Download Newsletter April 2010 - PNM Financial Management

1st May 2010
Market View
Overview
The economic optimism that greeted the New Year receives a setback as dark clouds
gathered during the past few weeks. This shift in mood was partially triggered by signs of
economic confidence beginning to taper off but was really sparked by increasing fears of a
sovereign debt crisis. The catalyst was Greece’s credit downgrading due to its unsubstantial
debt profile and falsifying of fiscal records. This sparked a general sell-off across the
peripheral Euro bond markets and briefly undermined the wider markets as well. Added to
these concerns was the tightening in monetary policy in China and India, the strongest
global economies through the crisis period – and the first concrete outline to President
Obama of a new regulatory regime for the financial sector. The underlying tone is one of a
low growth recovery necessitating a prolonged period of policy accommodation despite
concerns over public debt and in some cases fears of higher inflation. It is critical for policy
makers to avoid the mistakes the Japanese authorities made which has condemned their
economy to admit two decades of deflation.
Base Rate
The Bank of England has held the bank base rate at 0.5% while adding no new funding for
the Quantitative Easing programme (Q.E). the Q.E plan will remain fixed at £200 Billion for
the time being, having seen no increase in scale since November 2009. With the General
Election set for May 6th this reaction showed a display of Strict Neutrality by the Monetary
Policy Committee. The next decision on the base rate will be made May 10th.
Outlook
After the strong performance of global stock markets and corporate bonds over the past six
months, and indeed since March 2009, many investors are rightly asking what next? Can we
expect to see the same levels of return over the next six months? Of course, we cannot say
for sure what lies ahead, but the ability of the world’s economy to survive one of the toughest
periods in history and make such large strides in a relatively short space of time is
encouraging. The willingness of governments worldwide to do everything in their power to
save the economy from depression is another reason to be hopeful about the future.
Some caution is needed though since there are still lots of unresolved issues as we go into
the second half of 2010, most notably what will happen once the authorities begin to scale
back their financial support. While powerhouses like China and India might be able to
comfortably accommodate such a move, there is real concern about what impact higher
interest rates would have on more developed nations, especially given the record levels of
government borrowing in some countries and still fragile economic activity.
PNM Financial Management Website
Our new website www.pnmuk.co.uk is now ready to go live. Here you can find up-to-date
information and links to various websites.
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Market Watch
What a change a year can make!
April marks a year since the FTSE 100 hit a 6 year low to stand at 3512. This low point was
the end of a six month slide that saw the index of the UK’s biggest companies lose 37
percent over its value as the financial crisis took hold.
UK Equities have rebounded strongly since then and the FTSE has risen by over 60%.
Over the medium term UK Equities still remain attractive despite the size of the budget
deficit, high Levels of personal debt and increasing speculation over a hung parliament in the
coming election.
Election Effect on the Stock Market
Over the past 50/60 years there is little evidence to suggest the outcome of the election
affects the stock market’s ability to prosper. Stock markets tend to ignore politicians and go
their own way. We must not forget that over 50% of earnings from FTSE 100 companies are
now derived overseas. This goes some way to explaining stock markets lack of interest in
the election.
ISA’s Increase in Contributions
As from 6th April 2010 the maximum that can be invested into an ISA has risen to £10,200.
Benefits:
1. No Capital Gains Tax
2. You can take income without having to declare this on your tax return.
Fidelity International have carried out an analysis which showed that investors who use their
ISA allowance earlier in the tax year could be thousands of pounds better off.
Investing earlier rather than later in the tax year simply gives your money more time to grow
in the market over the long run.
Put another way, more of your money is sheltered from the tax man longer!
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Asset Allocation and Asset Class Overview
Developed Markets Equities: the equity markets should profit from growing M&A activity,
favourable monetary policy conditions, widening margins giving low financing costs,
moderate wage growth, restructuring benefits and rising demand.
Emerging Market Equities: Buoyant domestic demand and reviving exports promise strong
earnings growth in many emerging markets.
Fixed Income – Sovereign Bonds: The bond markets should remain vulnerable despite a
favourable short-term inflation outlook. A major risk is posed by the phasing out of quantitive
easing (less demand) coupled with growing supply (steep rise in government debt). Euro
zone bonds are likely to come under pressure from rising supply and higher risk premiums
(debt problems in the periphery and implicit bailout obligation on the part of the larger
countries).
Fixed Income – Corporates/Credits: Corporate bonds are unlikely to repeat their
exceptionally good performance in 2009 this year in an environment where interest rates are
set to pick up again globally. Nonetheless, positive returns are expected; high-yielders are
attractive as the spreads versus sovereign bonds are still higher than at the time of the
Lehman collapse.
Property / Infrastructure: the global property markets should see a further stabilisation in
2010. As there are still risks, investors should focus on quality properties in prime locations
on long-term lease.
Commodities / Foreign Exchange: driven by the recovery of the world economy and the
growth in the emerging markets, rising demand for commodities and generally firmer
commodity prices are expected. But the price rise is expected to be much lower than last
year.
Risk and burdens posed by public finances in the EU, possible contagion effects and moral
hazard (Greece’s problems spreading to other periphery countries) should now be largely
priced into the EUR/UD exchange rate. During the course of the year, the USD’s
fundamental advantages (stronger growth and interest rate advantage) should gain in
importance.
Private Equity: private equity deals should continue to pick up in 2010 on the back of the
increased need for corporate restructuring and funding.
Absolute Return / Hedge Funds: a robust performance is expected from the hedge fund
industry again in 2010. A balanced strategy and professional manager selection are crucial.
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Fund Information - 2010

