WealthSelect Managed Portfolios quarterly report - June 2023 (Q2 2023)

A note from your portfolio manager

Equity markets continued to rally in the second quarter of the year driven by the same stocks and themes that worked in the first quarter – namely technology, and even more specifically, stocks with exposure to artificial intelligence (AI). Fixed income continued to lag with government bonds posting negative returns and gilts (UK government bonds) being particularly poor as inflation has remained stubbornly higher at home than in other economies.

‘Economic catastrophe’ avoided… for now

As the banking crisis from Q1 faded the debt ceiling debacle intensified and then reached its inevitable conclusion, increasing the limit and kicking the can down the road until after the next presidential election. Interestingly, the warning from the US Secretary of the Treasury, Janet Yelling, of “economic catastrophe” if a default were to happen will undoubtedly not be addressed until the new debt limit is reached.

A soft landing in the States

The other big story of the quarter was the drop in inflation in the US albeit still well above the 2% target of the US Federal Reserve (the Fed). This has allowed the “soft landing” economic scenario (interest rates have been raised just enough to bring down inflation without causing a severe economic downturn) to be reflected in the performance of US equity markets. Alongside this, unemployment rates remain low and consumer spending, alongside corporate earnings, have remained resilient.

More good news needed

The boost to equities from the additional liquidity provided to support depositors and the market started to fade in the second quarter and valuations are now considerably higher (as prices have advanced but earnings have not) than they were at the start of the year. Therefore, we think there needs to be more good news delivered to justify a further leg up in the rally.

UK equity

UK market struggles

The UK market struggled in the quarter and several factors can be considered as influencing this such as the lack of UK listed high-growth technology names compounded by the dominance of energy and materials stocks; inflation remaining stubbornly high; and the Bank of England raising interest rates again. The strength of sterling over the quarter also weighed on companies earning their revenue in US dollars.  Currency exchange rates impact investments in other countries, so when the dollar rises compared to sterling, this adds to returns; if it falls, this reduces returns.

Manager selection delivers performance

While UK equities posted a small loss, the underlying managers in the portfolio were able to outperform, and, in four out of the five holdings, drive positive returns in the period. The only fund to deliver a loss was the Quilter Investors UK Equity Large-Cap Income Fund.

Finding opportunities

The Quilter Investors UK Opportunities Fund (managed by Artemis) was a good example of the robust performance from our underlying managers. The fund has managed to eke out relative performance in each month of the quarter and built on its strong start to the year. The team’s focus on companies at various stages of the rehabilitation process allows it to be less driven by the machinations of monetary and fiscal policy but by the successful implementation of reforms within the businesses in which they invest.

Fixed interest

Bond yields rise

While the Fed paused its interest rate hiking cycle in June, as inflation in the States continued to moderate, it was not enough to stop bond yields rising. Closer to home the Bank of England continued to raise rates as inflation remained at significantly elevated levels.

Corporate bonds outperformed over the quarter, but not enough to drive positive returns. We utilised the underperformance in the gilt market to add to positions in the June rebalance alongside increasing our exposure to higher-quality corporate bonds.