True Potential Portfolios Key Themes – October 2022

Our in-house experts on the Investment Management team manage the True Potential Portfolios to help you do more with your money.

Their three goals are to:

• Maximise returns within a risk profile ranging from defensive to aggressive

• Reduce risk of volatility

• Drive down the cost of ownership

Our team works with 9,620 experts in 162 locations around the world, using their on-the-ground expertise to make decisions about the asset allocation of the True Potential Portfolios.

October was a good month for the True Potential Portfolios with all ten Portfolios providing positive returns. You can see the past performance of the Portfolios at the bottom of this page.

What were the key themes in October?

• During October market implied interest rates have moved higher in the US. They were originally expected to peak next year at 4.25% moving closer to 5%. Expectations are that core inflation will remain stickier and thus a challenge for a longer period.

• It was a turbulent month for UK politics and asset prices with ten-year UK gilt yields starting the month at 4.1%, peaking at 4.45% and finishing the month at 3.53%. The removal of the unfunded tax cuts proposal and a change of Prime Minster has led to less volatility and strong returns from UK Gilts and Sterling over the period. The UK has experienced the opposite to the US, expectations for interest rates into 2023 have declined with a changed political environment and a focus on fiscal prudence.

• In respect of economic growth, we believe growth will slow below trend this year. Whilst global recession risks for 2023 have risen, this is not yet a given. Labour markets remain strong and despite the drawdown, households continue to have excess savings and a willingness to use credit facilities.

• The US Dollar is up 16% trade-weighted, year to date. Factors supporting the Dollar include the Federal Reserve’s earlier, more aggressive, moves in the rate hiking cycle. The US, in absolute terms, is currently at a higher level of interest rates compared to the UK, Europe, and Japan. Our view is one of support for the Dollar to remain in the near term.

• Weakness in the Pound has been a key feature since our last meeting, though some of this pressure has eased.

• Valuations across equities, sovereign bonds, credit, and real yields are more attractive than at the beginning of the year.

• For equities, prices are lower than the start of the year. At present, analysts have been slow in revising earnings projections and we anticipate earnings to adjust downwards as we move into 2023.

• Within fixed income, the valuation opportunity is more compelling relative to the beginning of the year. Spread levels, the amount of extra yield an investor requires to hold corporate fixed income over government bonds, have significantly increased since the start of the year. Spreads on UK Investment Grade have widened from 1.11%s to 2.52%. For sovereign bonds, yield levels have risen significantly since the start of the year. In the case of the UK, 10-year UK gilt yields have increased from 0.97% to 3.49%.

• So far in 2022, alternatives, notably trend and certain long/short products, have provided diversification through lower volatility and a positive return helping to cushion drawdown. We continue to favour their role as a diversifier but note favourable opportunities in other asset classes.

Bringing those components together, we continue to believe prudent positioning is suitable for the near-term environment. Many of our fund manager partners are adding to fixed income, particularly through Bonds with a shorter term to maturity, where they believe the yield on offer is attractive. Fixed income is the key asset class where we believe the opportunity has improved and continue to hold alternatives as a diversifier within portfolios.

What changes have we made to the True Potential Portfolios?

Taking into account the themes from the month and our view for the future, we made active changes to the following Portfolios:

• Balanced
• Balanced Income
• Growth
• Growth +
• Aggressive

Where no change has been made, this is due to our conviction that the Portfolio is positioned optimally.

Additions to Portfolios

Growth Aligned
This fund range is well positioned with our investment outlook. The fund successfully navigated the challenges within fixed income markets and holds alternative products which have the potential to offer true diversification.

SEI
Aligns with our view of retaining equity exposure whilst helping to manage volatility through minimum volatility equity products.

UBS
Further diversification by geography and asset class and to increase yield (Balanced Income only).

Reductions to Portfolios

UBS
With this change, we have reduced exposure to longer dated UK government bonds and their alternative product which is positioned for a weaker US Dollar and stronger Japanese Yen.

Allianz
Allianz has a more negative outlook and positioning compared to our view.

Threadneedle
Exposure has been moderated ahead of the retirement of Richard Colwell as we spend time with the new equity manager, Jonathan Barber.

What changes have our fund manager partners made?

Although we have made no changes to some Portfolios, examples of changes that have been made by our fund manager partners are below. In line with our view, fixed income as an asset class has been increased.

7IM – Reduced emerging market equities and bought developed markets. Added to global corporate bonds from US mortgage-backed bonds.

UBS – Added to FTSE 100 by reducing S&P 500. Rotated from UK gilts to German bunds.

Growth Aligned – Bought shorter dated UK gilts. Continuing to add to UK corporate bonds.

Waverton – Bought US inflation linked bonds.

In addition to this monthly update, you can watch our daily Morning Markets videos by subscribing to the True Potential YouTube Channel.

With investing, your capital is at risk. Investments can fluctuate in value and you may get back less than you invest. This blog is not financial advice or a personal recommendation.

Performance

Launched 1 October 2015. *Income subject to revision in the current market environment. Yield figure indicated on this page is the forward-looking 12-month yield, net of charges and UK withholding tax. Personal dividend tax charges may still apply and is subject to individual circumstances.

With Investing, your capital is at risk. Investments can fluctuate in value, and you may get back less than you invest. Past performance is not a guide to future performance. This blog does not constitute a personal recommendation or financial advice.