Invesco Perpetual Corporate Bond (Sterling Corporate Bond)
Paul Read and Paul Causer believe the conditions for corporate bonds remain supportive,
given low interest rates and inflation. They do not, however, expect the higher quality
investment grade bonds to repeat their strong gains of 2009. They are currently seeing
attractive opportunities in insurance and financial bonds, but feel that the more defensive
sectors like utilities are less attractive than they were six months ago.

M&G Strategic Corporate Bond (Sterling Corporate Bond)
In 2009, corporate bonds saw one of their best years in decades - capital values have
increased and yields have fallen from their highs. Despite this, Richard Woolnough is
optimistic about further growth. He believes inflationary pressure is relatively muted, which
should prove supportive of bond valuations. One area where he is cautious is government
bonds which could underperform given the large amount of issuance expected

Standard Life Higher Income (Sterling High Yield)
Going into 2009, the fund was defensively positioned and had a large exposure to gilts. As
the outlook for the economy improved and the risk of companies defaulting on their debt fell,
Erlend Lochen gradually increased the fund's exposure to higher risk high yield bonds. While
these have staged a rally, their yields remain attractive. Careful bond selection will be crucial
going forward as we are likely to face slow economic growth.

Invesco Perpetual Monthly Income Plus (Sterling Strategic Bond)
High yield bonds have recovered strongly but the managers believe there is still scope for
further gains from current levels. Many of these bonds are still offering double-digit yields
and opportunities remain even after the strong rally. Within investment grade bonds, the
managers do not expect a repeat of last year's gains, but the underlying conditions of low
inflation and low interest rates should support prices

M&G Optimal Income (Sterling Strategic Bond)
Richard Woolnough believes there is little risk of inflationary pressure and interest rates will
remain low. In this environment, corporate bonds still have room to make good progress
despite their strength over the last year. The fund currently has around 70% invested in
higher quality investment grade bonds and 20% in higher risk high yield bonds. He is less
optimistic about gilts and therefore has minimal exposure.

Allianz Pimco Gilt Yield (UK Gilt)
The fund aims to maximise total return consistent with preservation of capital and prudent
investment management primarily through investment in British Government securities.

Henderson Index Linked Bond (Index Linked Gilts)
The investment object for this fund is to provide a return by investing primarily in United
Kingdom Government issued Index Linked Securities. The fund may invest in other
transferable securities, money market instruments, derivatives and forward transactions,
deposits and units in collective investment schemes.
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
M&G Global Macro Bond (Global Bonds)
To maximise long term total return (the combination of income and growth of capital).

Threadneedle Absolute Return Bond (Absolute Return)
To achieve a total positive return in all market conditions through exposure to the global
bond markets. The fund will invest primarily in, derivatives, cash and near cash, fixed
interest securities, index linked securities, money market instruments and deposits. At times
the portfolio may be concentrated in any one or a combination of such assets. The manager
may take long and short positions through derivatives in such issues.

Aviva Investors Property Trust (Property)
Recently my opinion of commercial property has turned more positive. Whilst this fund has
fallen with the sector as a whole, the management team is experienced and should
capitalise on any recovery.

JPM UK Dynamic (UK All Companies)
This fund has returned to form over the last six months after underperforming during 2008.
Its main holdings are larger companies such as BP, HSBC and GlaxoSmithKline

Old Mutual UK Select Mid Cap ICVC (UK All Companies)
Richard Watt believes economic conditions will show modest improvement, leading to
gradual stock market gains this year. With this in mind he has retained exposure to the
fund's economically sensitive companies as well as diversifying the portfolio towards more
defensive businesses. Moreover, he is focusing on companies with overseas earnings, for
which the growth prospects look stronger than those companies relying on domestic
consumption.

Rensburg UK Select Growth (UK All Companies)
Following the strong run in the stock market in 2009, Mark Hall has taken profits from some
holdings more sensitive to the economic climate, reinvesting in areas of the market he
believes are overlooked and undervalued. These include defensive sectors like tobacco
which have relatively resilient revenues and cash flows. He believes that the outlook for the
UK economy is uncertain in 2010 and a more defensive stance should prove rewarding.

Schroder UK Mid 250 (UK All Companies)
A good year for this fund as medium-sized companies outperformed during a strong market
recovery. Managed by a highly experienced team who should serve investors well over the
long term.

