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Thesis

Asset Allocation January 2016

2015 performance Mandate 5 of 7 attribution compared to WMA Balanced – full year 2015 -60 -40 -20 0 20 40 60 80 620 All our mandates strongly outperformed UK their benchmarks during 2015. The securities model portfolio for mandate USA 5 of 7 had a total return of 8.42%, a Europe (Hedged) good distance ahead of the FTSE WMA Japan (Hedged) Balanced Index which returned 2.70%. EM & Asia

The returns to our asset allocation International positions were small and overall had a neutral effect on returns. Underweight UK property allocations to the US, Europe and Infrastructure the UK had a negative effect on Hedge funds performance, and the overweight allocations to emerging markets that Sovereign bonds was held for much of the year was also Corporate bonds a detractor. Much of this was offset Cash however by our overweight allocation to Japan and the international private ■ Weight (%) ■ Allocation (bp) ■ Stock selection (bp) Source: Thesis/Morningstar equity and small-cap exposure. The small remainder of underperformance Share index. Highlights have been have helped to raise valuations and caused by equity allocations was offset the price comparison site operator price/earnings ratios above 20 have by our infrastructure allocation and the Moneysupermarket, housebuilders not been uncommon. As economic zero weighting to gilts was offset by Berkeley and , and software conditions begin to make corporate our corporate bond allocation. firm which all returned earnings more difficult to foresee, over 50%, while retailer WHSmith, there is now a substantial risk to a Fund selections were generally good. kitchen supplier Howden, and insurer stock’s valuations from even a slight Our bond and alternative asset all returned over 30%. The miss of reported earnings or outlook fund blends were ahead of their biggest disappointments were mining versus the market’s expectations. In benchmarks as were the international firm Rio Tinto (-30.4%) and coating recent days Greggs, Restaurant Group and European equity selections and manufacturer (-22.6%). and Moneysupermarket have all been the decision to hedge our exposure to punished for results which were close the euro. Some of our more aggressive to expectations but were reported selections in the US and emerging January blues alongside slightly more cautious markets underperformed, while Japan management guidance. The start of suffered from our decision to hedge Prior periods’ performance records the US earning season has also been part of our currency exposure. soon turn to ancient history, and lacklustre, with little in the way of 2016 has presented a particularly genuine positive news. The majority of our outperformance challenging start to the year. Fears over was delivered from UK equity selection the pace of global growth have resulted A number of macroeconomic as our UK Equity Committee, aided by in sizeable equity market falls and fresh headwinds exist for equities. In our Thesis Equity Stock Screen (TESS) lows for many commodities. particular Asian economies are under process, had a very successful year. pressure. China’s growth is slowing; Half the stocks that have been on During recent years equity markets some deceleration is necessary as our buy list during the year delivered have been rising more as a result of its economy is rebalanced towards double-digit returns over the period multiple expansion then they have due domestic demand, but too great a we held them, against a total return to earnings growth. Share buy-backs, loss of speed would be worrying. The of only 0.98% from the FTSE All funded in many cases by borrowing, introduction of “circuit breakers” to

1 January 2016

China’s equity market at the start of Strategy banks and governments, which the year did not have a positive effect could shift sentiment in a more and had to be suspended. Debt levels Our recent positioning has prepared positive direction and cause a are a concern, and the lack of clarity on us reasonably well for market sharp shift upwards in markets. the direction of the Chinese currency volatility. We have held cash in It would be guesswork to try and has added to market uncertainty portfolios for some time in order time such action however and it is and elevated the risk of more explicit to moderate risk and to provide not central to our forecasts. The competitive devaluations. Emerging opportunities for reinvestment when Governing Council of the European market currencies are likely to come the time is right. In recent months Central Bank held back from further under continued pressure as US interest we have reduced our allocation to monetary expansion at its January rates rise. Banks with significant emerging market equities and added meeting, though the market reacted exposure to emerging markets have to hedge funds to take advantage of positively to hints that more could be come under selling pressure as a result. their potential to deliver uncorrelated forthcoming in March. Although Mark Hard commodities are likely to remain returns. In direct equity portfolios Carney has stated that UK rates are a hindrance for some time as a result we tilted our UK equity exposure unlikely to rise for some time, the of lower growth, and in particular the away from cyclical sectors such as probability of further stimulus from slower pace of capital spending in China, industrials and towards consumer the Bank of England is low, while causing demand to be lower than in stocks whose revenue is largely the Federal Reserve is unlikely to recent years. Energy prices are also generated from the more resilient change direction unless conditions destined for a protracted low period domestic economy. deteriorate sharply. This leaves the because of abundant supply stemming Bank of Japan and the People’s Bank from the development of shale drilling Our current thinking is that while of China with the greatest likelihood techniques and the resumption of oil equity markets have become of a surprise announcement. exports from the US and Iran. It is not considerably cheaper than they were easy to judge which of these risks are at their peaks last spring, we have Taking a medium-term view, with fully priced-in to current valuations. As a not yet felt sufficiently confident in multiple headwinds facing the global result a degree of caution is required on a quick and sustainable recovery to economy, markets are likely to remain an ongoing basis. commit additional capital to equities. volatile for much of 2016. We will We increased our equity weightings continue to monitor events closely in From current levels markets could in late August when markets were order to optimise clients’ portfolios move decisively lower or they could close to current levels and having not for the conditions. Volatility brings rally. That sounds facile, but the significantly lightened our exposure opportunities as well as risks and crucial point is that we would expect during the subsequent rally we believe active management can show its a significant movement but cannot be it is best to keep our remaining powder value in such periods. While we still sure of the direction. Given the current dry for now. Further falls are possible do not anticipate a recessionary levels of negative market sentiment and we anticipate that rallies will be market crash, the probability of we put a roughly equal probability unlikely to push indices as high as further falls has increased and we on each outcome. Markets have been October’s relief rally did, and might do not anticipate returning to an testing their previous support levels only last for a short time. We would overweight allocation to equities and have been seen to break down look to use a rally to take additional until we see either an improvement in into lower ranges. Closing index levels risk out of portfolios in the expectation prospects for corporate earnings or between now and the month end will that lower levels would subsequently see valuations which present a clear be watched especially carefully. A be retested. opportunity for gains. month-end figure below the previous support levels would most likely be Lower equity weightings would of taken by the market as a very bearish course act to dampen volatility and Matt Hoggarth signal. In contrast it is possible that preserve capital in any renewed or Investment Analyst buyers could return to the market in greater falls. The greatest risk to greater numbers, judging the negative this strategy would be the chance sentiment to have been overstated and of any concerted and potentially Email: [email protected] push the valuations higher again. coordinated action by central

