Moderately Adventurous Model Portfolio

Quarterly Report

All performance data shown above is sourced from Morningstar Direct. The performance of the overall Model Portfolio shown in the performance table above and the performances of the constituent parts of the Model Portfolio (shown in the table) are based upon data sourced from Morningstar Direct and represent a model only; they are not representative of an actual portfolio or fund. Past performance is no guide to the future. ‘Ptl’ stands for percentile and relates to the ranking of the fund within its IMA sector. CB stands for Custom Benchmark. The Custom Benchmark is based upon a composite of the indices/sectors shown above to represent the eValue FE asset allocation output. Morningstar OBSR Fund Ratings are subject to change at any time and without warning. Please see for the latest Ratings.

Moderately Adventurous Model Portfolio - Quarterly Commentary – Q1 2015

Key Facts

The Model Portfolio Service for Paradigm members was established in January 2009.

The asset allocation is sourced from Adviser Workstation (AWS). It is set by Morningstar Investment Management Europe and is based on Ibbotson’s proven ‘building blocks’ approach.

Morningstar Investment Management Europe populates the asset allocation with funds it considers appropriate and attractive as a result of its in-depth, qualitatively-driven research process.

The objective is to deliver a risk and return profile in each of the asset classes that is commensurate with the underlying markets, whilst seeking outperformance over the long-term.

Investment Objective

The investment objective, as provided by Ibbotson, is as follows: The Moderately Adventurous Portfolio is designed for investors with a relatively high tolerance for risk and a longer time horizon. These investors have little need for current income and seek above-average growth from their investable assets. The main objective of this portfolio is capital appreciation, and its investors should be able to tolerate moderate fluctuations in their portfolio values.

Asset Allocation1

1As at 30/06/2014

*Cash may be held in a money market fund or in a cash deposit. The Fidelity Cash fund is used in this model for the purpose of generating a performance track record for the Model Portfolio.

Performance from 31/12/2008 – to quarter end

The Custom Benchmark used to measure performance has been amended to better reflect the performance from fund selection over time. The new passive custom benchmark effectively populates Ibbotson’s strategic asset allocation with trackers, except for direct property where due to the lack of a passive option, the ABI UK Direct Property (Life) sector average is used as a proxy, and cash where LIBOR is used as a proxy. As at the end of the quarter the benchmark is composed of the following: 2% BBA LIBOR GBP 3 Months, 6% ABI UK Direct Property (Life), 3% FTSE Gilts All Stocks, 3% Markit iBoxx GBP NonGilts, 3% FTSE Index-Linked All Stocks, 4% Citi WGBI NonGBP, 35% FTSE All Share, 13% FTSE World Europe ex UK, 14% MSCI North America, 6% MSCI Emerging Markets, 5% MSCI AC Pacific ex Japan, 6% MSCI Japan. Please refer to the information in the footer below regarding performance. The performance chart shows the cumulative returns of the Model Portfolio and the Custom Benchmark, assuming a starting value of 100.

Recommended Changes

Asset allocation: Morningstar issued its annual asset allocation update in May 2015. The changes are:

Increase cash by 1%.
Decrease UK index-linked gilts by 1%.
Increase EM equities by 3%.
Increase Japanese equities by 1%.
Decrease UK equities by 1%.
Decrease North American equities by 2%.
Decrease Pacific Ex Japan Equities by 1%.

Fund selection: In addition the following changes to fund selection are recommended:

North America Equity

-Remove Baillie Gifford American

-Introduce Legg Mason CB US Aggressive Growth

Performance – Portfolio Constituents to 31/03/2015

The table below shows the performance of the overall Portfolio, on a model basis only, together with the performance of the custom benchmark. It also shows the performances of the underlying funds that currently feature in the Portfolio and relevant indices. The shaded rows show the performances of the constituent parts of the Portfolio.

