Annual Short Report. for the year ending 30 September City Financial Investment Fund Series III City Financial Multi Asset Diversified Fund

Transcription

1 Annual Short Report for the year ending 30 September 2015 City Financial Investment Fund Series III City Financial Multi Asset Diversified Fund

2 Corporate Information Authorised Corporate Director City Financial Investment Company Limited (Authorised and regulated by the Financial Conduct Authority) Head Office: 62 Queen Street London EC4R 1EB Telephone: Fax: Website: Directors of the ACD R.C. Hain, A.N. Williams, J.P. Hollihan M.L. Stein, D.R. Beatty, L.S. Aggarwal Investment Manager City Financial Investment Company Limited 62 Queen Street London EC4R 1EB (Authorised and regulated by the Financial Conduct Authority) Depositary BNY Mellon Trust & Depositary (UK) Limited (Authorised and regulated by the Financial Conduct Authority) Registered Office: The Bank of New York Mellon Centre 160 Queen Victoria Street London EC4V 4LA Principal place of business: One Canada Square, 43rd Floor London E14 5AL Administrator and Registrars Capita Financial Administrators Limited Customer Service Centre: 2 The Boulevard City West One Office Park Gelderd Road Leeds LS12 6NT Telephone: Fax: (Authorised and regulated by the Financial Conduct Authority) City Financial Multi Asset Diversified Fund The Fund s investment objective and policy The investment objective of the City Financial Multi Asset Diversified Fund ( the Fund ) is to achieve consistent long term returns from both capital and income by investing across a diversified global portfolio of assets. The Investment Manager uses a global asset allocation framework to invest across a diversified range of asset classes, geographies, sectors and investment styles. The portfolio invests in a combination of specialist funds, ETFs, listed investment vehicles, individual securities and cash, and uses derivatives for hedging and investment purposes to both reduce market risk and enhance returns. As a consequence, the portfolio exhibits low correlation to traditional asset classes. Positions are generally held with a three to five year time horizon. However, the management of the portfolio is active and the investment strategy is liquid and dynamic in order to adapt to changing market conditions. Investment Manager s Report Market Background Independent Auditor Grant Thornton UK LLP 30 Finsbury Square London EC2P 2YU Buying and Selling of Shares: The Administrator will accept orders to deal in the shares on normal business days between 8.30am and 5.30pm (London time). Instructions to buy or sell shares may be either in writing to: 2 The Boulevard, City West One Office Park, Gelderd Road, Leeds LS12 6NT or by telephone on Report and Accounts: This document contains a short report of the City Financial Multi Asset Diversified Fund, a sub-fund of the City Financial Investment Fund Series III, for the year ending 30 September The full Report and Accounts for the Fund is available free of charge upon written request to City Financial Investment Company Limited, 62 Queen Street, London EC4R 1EB. Other Information: The information in this report is designed to enable you to make an informed judgement on the activities of the Fund during the year it covers and the results of those activities at the end of the year. Capital markets were unsettled over the period from 1 October 2014 to 30 September It was a period over which inflation remained subdued and central banks continued with extremely supportive policies, including quantitative easing measures in Japan and the Eurozone. Economic growth remained positive but unexceptional and ultimately failed the transition to a meaningfully higher trend. The policy support and optimistic 2015 growth forecasts supported equity and bond markets over the first part of the period. However, the patchy nature of global economic growth weighed increasingly on market performance, with disappointing data from key areas including the US and China. The plummeting oil price also complicated the global environment. It started the period under review at $87.11 and fell below $40, before ending at $ The heavy fall subdued headline inflation, undermining the short term case for interest rate rises and created pockets of distress in the US high yield bond market. Nevertheless, the expected positive impact on consumer spending was slow to emerge, meaning that the US economic growth has been anaemic over 2015 year-to 30 September In the Eurozone, Greece re-emerged as a significant issue in The country s debt crisis escalated beyond our expectations as the government s brinkmanship with EU authorities led it to default on an International Monetary Fund loan. We had correctly anticipated a brief pick-up in global economic growth momentum over the second quarter. 2 City Financial Multi Asset Diversified Fund Annual Short Report, 30 September

