation 50 Julius Baer Strategy Balanced

-1.59%


EWM Model Portfolio – Ytd performance

• Total Return (Ytd1): -1.59% vs. -1.12% Benchmark2

• Standard Deviation (Ytd1): 3.01% vs. 5.09% Benchmark2

• Downside Risk (Ytd1): 2.33% vs. 3.89% Benchmark2

• Sharpe Ratio (Ytd1): -1.20vs. -0.59 Benchmark2


2 Benchmark = 5% Fed Funds + 43% JPM Global Aggregate Bond Index + 38% MSCI World + 4% S&P GSCI + 10% HFRI FoHF

-4%

-3%

-2%

-1%

0%

1%

2%

3%

4%

Dec 17 Jan 18 Feb 18 Mar 18 Apr 18 May 18 Jun 18 Jul 18 Aug 18 Sep 18 Oct 18 Nov 18

MWM Balanced USD Benchmark


EWM Model Portfolio – Historical performance (1)

• Total Return (1 year1): -0.69% vs. 0.22% Benchmark2

• Total Return (3 year1): 5.26% vs. 16.06% Benchmark2

• Total Return (Since Jan 121): 25.66% vs. 37.52% Benchmark2



-20%

-10%

0%

10%

20%

30%

40%

50%

Dec 1

1

Mar

12

Jun 1

2

Sep 1

2

Dec 1

2

Mar

13

Jun 1

3

Sep 1

3

Dec 1

3

Mar

14

Jun 1

4

Sep 1

4

Dec 1

4

Mar

15

Jun 1

5

Sep 1

5

Dec 1

5

Mar

16

Jun 1

6

Sep 1

6

Dec 1

6

Mar

17

Jun 1

7

Sep 1

7

Dec 1

7

Mar

18

Jun 1

8

Sep 1

8

MWM Balanced USD Benchmark Difference


EWM Model Portfolio – Historical performance (2)

• Standard Deviation (1 year1): 2.93% vs. 4.94% Benchmark2

• Downside Risk (1 year1): 2.28% vs. 3.79% Benchmark2

• Sharpe Ratio (1 year1): -0.86 vs. -0.40 Benchmark2

• Var 95% - 1day (1 year1): -0.34% vs. -0.52% Benchmark2



-5.0%

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

Ja

n 1

2

Ap

r 1

2

Ju

l 1

2

Oct 1

2

Ja

n 1

3

Ap

r 1

3

Ju

l 1

3

Oct 1

3

Ja

n 1

4

Ap

r 1

4

Ju

l 1

4

Oct 1

4

Ja

n 1

5

Ap

r 1

5

Ju

l 1

5

Oct 1

5

Ja

n 1

6

Ap

r 1

6

Ju

l 1

6

Oct 1

6

Ja

n 1

7

Ap

r 1

7

Ju

l 1

7

Oct 1

7

Ja

n 1

8

Ap

r 1

8

Ju

l 1

8

Oct 1

8

MWM Balanced USD Benchmark

This document is for information purposes only and does not constitute, and may not be construed as, a recommendation, offer or solicitation to buy or sell any securities and/or assets mentioned herein. Nor may the information contained herein be considered as definitive, because it is subject to unforeseeable changes and amendments. Past performance does not guarantee future performance, and none of the information is intended to suggest that any of the returns set forth herein will be obtained in the future. The fact that EWM can provide information regarding the status, development, evaluation, etc. in relation to markets or specific assets cannot be construed as a commitment or guarantee of performance; and EWM does not assume any liability for the performance of these assets or markets. Data on investment stocks, their yields and other characteristics are based on or derived from information from reliable sources, which are generally available to the general public, and do not represent a commitment, warranty or liability of EWM. The information contained herein: (1) is proprietary to Mora Wealth Management AG (“MWM”); (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. MWM is not responsible for any damages or losses arising from any use of this information.

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