Please be aware that this Model Portfolio does not incorporate any fund changes that are recommended in this document, i.e. it shows the positioning as it stood throughout the quarter and before any asset allocation and/or fund selection changes suggested at the end of the quarter. The performances shown are those of the retail share classes.

Fund / Weight (%) / Mstar OBSR Analyst Rating / Q1 2015 (%) / 2014(%) / 2013 (%) / 2012 (%) / Since Inception Annualised (%)
Avidity –Moderately Adventurous Portfolio / 100.0 / 6.64 / 5.46 / 16.15 / 9.43 / 10.60
CB Moderately Adventurous Portfolio / 6.16 / 6.17 / 14.86 / 9.12 / 9.82
IMA OE Mixed Investment 40-85 Shares** / 5.78 / 4.85 / 14.61 / 10.00 / 9.60
UK Equity / 35.0 / 5.66 / -0.32 / 23.11 / 11.88 / 12.12
AXA Framlington UK Select Opportunities / 7.0 / Gold / 5.57 / 0.01 / 28.78 / 10.56 / 16.01
CF Woodford Equity Income / 8.5 / Bronze / 8.61
Investec UK Special Situations / 6.0 / Gold / 4.96 / -1.23 / 25.76 / 14.98 / 13.81
M&G Recovery / 5.0 / Bronze / 3.80 / -9.59 / 14.13 / 8.71 / 9.75
Old Mutual UK Alpha / 8.5 / Silver / 4.36 / 1.24 / 31.13 / 22.78 / 14.48
FTSE All Share / 4.67 / 1.18 / 20.81 / 12.30 / 12.14
Europe Equity / 13.0 / 10.96 / 0.48 / 25.38 / 18.82 / 8.12
Henderson European Selected Opps / 7.0 / Silver / 11.71 / 2.56 / 26.57 / 20.35 / 9.19
Jupiter European Special Situations / 6.0 / Silver / 10.09 / -1.66 / 27.32 / 17.00 / 8.95
FTSE Europe ex UK / 10.56 / 0.16 / 25.18 / 17.82 / 7.91
North America Equity / 14.0 / 6.47 / 19.50 / 29.86 / 5.55 / 15.84
HSBC American Index / 6.0 / Silver / 8.71 / 21.36 / 30.41 / 7.96 / 15.91
JPM US Equity Income / 4.5 / Silver / 6.00 / 20.45 / 28.67 / 4.95 / 15.00
Schroder US Mid Cap / 3.5 / Siler / 4.76 / 17.88 / 32.65 / 3.51 / 16.02
S&P 500 / 6.03 / 20.76 / 29.93 / 10.91 / 15.98
Emerging Markets Equity / 6.0 / 4.79 / -0.90 / -1.18 / 17.97 / 13.05
Lazard Emerging Markets / 3.0 / Silver / 2.62 / 0.79 / -2.76 / 15.62 / 11.23
M&G Global Emerging Markets / 3.0 / Bronze / 6.96 / -3.50 / -1.98 / 15.99
MSCI EM (Emerging Markets) / 7.39 / 3.90 / -4.41 / 13.03 / 10.37
Asia Dev ex Japan Equity / 5.0 / 11.89 / 9.51 / 2.62 / 14.20
Fidelity South East Asia / 5.0 / Bronze / 11.89 / 9.51 / 2.62 / 14.20 / 13.24
MSCI AC Far East ex Japan / 9.64 / 7.81 / 2.00 / 16.70 / 13.15
Japan Equity / 6.0 / 16.43 / 3.24 / 23.41 / 3.48 / 6.14
Schroder Tokyo / 6.0 / Gold / 16.43 / 3.24 / 23.41 / 3.48 / 6.14
Topix / 16.07 / 2.68 / 24.67 / 2.82 / 4.36
Fixed Interest / 13.0 / 2.77 / 9.92 / -1.07 / 5.15 / 6.5
Fidelity Strategic Bond / 3.0 / Silver / 3.23 / 8.50 / 1.30 / 11.85 / 9.14
IMA OE £ Corporate Bond / 3.20 / 9.83 / 0.58 / 13.32 / 8.27
Markit Boxx GBP NnGit TR / 2.86 / 12.20 / 0.87 / 13.04 / 8.56
L&G All Stocks Indx Linked Gilt / 3.0 / Silver / 3.11 / 18.82 / .011 / 0.16 / 8.79
FTSE Index Linked All Stocks / 2.86 / 18.96 / 0.54 / 0.63 / 9.13
Royal London UK Government Bond / 3.0 / Silver / 1.78 / 11.03 / -4.90 / 1.72 / 4.57
FTSE Gilts All Stocks / 2.20 / 13.86 / -3.94 / 2.70 / 5.55
Invesco Perpetual Global Bond / 4.0 / Bronze / 2.93 / 3.73 / -0.38 / 5.47 / 3.62
Citi WGBI BonGBP GBP / 2.39 / 5.13 / -5.89 / -3.14 / -0.01
IMA OE Global Bonds / 1.81 / 4.40 / -3.02 / 7.38 / 4.50
Property / 6.0 / 1.62 / 13.32 / 4.21 / -1.58 / 3.52
M&G Feeder of Property Portfolio / 2.0 / n/a / 1.41 / 13.48 / 5.69 / 0.59
Threadneedle UK Property Trust / 4.0 / n/a / 1.73 / 13.71 / 4.21 / -1.58 / 3.58
IPD UK All Property Monthly / 3.01 / 19.31 / 10.90 / 2.35 / 8.39
Cash* / 2.0 / 0.03
Fidelity Cash / 2.0 / n/a / 0.03 / 0.09 / 0.07 / 0.17 / 0.24
ICE LIBOR GBP 3 Mnths / 0.14 / 0.54 / 0.52 / 0.99 / 0.89