3 However, the issue contributed to weaker global investor sentiment in the early summer even though an existential crisis for the Eurozone was belatedly averted. Government bond markets performed well amidst falling inflation and deteriorating economic growth momentum. FTSE Gilts All Stocks Index rose +8.2% over the period but the gains were front-loaded. The asset class declined over the second six months to 30 September 2015 as the outlook for monetary policy became more uncertain in the US and the UK. Equities performance was mixed. All major markets sold off sharply in the final weeks of the twelve months ending 30 September 2015, including an unusually sharp drawdown in the second half of August. They suffered from growing evidence of a weakening economy and significant industrial over-capacity in China, which particularly affected emerging markets ( EM ) and commodities. US economic growth also slowed, jeopardising the outlook for corporate earnings at a time when expectations appeared elevated. The MSCI Emerging Markets Index fell -13.6% as a result of these issues. MSCI UK (-6.0%) and MSCI Europe ex UK (-1.6%) also fell. However, returns were positive from US and Japanese equities, with the S&P 500 returning +6.4% and MSCI Japan delivering +4.7%. They performed better in the first six months of the period, with the US supported by a stronger currency and Japan benefiting from monetary stimulus. Fund Performance The Fund returned +3.13% over the twelve months to the end of September 2015, based upon the performance of the A Accumulation share class. This compares to a return of +0.81% from the IA Mixed Investment 0-35% Shares sector average. The strong relative performance was driven both by good fund selection and by the successful implementation of tactical asset allocation strategies in bond markets. The Fund benefited from our constructive approach to government bonds over the first six months of the period. This positioning was predicated upon the assessment that economic data would not be strong enough to generate upward pressure on interest rates and that sovereign debt would benefit from a reset of interest rate expectations. Entering 2015, our proprietary risk models correctly warned of rising volatility in bond markets. As a result, we moved to a more tactical approach. This enabled us to participate significantly in the strong rallies in the first quarter while avoiding much of February s brief but sharp weakness in the asset class. In equities, our cautious approach towards EM was helpful. We were biased towards being underweight throughout the period. Fund selection was also very helpful in the UK and Europe ex UK. Our key holdings comfortably outperformed the regional benchmarks, with particularly strong relative performance from BlackRock European Dynamic and Ardevora UK Income. Despite the outperformance over the full year ending 30 September 2015, the Fund did underperform the sector average over the second half of the period. This was primarily due to an overweight in equities when the Greek crisis re-emerged in June An overweight in Europe ex UK equities relative to the US also weighed on returns. During the weak market performance in August, performance was more competitive as the use of hedging strategies helped the Fund perform approximately in line with its peer group. Portfolio Activity Over the past twelve months, the fixed income allocation has fallen materially. Our expectation of higher volatility in bonds in 2015 was led by our proprietary risk models and led us to hold a lower weighting in It also prompted a gradual shift towards alternative income and lending strategies such as VPC Specialty Lending Investments, Ranger Direct Lending and UK Mortgages. These investment trusts offered attractive yields and should benefit from bank disintermediation. We felt that traditional investment-grade and high yield bonds offered less value and so we phased out a number of holdings over the year ending 30 September 2015, including Man GLG Strategic Bond, City Financial Defensive Global Bond, Absolute Insight Credit and M&G Inflation Linked Corporate Bond. The equity allocation initially rose, but we became progressively more constructive following the moderate correction in September and October However, the implementation of a much more cautious outlook for the asset class in August 2015 meant that the final weighting in equities was moderately lower than at the start of the period in October Cash rose as a reflection of our conservative stance. Within equities, we emphasised European and Japanese markets as the year progressed. We believed that European growth momentum would exceed low expectations and, therefore, added to our holdings in BlackRock European Dynamic and Schroder European Alpha Income. In Japan, we have focused on a very specific small cap growth strategy, Legg Mason Japan, which has performed very well year-to-date in We cut our positions in US equities, notably Legg Mason ClearBridge US Aggressive Growth and SPDR S&P US Dividend Aristocrats UCITS ETF, as we felt the market was increasingly vulnerable to earnings disappointments. Elsewhere, we added two diversifying holdings, Summit Germany and Goldman Sachs Equity Risk Premia Long/Short. Summit Germany is a portfolio of German commercial properties with a high-quality and diversified tenant pool that produces a healthy yield. Goldman Sachs Equity Risk Premia Long/Short aims to capture positive factor performance (long) relative to the MSCI World Index (short). The five factors are quality, value, low beta, momentum and size. Its key attribute is its non-directional exposure, which means that it has a low correlation with equities and has a low volatility path of returns. These two characteristics made it a good addition to a low risk, diversified portfolio. 4 City Financial Multi Asset Diversified Fund Annual Short Report, 30 September

