The Fund was flat in September against a backdrop of a small price fall in world equity markets (although this translates into a small rise in GBP terms due to Sterling weakness). Gilts, US Treasuries and Gold all gave negative returns, while Oil was up 16%.

Since launch on 12th July 2017 the Fund has returned 88.4% which compares with a return of 74.6% from the Investment Association (IA) Flexible Sector. Against all 680 funds in the four IA Mixed Asset Sectors (Flexible Sector plus the 0-35% Shares, 0-60% Shares & 40-85% Shares Sectors), the Fund is ranked in the second quartile over 1 year and in the first quartile over 3 and 5 years. Against the IA Flexible Sector, the Fund is in the second quartile since inception.

In September, the strongest performing global sectors in September were Technology (+6.6% in GBP terms) and Communication Services (+5.7%). The concentration in Technology and Communication Services is borne out by the fact that 8 out of the 11 global sectors gave a negative return in September, with the weakest sector being Materials (-5.4%).

The S&P 500 and world equity markets in general ended September close to their all time highs, driven by continued high expectations for future corporate earnings over the next 12 months. At the moment, this is all markets seem to care about, maybe with good reason, and the worries causing weak bond markets are hitherto being ignored.

The Fund is currently in pretty much full capital preservation mode. The Equity allocation is only 22%. We have a new token 10% exposure to US 10 Yr Treasuries because they became oversold. Gold is 12% and a diversified basket of Commodities is 9% of the Fund. Otherwise we are holding 43% in very short duration Governments bonds while we wait to see what happens.

It may be worth pausing to comment on our asset allocation approach. We are quite happy to be fully invested in equity markets, and that is our preferred position, but only if Equity valuation is reasonable and momentum is supportive. When Equity valuation and/or momentum give warning signals, our model can and does move to a very defensive position, and can even be zero in Equities in extremis. There have been quite a few examples over the life of the Fund since 2017 when the Fund has become very defensive (2018, Covid 2020, much of 2022 etc), similar to the current low allocation in Equities. In the event, those Equity markets falls all turned out to be only “medium” setbacks which were also fairly short-lived. We mention this because, if any of these had turned out to be major bear markets, we think the Fund would have been well-positioned “just in case”. The worst two equity bear markets this century were the 2008 Global Financial Crisis (peak-to-trough price fall of 55%) and 2000-2003 Tech crash (44%). This Fund (launched in 2017) hasn’t been tested in such conditions but we can say that the model we use was, on a simulated basis, very defensive through both two terrible periods.

Our message continues to be that we are still sitting on the sidelines. Continued high expectations of future earnings growth is a major positive, but the starting point for equities is that they are expensive – although obviously not quite so expensive assuming that earnings growth does comes through.

The more subtle point is that much depends on what valuation measurements one looks at. The bulls point out that the forward Price/Earnings Ratio (ie assuming strong earnings growth does materialise) is high but not extreme and therefore sustainable. Our concern is that the PE Ratio depends on reported earnings which includes uncertainties over depreciation. In a world when the earnings growth is coming from massive AI capex, it is hard to know how reliable reported earnings are because of depreciation uncertainty. We prefer to look at cash earnings, which gives a much more worrying valuation picture. This ultimately explains our caution over Equity markets, as shown below.