Data is sourced from Morningstar Direct. Please be aware that adjustments to previously reported data can occur. This can be due to factors such as changes to tax treatments, income distributions, pricing or updated information from third parties.

**The IMA sector averages have been included for information purposes only, as per the request of Paradigm. The Model Portfolio is managed without reference to these peer groups.

*Cash may be held in a money market fund or in a cash deposit. The Fidelity Cash fund is shown here for the purpose of generating a performance track record for the Model Portfolio.

The estimated weighted yield of the Portfolio, based upon the most recently published yields as at the time of writing, was 1.73%. Source: Morningstar Direct.

Executive Summary

All performance data shown above is sourced from Morningstar Direct. The performance of the overall Model Portfolio shown in the performance table above and the performances of the constituent parts of the Model Portfolio (shown in the table) are based upon data sourced from Morningstar Direct and represent a model only; they are not representative of an actual portfolio or fund. Past performance is no guide to the future. ‘Ptl’ stands for percentile and relates to the ranking of the fund within its IMA sector. CB stands for Custom Benchmark. The Custom Benchmark is based upon a composite of the indices/sectors shown above to represent the AKG asset allocation output. Morningstar Analyst Ratings are subject to change at any time and without warning. Please see for the latest Ratings.

Market Summary

As has occurred in the last few years, 2015 started by failing to meet economic growth expectations. Global GDP growth appears to have slowed sharply during the first quarter, with first quarter estimates having fallen to an annualised rate of 1.5% from 2.2%, a significant decline compared to Q4’s 2.7% level. The drop can be attributed to weather-related weakness in the US economy and a notable slowdown in emerging markets, in particular China. In the UK, where a very uncertain general election is just round the corner, preliminary estimates have pointed to a weaker first quarter than first expected. However, this first estimate is likely to eventually be revised upwards in line with what PMIs and other surveys are indicating, which is that the underlying UK economy appears to be growing at a healthy 2.5% annualised growth rate thanks primarily to solid household consumption.
A major event over the period was the ECB’s announcement of a quantitative easing program in excess of EUR1tn which should serve to weaken the euro and bolster the European recovery. Meanwhile, recent central bank rhetoric in the US and the UK has pointed to rate rises occurring later than expected, probably not until late Q3 2015 in the US and 2016 in the UK. This environment was largely positive for most asset classes, in particular equities, where Japan and Europe ex UK were the standout performers. Although UK, US and EM equities underperformed Japan and Europe, they still recorded healthy mid-single digit quarterly returns.
Fixed income markets in the UK posted small positive returns but underperformed equities and continued to experience some volatility, with bond yields oscillating throughout the period. Partly as a result of a weak February, UK gilts posted small positive returns over the period and lagged versus corporate bonds.

