The past month has certainly seen volatility return to financial markets most notably to equities. The Euro Stoxx index, which is a broad basket of Eurozone shares, saw a drop of over 16% from peak to trough during the month of August, before subsequently recovering part of the decline. Most other equity markets experienced similar gyrations. This volatility was triggered by events in China where recent routs in stock prices were then followed by policy actions which raised concerns over the underlying health of the Chinese economy.
The Chinese Central Bank devalued the local currency, the Yuan, and opened the door for further currency weakness and also cut interest rates. Some analysts saw this as a panic response to weaker Chinese economic data and raised concerns over how weak the economy might actually be, and what impact it would have on global growth and global corporate profits. It was always our view that the Chinese economy would see some slow-down from its 7% growth rate as we outlined at the Appian Investment Seminar last March. We remain vigilant and continue to monitor the economic prospects in China as the authorities seek to transition the economy from investment-driven, to one where the consumer and domestic demand play a greater role.
Elsewhere during the month we saw further evidence of a better US economy with the economy showing a growth rate of 3.7% for the second quarter and continued signs that the consumer is returning to more normal spending patterns. This improving economic picture points to some increase in US interest rates before the end of the year unless concerns over the Global economy prompt the US Central bank to stay their hand.
How were we positioned in Appian for these market conditions? In recent months we had grown more cautious on markets, and had reduced our weighting to equities close to the lower end of our range. Our Value Fund for example currently holds about 35% exposure to equity markets – at the turn of the year this figure was in the mid 40’s. We also currently hold just under 30% of the fund in cash. This highlights the benefit of our dynamic approach to asset allocation and provided us with a buffer against the extreme market volatility and also ample fire power should we see opportunity in markets. Within our equity funds we also have ample cash, should opportunities arise and the underlying quality of our selected stocks, where we emphasise factors such as solid financials, superior cash flow and well covered dividends, ensures that they hold up better than average portfolios in times of stress. Our underlying equity performance in August was superior to the market average and we continue to deliver returns with a lower level of volatility or risk.
So while our funds did see a slight dip in the month – the Appian Value Fund slipped by 3.1% - this was a significantly better performance than standard Irish managed funds many of which lost over 6% in August.
Appian Funds are still showing very healthy returns so far this year with the Value Fund up by 4.5% and the Equity Fund and the Small Companies Opportunities Fund up by 9.7% and 22.7% respectively.