Recent News

Universal sentiment in markets is very often wrong. Whilst many investors are underweight in gilts, we believe there is a plausible case for owning this asset class in 2010.

Yesterday’s announcement of 0.1% positive quarter-on-quarter growth, after six quarters of contraction, speaks to the fragile nature of the UK economic recovery. We believe the key to positive gilt demand in 2010 will be weak economic performance.

When quantitative easing began in March of last year the consensus view was that it would cause a bull run in the gilt market – this did not happen. The positioning of the Fund with this in mind was a primary factor in generating the positive performance of the City Financial Strategic Gilt Fund in 2009, the only such positive return amongst its peers last year[1].

Rather than a surge in gilts, 2009 was characterised by a long and sustained rally in the equities markets. While this may have been simply coincidental to quantitative easing, it suggests that we should consider the possibility that a withdrawal of quantitative easing will have an equal, but opposite, effect. We could therefore see a retracement in equities and a much more stable gilt market than is currently built into most forecasts.

Regardless of who crosses the threshold of number 11 next, serious fiscal tightening is all but certain. The withdrawal of government spending on this scale will imperil the economic recovery that today’s announcement suggests is rather fragile. As a policymaker, how do you tighten fiscal policy and terminate quantitative easing without falling into a double-dip recession?

The FSA is also expected to increase the amount of highly rated liquid assets that deposit-taking banks must keep on their balance sheets – this could fund a significant proportion of this year’s government borrowing requirement.

Whilst quantitative easing has bolstered the narrow measure of the money supply, this massive injection of liquidity has had no effect at all on the wider measures of money supply. The real economy will not feel the benefits until the banks begin to on lend the money currently on deposit with the Bank of England. This is why we would not rule out a further easing in monetary policy either through a cut in interest rates, possibly to Swedish-style negative interest rates, or through further quantitative easing. These measures could help to offset fiscal tightening.

Investors will need to weigh these factors to achieve the proper balance between equities and fixed interest within their portfolios.

[1] Source: Lipper, 31.12.2008 – 31.12.2009. Note: IMA UK Git Sector.

City Financial Equity Income Fund
City Financial has proposed to rename the UK Select Alpha fund to the City Financial Equity Income fund. In addition, the fund has increased in size from ~£4.5 million to ~£10.0 million through the injection of ~£5.5 million of additional investor capital. It is proposed that the fund will also move from the IMA UK All Companies sector to the IMA UK Equity Income sector. City Financial has appointed Loudwater Investment Partners to manage the fund. These changes will be designed to make the fund more efficient from a cost standpoint, to the benefit of investors.

Loudwater Investment Partners is led by the former Chairman of Panmure Gordon, Richard Wyatt. Loudwater plans on migrating the fund’s portfolio to focus on high dividend yielding UK equities.

City Financial MultiManager Income Fund
On 27 November 2009, shareholders in the City Financial Diversified Absolute Return Fund voted in favour of consolidating its similarly-managed assets into the City Financial MultiManager Income Fund, managed by John Husselbee. This fund is in the top quartile of the IMA Cautious Managed Sector for 2009 year to date. The continuing fund will have over £20 million of assets and therefore represents a more efficient manner for investors to gain access to John Husselbee’s proven multi-asset investment capability.

Rob Hain, Chairman of City Financial, commented:
“As we close in on the £200 million mark of assets under management, 2009 has been a landmark year in the development and performance of City Financial. In the last three years, our largest fund, the Strategic Gilt Fund has seen its assets rise from £7 million to over £80 million and is the best performing fund in the IMA UK Gilts sector since its launch in December of 2006.

City Financial is committed to ensuring that investors’ funds are organised in a manner that is appropriate to the prevailing investment landscape. Therefore we have taken action to make a number of changes to our smaller funds that will counter increased cost pressures in the UK.

As we have demonstrated over the past three years, City Financial harnesses the proven skills of independent fund managers to deliver superior investment returns. We are confident that Loudwater will also establish an enviable track-record for the City Financial Equity Income Fund over the coming years.”