Portfolio Performance Summary

Over the quarter,the Active Portfolio outperformed its custom benchmark. Since inception, the Portfolio has outperformed its custom benchmark, meaning that fund selection has added value over a passive alternative.
Within the equity portion, relative performance was boosted by the UK, US, Europe ex UK, Japan and Asia ex Japan equity fund blends which all outperformed their respective benchmarks. More specifically, the top contributors were CF Woodford Equity Income, Baillie Gifford American, Henderson European Selected Opportunities and Fidelity South East Asia.
Within the fixed income portion of the Portfolio, the outperformance from Fidelity Strategic Bond and Invesco Perpetual Global Bond was not sufficient to offset the impact from the relative underperformance from the Royal London UK Government Bond fund.

Market Outlook

Please note Morningstar OBSR is not mandated to tactically adjust the asset allocation of the Portfolio, so the below views are included for information purposes only.
Although 2015 is off to a very disappointing start from an economic growth standpoint, the good news is that Q1 should prove atypical being beset by a number of coincidental but considerable drags in a few major economies. Such slow growth probably understates underlying trends as the downturn in the US was mainly due to a number of temporary factors, the authorities in China aim to boost growth, while the recent stronger than expected outturn in Europe is encouraging. A global rebound is certainly the message from leading indicators. The latest OECD Composite Leading Indicator notes “positive change in growth momentum in the euro area and stable growth momentum in the OECD area as a whole”.
Overall, whilst we believe that equities should on balance outperform bonds and cash in the context of an improving macroeconomic backdrop, much of this appears largely reflected in current equity market valuations and positive earnings surprises are required for equity markets to make further headway. Greater market volatility is likely as numerous risks remain, such as a ‘Grexit’, Middle East unrest, a China hard-landing and further EM-related turbulence.

All performance data shown above is sourced from Morningstar Direct. The performance of the overall Model Portfolio shown in the performance table above and the performances of the constituent parts of the Model Portfolio (shown in the table) are based upon data sourced from Morningstar Direct and represent a model only; they are not representative of an actual portfolio or fund. Past performance is no guide to the future. ‘Ptl’ stands for percentile and relates to the ranking of the fund within its IMA sector. CB stands for Custom Benchmark. The Custom Benchmark is based upon a composite of the indices/sectors shown above to represent the AKG asset allocation output. Morningstar Analyst Ratings are subject to change at any time and without warning. Please see for the latest Ratings.

Market Summary

Economic Background

Although the dramatic 40% or so collapse in crude oil prices was the key The year began with considerable optimism that 2015 would be the year in which the global economy would eventually lift-off from its prior three year, sub-trend growth plateau driven by a coordinated expansion by the developed economies (DM) and despite a slowdown in emerging markets (EM). Once again, Q1 has disappointed, however, with GDP growth likely to report way below expectations at around 2.0%, one of the weakest quarters of the expansion to date. Whilst not wholly to blame, transitory factors that bedevilled the US economy, an ongoing slowdown in China and deeper than expected recessions in Russia and Brazil were the proximate cause.

Early expectations of 3% US growth had collapsed to nearer 1% by quarter end. A number of temporary problems, including harsh winter weather, West Coast port strikes and oil and gas cutbacks, together with a longer lasting appreciating dollar, have all taken their toll on forecasts. The effects are widely spread, afflicting consumer spending, despite supportive background conditions (strong income growth), as well as capex and net exports.

