Cautious Portfolio Fact Sheet

Markets sold off as investors turned cautious, weighing on the portfolio’s equity and property holdings. Rising government bond yields weighed heavily on interest-rate sensitive areas of the market, with Gravis UK Listed Property selling off, after a period of strong performance. US equity markets gave back the modest gains made year-to-date, reflected in the weakness of HSBC American Index Fund and JP Morgan American Investment Trust, while Artemis UK Select and Edinburgh Investment Trust, retreated alongside broader equity weakness.

Not all equity holdings struggled, however. An allocation to Vanguard’s FTSE All-Share tracker benefitted from its defensive exposure to material and energy, rallying in response to supply-chain bottlenecks.

Within fixed income, the portfolio’s allocation was more resilient. Meaningful allocation to shorter-duration, inflation-linked and absolute return-oriented bond funds limited losses, in a market environment where bond duration offered little protection against rising inflation expectations.

Overall, it was a tough quarter across most asset classes, but the portfolio was cushioned somewhat by its more cautious fixed income positioning when equity markets came under pressure.

At the time of writing, a ceasefire between the US and Iran is in effect, whether it holds up is to be seen, but markets have breathed a sigh of relief for the time being. Equities have broadly re-traced the losses brought by this conflict, with all major large-cap indices posting positive year-to-date returns. Despite this, volatility in the commodities market remains high, and the inflationary impact of potentially structurally higher energy costs is yet to be seen. Interestingly, US tech, known for being richly valued, is currently trading on its lowest 12-month forward valuation premium level over other sectors since mid-2020.

In the UK, 10-year Gilt yields have recovered somewhat to around 4.8%, having nearly breached the 5.0% level at the height of the conflict. At the shorter end of the curve, the market is now pricing in one 25 basis point rate hike, compared with more than three at the peak of the crisis. Bank of England Governor, Andrew Bailey, has described current events as a major energy shock whose duration will be key for future inflation.