2 January 2016

Current allocations Sector allocations 100 Sector 1 of 7 2 of 7 3 of 7 4 of 7 5 of 7 6 of 7 7 of 7 allocations

Equity 90 United Kingdom Large & Mid Cap 1.00% 14.83% 22.53% 32.37% 33.98% 36.97% 38.28% 80 Small Cap – – – – – – – 1.00% 14.83% 22.53% 32.37% 33.98% 36.97% 38.28% International 70 Large Cap 1.00% – – 1.55% 2.15% 2.50% 2.80% Small Cap – 0.50% 1.00% 1.80% 2.50% 3.75% 5.50% 60 Private Equity – 1.00% 2.03% 2.50% 3.25% 3.64% 4.72% 1.00% 1.50% 3.03% 5.85% 7.90% 9.89% 13.02% 50 Continental – 0.50% 1.30% 1.75% 3.00% 4.58% 6.18% Europe USA 1.67% 3.89% 4.97% 10.06% 13.30% 16.70%

– (%) Allocation Cumulative 40 Japan – 0.90% 2.38% 3.00% 6.00% 7.75% 9.50% Emerging & Asia – 0.50% 1.30% 2.00% 3.50% 4.21% 6.72% (ex Jpn) 30 Total Equity 2.00% 19.90% 34.43% 49.94% 64.44% 76.70% 90.40%

20 Alternative Assets UK Commercial 12.00% 12.00% 12.00% 8.50% 5.00% 5.00% – Property 10 Infrastructure 7.10% 5.50% 6.00% 4.40% 3.00% 3.00% – Hedge Funds 8.60% 7.25% 12.00% 8.00% 8.25% 9.00% 3.00% Total Alternative 27.70% 24.75% 30.00% 20.90% 16.25% 17.00% 3.00% 0 Assets

1 of 7 2 of 7 3 of 7 4 of 7 5 of 7 6 of 7 7 of 7 Fixed Interest Sovereign Bonds – – – – – – – ■ Cash Equities Corporate Bonds 69.30% 51.05% 30.00% 25.00% 14.00% UK Large – – Fixed Interest ■ and Mid Cap High Yield & – – – – – – – Sovereign Bonds EM Bonds ■ ■ UK Small Cap Corporate Bonds Total Fixed 69.30% 51.05% 30.00% 25.00% 14.00% – – ■ ■ International Interest High Yield and ■ Continental EM Bonds ■ Cash Europe Cash / Trading 1.00% 4.30% 5.57% 4.16% 5.31% 6.30% 6.60% Alternative Investments ■ USA Liquidity ■ UK Commercial ■ Japan Total Cash 1.00% 4.30% 5.57% 4.16% 5.31% 6.30% 6.60% Property ■ Emerging and ■ Infrastructure Asia (ex Jpn) Total 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% ■ Hedge Funds

Important Information This update is for information only and is not an invitation to engage in investment activity. Issued by Thesis Asset Management plc, Exchange Building, St John’s Street, Chichester PO19 1UP. Authorised and regulated by the Financial Conduct Authority (registration number 114354). Investors should be aware that the value of their investments and the income from them can fall as well as rise and they may not receive back the full amount they invest. Past performance is not a guide to future performance. Investments denominated in foreign currencies are subject to fluctuations in exchange rates which can be favourable or unfavourable. TAM1601_30

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