Forecasters’ scepticism of improving consumer trends evident in the second half of last year have proven unfounded as data from the euro area has provided most of the positive highlights for the global economy so far this year. Continuous upward revisions to GDP growth have lifted estimates for Q1 growth to around a 2.0% p.a. rate led by a strong turnaround in Germany and a region-wide improvement in business and consumer confidence. The latter was driven by a whole raft of tailwinds, from QE to lower oil prices which, to date, have offset increasingly concerning developments in Greece.

UK GDP data is subject to substantial revision evidenced by the latest Quarterly National Accounts showing the economy grew by 2.8% in 2014 (previously 2.6%). Current estimates for Q1 based on government figures suggest the economy may have slowed sharply at the start of the year to around a 1.5% p.a. rate. This is contrary to the message from survey data and retail sales, however, which indicate a pace some 1% higher. Of course, the general election is a source of considerable uncertainty but, as yet, there is little evidence business or consumer confidence has been affected to any great degree.

Japan’s rebound from recession has proven less than convincing with 1.5% p.a. growth in Q4 likely to be repeated in Q1. In particular, weak real income growth has caused a shortfall in household spending and led to downward revisions through the quarter. Similarly, February exports registered a sizeable drop which should ensure a substantial negative contribution from net trade.

GDP growth in China has slowed markedly in Q1, probably into a 5-6% q/q p.a. range. The scale and speed of the downturn has certainly concerned the authorities who have instigated further measures to support growth. Perhaps more important is the reform programme with a whole host of initiatives, particularly in the financial sector, including reducing risks from local government investment vehicles and easing problems in the housing sector.

That AP/EM is slowing has become increasingly evident through Q1 as China slowed and commodity affected/financially constrained countries, such as Russia and Brazil, hit recession. Given their size, in aggregate, it is inevitable EM must slow but it should also be noted that, outside of these countries, growth in most others, particularly in Asia, has held up well in Q1.

It is somewhat ironic to observe that even as growth slowed during Q1 and headline inflation fell sharply, in general, deflation fears subsided. This was partly due to central banks becoming even more accommodative, particularly the ECB’s aggressive QE programme, allied to signals that the US Federal Reserve will refrain from any near term hike in rates that could destabilize financial markets and economies.

Financial Market Background

With such a wide range of “shocks”, ranging from the implications of the oil price collapse to ECB QE, including slowing world growth, temporary deflation, a soaring dollar and rising geopolitical tensions, it is no wonder Q1 was a highly volatile period for financial markets. Perhaps the main surprise was that positive returns were recorded by most asset classes and, certainly for UK investors, sterling returns were much higher than most had anticipated.

Although divergent monetary policies amongst the leading central banks remained a key theme, background conditions became increasingly accommodative over the quarter. Firstly, the ECB’s QE programme delivered even more than anticipated, including buying bonds at negative yields, while weaker than expected growth and inflation in both the US and UK engendered a series of increasingly “dovish” FOMC and BOE/MPC commentaries that has delayed financial market expectations of policy tightening.

Having risen sharply last quarter, volatility in fixed income markets soared in Q1. Yields in US and UK government bond markets see-sawed throughout the quarter, particularly long dated maturities. Ten-year US treasury yields, for example, began the year yielding 2.17%, by the end of January they were 1.64% only to surge to 2.24% in early March. From a 10-year+ index perspective, this generated profits of 9% in January to be followed by a similar size loss during February and early March, swings larger than anything recorded in the US equity market since 2011! Excessive initial deflation fears priced into 5-year forward breakeven rates were swiftly retraced but the net result was still decent gains supported by the savings glut and a shortage of bonds. This was especially true for Europe where yields just kept on falling as ECB QE buying began in March, forcing yields ever lower and into negative territory. Indeed, it is estimated that more than a quarter of Eurozone government debt had a negative yield at quarter end.