November 2019: recent changes to our Smart Portfolios

At the start of November, we made changes to four out of our five Smart Portfolios. These changes were defensive in nature, as global economic growth appears to be slowing and geopolitical frictions have led to increased uncertainty.

The value of investments can fall as well as rise, and you may get back less than you invested. Past performance is no guarantee of future results

Strong performance against our benchmarks

Since we launched IG Smart Portfolios in February 2017, the performance of the portfolios has been strong during a challenging investment period. Over the last three years, we have seen both sustained periods of low volatility as well sharp stock market selloffs. Recently, global economic data has weakened and the US Federal Reserve has reversed its stance on monetary policy, cutting interest rates by a total 0.75% this year.

As you can see from the table below, our moderate, balanced, growth and aggressive profiles have all outperformed their respective benchmarks. As you go from the moderate to the aggressive portfolio the amount invested in stocks, otherwise known as equities, increases. Stocks are riskier than bonds, but over the longer term have typically delivered higher returns.This has also been true so far in 2019 and since our launch date.

2019 year-to-date Since launch (28 February 2017)
IG Smart Portfolio Benchmark IG BM Diff IG BM Diff
Conservative 3m Libor +1% 3.4% 1.5% +1.9% 2.5% 4.5% -2.0%
Moderate ARC GBP Cautious 9.1% 6.5% +2.6% 7.8% 5.8% +2.0%
Balanced ARC GBP Balanced Asset 11.9% 9.0% +2.9% 11.9% 8.2% +3.7%
Growth ARC GBP Steady Growth 14.0% 10.9% +3.1% 14.8% 11.4% +3.4%
Aggresive ARC GBP Equity Risk 15.5% 12.5% +3.0% 17.2% 13.5% +3.7%

Source: IG

As a reminder, the ARC GBP Private Client Indices that we use as a benchmark for our four multi-asset portfolios is a comparator benchmark, inviting you to compare IG Smart Portfolio returns with similar risk-rated investments. The ARC benchmarks are compiled using the net of fees performance data from many of the UK’s leading investment managers such as Coutts, Rathbones and Schroders.

Our conservative portfolio tracks the 3-month LIBOR rate + 1% and contains bonds and cash-like securities. This portfolio treaded water over 2017 and 2018 as the bond market struggled to digest the gradual interest rate hikes by the Federal Reserve (Fed) and other central banks. However, the sharp U-turn in Central Bank policy this year has increased demand for longer-dated bonds, contributing to rise in bond prices which has helped our conservative portfolio outperform its benchmark, year-to-date.

A gloomy economic picture, but corporate earnings remain steady

The rise in protectionism across the world has brought about a dramatic shift in the market environment. Macroeconomic uncertainty has risen as the range of potential economic and market outcomes has widened. The International Monetary Fund (IMF) said in its latest world economic outlook report that the US-China trade war has weighed on business investment. This can be seen in the US manufacturing data, which has been weakening over the last two years.

In contrast, the US consumer appears resilient. Consumer confidence remains strong, unemployment is at the lowest rate since the 60’s and earnings are comfortably exceeding inflation. The Fed has signalled that they are pausing their rate cutting cycle for now, but could cuts rates further if the data starts to show consumption deteriorating.

On the other side of the coin, a key concern for the both the Fed and for investment managers is if a fully blown trade war leads to high rates of cost-push inflation. This type of inflation is created by higher costs of production rather than rampant consumer demand. If inflation were to rise above its 2% target, the Fed would be forced to raise interest rates to combat inflationary pressure, which would simultaneously quash economic growth. Equities have typically been a good investment relative to inflation, as companies can pass on higher costs by raising prices.

Closer to home, Brexit remains unresolved and investors eagerly await the outcome of the upcoming general election (12 December) to see whether a change in political power can bring about a resolution to the UK’s withdrawal from the European Union (EU). This would only be the start though. According to political experts, the future relationship with the other 27 members will be even more awkward to negotiate.

Nevertheless, the latest corporate earnings out of the US suggest not all is bad. At the time of writing, around 40% of companies in the S&P 500 had reported earnings for third quarter (Q3) 2019. Factset found that 80% of these firms a positive earnings per share (EPS) surprise while 64% had a positive revenue surprise. Our general outlook on equities remains constructive, but we are aware of the mounting challenges that businesses face.

Figure 2: current asset allocation (as of 4 November 2019)

Asset allocation Conservative Moderate Balanced Growth Aggressive
Bonds 100% 68% 47% 34% 19%
Stocks 0% 28% 49% 64% 79%
Alternatives 0% 4% 4% 2% 2%

Source: IG

Overall, the portfolios are currently cautiously positioned but if a market event led to equity valuations becoming more attractive, we have the ability take on additional equity risk. We could fund this opportunity by selling some of the 'dry powder' in the portfolios, namely low-risk bonds and cash-like securities.

What were the recent changes to the portfolios?

For now, amid the decelerating economic backdrop, we have slightly reduced our exposure to equities in three of the profiles, but have left the weight in the aggressive profile unchanged. We did, however, increase the proportion invested in US and European equities whilst simultaneously reducing the exposure to UK and emerging market stocks.

Figure 3: changes to the equity part of the portfolios (as of 4 November 2019)

Change Conservative Moderate Balanced Growth Aggressive
North America - 5% 6% 4% 5%
UK - -5% -5% -3% -4%
Europe ex. UK - 2% 2% 1% 0%
Japan - 0% 1% 2% 1%
Asia-Pacific - 0% 0% 1% -1%
Emerging markets - -2% -4% -4% -2%

Source: IG

A key differentiator between our Smart Portfolios and other online wealth managers is BlackRock’s use of currency hedging, which helps to reduce the amount of currency risk in the portfolios. We recently increased the amount of overseas equity exposure that sees its returns hedged back into GBP. For instance, in our aggressive profile, 63% of the overseas equity exposure is now hedged back into GBP. Given that GBP remains close to multi-decade lows, if GBP were to appreciate against other major currencies the currency hedges would benefit portfolio returns.

In fixed income, given that interest rate cuts in the US have led treasury yields lower and a flattening of the yield curve, BlackRock have chosen to take some profit in shorter maturity treasuries and have opened a modest position in a 20-year US treasury bond exchange traded fund (ETF). This increases duration in the fixed income sleeve of the portfolios which would perform well if interest rates continue to be cut next year.

Lastly, our small position in gold remains unchanged. This have scope to be increased, especially if the probability of the cost-push inflation scenario outlined above were to rise.

Why choose an IG Smart Portfolio?

IG Smart Portfolios are a range of five risk-rated investment portfolios that are built using asset allocation insights from BlackRock, the world’s largest wealth manager. These are managed by IG to give investors a low-cost way to invest. Management fees start at 0.65% and fall to as little as 0.05% as your portfolio grows. You can start a portfolio with £500 and there are no set up, rebalancing or exit fees.

If you are thinking about investing in a Smart Portfolio or have any questions about your investments, we recently added a blog in the IG Community where you can ask IG’s portfolio managers. Alternatively, our Helpdesk is available 24 hours a day for any queries that you may have.

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