In the latter part of 2007, it was certainly easier to identify risk than identify value. The effects of the credit crunch, slowing economic growth, further banking write-downs and growing problems in UK property concerned us.
We feel that a cautious approach is still warranted. The economic and financial outlook remains uncertain, with economic pressures in the US and UK likely to worsen in the near term. Growth expectations in the US are being scaled back, while early 2008 UK company results suggest increased pressure on the consumer. Some debt markets remain constricted and significant write-downs continue to work their way through the banking system.
Seeking to offset these factors, central banks have injected an element of liquidity into the system, and are expected to further reduce interest rates to prop up growth. Western investment banks have boosted their balance sheets through partial share sales to Eastern sovereign funds. In the meantime, as central banks reduce interest rates, the risk of inflation remains.
We expect slower growth in the US and reduced growth in the UK and Europe. US recession is not our core view, but significant risks remain. Much depends on the health of the US stock market. We expect stronger growth from Asia than elsewhere, but are not convinced of the de-coupling argument. Should America fall over, it will be hard to stand up in Shanghai.
In uncertain times, the Midas multi asset approach reduces dependence on any given asset class, and within limits, enables us to vary the portfolio as seems expedient. The Midas Balanced Income fund’s returns are achieved without taking undue risk. In addition to its diversification, the Fund produces a healthy prospective gross dividend yield of 5.2%, despite a lower exposure to fixed interest than its peers in the Cautious Managed sector.
In terms of the fund’s approach, our cautious asset allocation view has been expressed through a defensive stance, emphasising more structured products and cash, reducing equity exposure and omitting UK property.
We have expanded in the area of structured products. Most investments made here have been short dated, and should hopefully generate double-digit income returns (12% to 21%) over six to twelve months, assuming no breach of protection.
Gold investments continue to provide attractive returns, supported by the US dollar revaluation and investor risk aversion. We have also introduced a new agriculture related investment. Further monies have been added to our existing hedge fund of funds holdings, which continue to deliver attractive returns through uncertain times.
Against the uncertain economic background, the fund remains underweight in equities in relation to its core position. Whilst valuations are not overstretched, there will be pressure on earnings forecasts and we find it difficult to see markets making headway in this context. Within the UK, we remain wary of more cyclical consumer stocks. Utility companies remain well represented in the portfolio, but we remain wary of general retailers.
The fund is underweight in bonds. We favour the shorter end of gilt and bond markets, where income has been higher and inflation risk is lower. We have added selectively to some specialist bond managers.
The Midas Balanced Income fund is essentially an enduring savings vehicle, structured to deliver attractive returns over the longer term. Our aim with the Fund is to return 8 -10% compound over the long term, with commensurately less risk than more aggressive funds.
Built on caution
The Adviser Fund Index (AFI) is
made up of the recommended portfolios of a panel of leading UK financial advisers and is based entirely on the funds those firms have actually recommended to clients.
The three AFI indices, aggressive, balanced and cautious, are intended to represent an ideal portfolio of funds for an individual in his 20s, 40s and 50s who is saving for a pension age of 65.
The Midas Capital Balanced Income fund takes a multi-asset approach to investing.