4 Outlook We hoped to gain clarity on the path of transitional improvement in financial conditions as we progressed in However, we believe that a number of extremely unusual structural features remain present. Additionally, we now face major uncertainties over US policy and the slowdown in China s economic growth. Until we can gain confidence over an improvement in Chinese growth, the Federal Reserve s ( the Fed ) intentions for interest rates and US corporate earnings, we should expect further major shocks. The potential for a marked global growth slowdown is rising in this noisy and confusing asset pricing environment. We still believe that the Fed want to raise rates sooner than later this year despite little evidence to justify such a move. Long positioning in the US dollar is still one of the most crowded trades in markets. If deflationary forces are to abate, US dollar strength will have to reverse into a trend of weakness in the last quarter of Whilst recent events have shaken out some of the investor complacency we warned of, we still believe that the last quarter will see another highly disruptive period for equities and bonds. Whilst we can see reasons for a short term rally in equities from heavily oversold conditions, we retain our relatively cautious medium term view. We are very conscious of the growing risk of policy error leading us further into a deflationary bias. We continue to place more emphasis on strategies that will protect against significant losses in bond, currency and equity markets. This included holding a high cash position and increasing our protective strategies in equity markets in August and September The combined effect of these measures means that we should be in a position to mitigate further major falls to the year end. Should equity markets sustain significant rallies, we are likely to lag in performance. All figures sourced from Morningstar Direct and Bloomberg, data range: 01/10/ /09/2015. Robert C. Hain, Chairman City Financial Investment Company Limited 4 December 2015 The Fund s performance vs IA Mixed Investment 0-35% Shares Sector 1-year Since launch* City Financial Multi Asset Diversified Fund IA Mixed Investment 0-35% Shares Sector * Launch date 8 November Source: Morningstar Direct to 30 September 2015, mid to mid based on A Accumulation shares which includes reinvested income. Top holdings % of fund Holding 30 September 2015 Holding 30 September 2014 Goldman Sachs EFI Long Short Risk Premia Portfolio class Z (GBP Hedged) 3x5 leverage UK Mortgages CATCo Reinsurance Opportunities DW Catalyst VPC Specialty Lending Investments TORO NB Private Equity Partners Summit Germany Ardevora UK Income Third Point Offshore Investors Sector spread of investments % of fund Global United Kingdom Europe United States Options Asia Pacific (ex-japan) Japan Futures Commodities Forward Currency Contracts Net other assets DW Catalyst CATCo Reinsurance Opportunities NB Private Equity Partners Royal London UK Equity Income Third Point Offshore Investors Ardevora UK Income Absolute Insight Credit TwentyFour Select Monthly Income Real Estate Credit Investments preference shares Boussard & Gavaudan Holding September September (0.13) (0.03) 0.45 (0.03) City Financial Multi Asset Diversified Fund Annual Short Report, 30 September

5 Distributions Share Class Interim 31 March 2015 Final 30 September 2015 Share Class Year Net asset value Shares in issue Net asset value I Income , , ,483,906 7,024, A Income A Accumulation I Income I Accumulation R Income R Accumulation I Accumulation ,444,978 17,094, ,636,031 20,464, R Income ,725 39, ,581 87, R Accumulation ,073,630 3,848, , , Price and income history Share Class Year Highest price pence Lowest price pence Distribution A Income 2013 (from 8 November) (to 30 September) A Accumulation 2013 (from 8 November) (to 30 September) I Income 2013 (from 8 November) (to 30 September) I Accumulation 2013 (from 8 November) (to 30 September) R Income 2013 (from 8 November) (to 30 September) R Accumulation 2013 (from 8 November) (to 30 September) Accounting and distribution dates Accounting Distribution Interim 31 March 31 May Final 30 September 30 November Ongoing charges figure Period ending 30 September September 2014* A shares 2.00% 2.14% I shares 1.09% 1.23% R shares 1.25% 1.39% * The Ongoing Charges Figure at 30 September 2014 was an estimate of the charges. An estimate was used rather than an ex post figure due to the Fund only being launched on 8 November 2013 and also a reduction in the Annual Management Charge of the R share class from 1% to 0.75% effective 9 January Net asset value as at 30 September Share Class Year Net asset value Shares in issue Net asset value 'A Income ,431,123 4,603, ,511,654 3,784, A Accumulation ,136,512 45,092, ,387,225 39,286, City Financial Multi Asset Diversified Fund Annual Short Report, 30 September