Jupiter Income (UK Equity Income)
Tony Nutt believes economic recovery is likely to be slower than anticipated as both
government and individuals alike aim to pay down debt. In this environment, he believes the
shares of larger companies with sustainable dividends are likely to be re-rated by the market
and increase in value.
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These include the telecommunications company Vodafone and pharmaceutical company
AstraZeneca, whose overseas revenue makes them especially attractive.

Marlborough Special Situations (UK Smaller Companies)
Over the last six months Giles Hargreave has been finding an increasing number of
opportunities in the market. This is reflected in the fund; the number of holdings increasing
from 162 to 199 as a direct result, many of which are smaller companies. Companies have
cut costs and improved their finances, putting themselves in a position to deliver strong profit
growth regardless of the poor state of the UK economy.

M&G America (North American)
Whilst many economic indicators have turned positive, Aled Smith believes the current
recovery is fragile. He does not generally take views on which sectors will outperform,
preferring to focus on identifying opportunities at a company level. Recent performance has
been aided by the fund's exposure to the pharmaceutical sector, which has benefited from
some takeover activity. The fund's bias in medium-sized companies could drive returns in
2010.

Schroder US Smaller Companies (North American Smaller Companies)
Jenny Jones believes the US Equity market is likely to be volatile in the next couple of
months, as the economic downturn is expected to last longer than recent recessions.
However, given the magnitude of the selloff we have experienced, share prices offer
attractive value.

Fidelity European (Europe Excluding UK)
Sam Morse, the new manager of the Fidelity European Fund, took full control from Tim
McCarron on the 1st January following a two month handover period. The objectives of this
fund are to achieve long term capital growth from a portfolio primarily made up of the shares
of continental European companies. The portfolio is likely to have a bias towards medium
sized and smaller companies.

Henderson (New Star) European Growth (Europe Excluding UK)
The manager of this fund is one of the best and most experienced in the sector. He currently
favours defensive companies that have so far been left behind in the market rally.

JPM European Smaller Companies (European Smaller Companies)
This is a higher risk sector, although JPM attempt to mitigate some of the volatility through
diversification. Industrials make up the largest part of the portfolio.

First State Asia Pacific Leaders (Asia Pacific Excluding Japan)
This fund focuses on high quality businesses with good cash flow. As these companies'
share prices were somewhat left behind in last year's rally, the fund has underperformed its
peers. We believe that 2010 will be a more difficult year, and will see a reversal of this trend.
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We are optimistic that when the focus returns to quality, this fund will be well-rewarded and
make up for its short-term underperformance.

First State Global Emerging Market Leaders (Global Emerging Markets)
The fund is more conservatively positioned than a year ago because Jonathan Asante
believes that valuations in many emerging markets are high. He is therefore wary of bubbles
being created in some areas. He favours higher quality businesses in the consumer sectors
and also has some exposure to gold. This defensive positioning has meant the fund has
underperformed in the last year, but we think it is well positioned to outperform in 2010.

Gartmore Emerging Markets Opps (Global Emerging Markets)
Chris Palmer believes that the world has entered recovery and has been adding positions in
more economically sensitive areas such as consumer goods and IT. He also favours Brazil,
Korea and Taiwan.

JPM Natural Resources (Specialist)
Commodities had a strong run in 2009, but Ian Henderson is adopting a balanced approach
as we move into the new decade. On the one hand, the fund is focused on base metals (the
price of which is more sensitive to economic sentiment), and on the other he maintains
exposure to gold, which offers some defensive characteristics during times of uncertainty.
We expect this positioning to be effective whilst the economic backdrop remains unclear.

BlackRock Gold & General (Specialist)
As economic uncertainty continues, investors could continue to see gold as a defensive
investment. The fund is focused on companies that are growing production. In an
environment of dwindling supply, these companies are expected to outperform. Evy Hambro
has also been building a small position in platinum where demand has increased, particularly
in the car industry which uses platinum in catalytic converters.

Neptune Global Equity (Global Growth)
Robin Geffen is especially keen on emerging markets, particularly those companies which
can benefit from increasing domestic consumption. In many parts of the developed world,
economic uncertainty continues, and much of the fund's exposure here is therefore in
companies that can benefit from emerging market growth. Elsewhere, the focus is on high
quality businesses thought able to weather difficult conditions.
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Changes to Portfolios
Each portfolio has been constructed to provide diversification across multiple asset classes
including Equities, Bonds, Commodities and Absolute Return Funds.
The first quarter of 2010 was a roller coaster ride for risk markets initially rising through the
first part of January only to correct significantly through to the middle of February as
sovereign debt risks became very elevated.
This was followed by a rally into the later part of this quarter. This is when Absolute Funds
came into their own.
Going forward I believe that economic uncertainty will persist, and we are likely to observe
occasional bouts of market volatility. Therefore funds that have the ability to manage
downside risks are likely to remain attractive, and so the Absolute Return sector should
benefit as a result.
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