6 Synthetic risk and reward indicator Additional information on the City Financial Multi Asset Diversified Fund Lower risk Typically lower rewards Higher risk Typically higher rewards The risk category is based on the rate at which the value of the Fund has moved up or down in the past. Simulated and historical data is used in calculating the risk category and may not be a reliable indication of the future risk profile of the Fund. The risk category shown is not guaranteed and may change over time. The lowest category does not mean risk-free. The Fund is in risk category 4 as its price has experienced moderate rises and falls historically. Risk Profile: The Fund has little exposure to credit or cash flow risk. There are no borrowings or unlisted securities of a material nature and so there is little exposure to liquidity risk. The main risks it faces from its financial instruments are market price, foreign currency and interest rate risk. The ACD reviews the policies for managing these risks in order to follow and achieve the Investment Objectives. Risk Warning: Please remember that past performance should not be seen as a guide to future performance and that the value of an investment and the income from it can fall as well as rise and may be affected by exchange rate variations. Important Information: The phone numbers of the ACD, Administrator and Registrars are now changed. The updated phone numbers can be found in the beginning of this report. The prices of all shares are published on Prices of shares may also be obtained by calling during the Administrator s normal business hours. Please also refer to Additional Information on the City Financial Multi Asset Diversified Fund on page 11 of this report. 10 City Financial Multi Asset Diversified Fund Annual Short Report, 30 September

7 City Financial fund range City Financial Multi Asset funds We believe that multi asset enables maximisation of returns across a wide range of assets and helps to remove the specific risk of a particular country, sector or fund manager going through a poor period of investment return. City Financial Multi Asset Balanced Fund The Fund aims to achieve consistent long-term total returns from both capital and income. Sector: IA Mixed Investment 20-60% Shares. City Financial Multi Asset Diversified Fund The Fund aims to achieve consistent long-term total returns from both capital and income. Sector: IA Mixed Investment 0-35% Shares. City Financial Multi Asset Growth Fund The objective of the Fund is to achieve consistent long-term capital growth. Sector: IA Mixed Investment 40-85% Shares. City Financial Fixed Income funds We offer a range of fixed income funds that provide exposure to UK, European and Global fixed income securities, currencies and related derivatives. City Financial Defensive Global Bond Fund The Fund aims to deliver consistent returns with minimal volatility and low correlation to most asset classes through a diversified portfolio of global fixed income securities, currencies and related derivatives. Sector: IA Global Bonds. City Financial Diversified Fixed Interest Fund The investment objective is to generate a high level of income, primarily through investment in a concentrated portfolio of fixed interest securities. Sector: IA Strategic Bond. City Financial Japanese Opportunities Fund The investment objective is to achieve capital growth through investing predominantly in Japanese listed securities. Sector: IA Japan. City Financial Multi Asset Dynamic Fund The Fund aims to provide long-term returns from capital growth over the longer term. Sector: IA Flexible Investment. City Financial Equity funds Our equity funds provide exposure to listed companies through income, total-return and long/short investment strategies. City Financial Absolute Equity Fund The Fund aims to achieve a positive absolute return for investors over rolling thirty six month periods primarily through investment in UK and global equities. Sector: IA Targeted Absolute Return. CFIC Loudwater Fund The aims are to generate a rising level of income and achieve long-term capital growth by investing in a concentrated portfolio of equities. At least 50% will be invested in the UK equities, with the balance in global equities which may include UK equities. Sector: Unclassified. 12 City Financial Multi Asset Diversified Fund Annual Short Report, 30 September

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9 Tel: Queen Street, London EC4R 1EB Conduct