“During the month of September some radical changes have taken place in the financial sector of the US. Hit by severe liquidity problems, the US investment bank Lehman Brothers was forced to file for Chapter 11 bankruptcy. The remaining investment banks were either acquired or converted to commercial banks in order to survive the financial turmoil. International stock markets accredited the end of the Wall Street investment banks with high losses. Our portfolio reacted to this market environment by increasing the bond and the cash exposure.”

“The landscape in financial markets changed dramatically during September. The speed at which corporate events occurred and the impact on both the credit and equity markets was remarkable. We continue to find attractive opportunities for longer term investors and continue to invest in exceptional fund manager talent. We remain focused on managers who have the flexibility to perform in challenging market conditions and remain happy with the portfolios underlying holdings and managers. However we feel that in this environment the leveraged loan market remains temporarily weak so have sold our position in favour of cash until we have more clarity.”

“Only Government bond investments made via the Robeco Lux-o-rente fund was up in September. The collapse of Lehman Brothers caused the credit markets to fall significantly. Convertible bonds fell a lot, and this asset class is now yielding 15-18 per cent with an option to convert into equities in the future. We see great potential in this asset class, and add another 5 per cent to the JPMorgan Global Convertibles fund. High Yield bonds fell further. A typical High Yield bond fund now yields 18 per cent. In our opinion that more than covers the coming defaults, so we introduce ING High Yield into our portfolio. We sell the Evli Ruble Debt and scale down Fidelity American Growth to finance the purchases.”

“The pressure on the international stock markets continues. We maintain a conservative weight in equities with a broad regional diversification. On the bond side we see good value in Deka-ConvergenceRenten CF and Deka-Global ConvergenceRenten CF after a decent increase in spreads of emerging market bonds and a devaluation of certain currency pairs against the Euro. The same situation appears in investment grade and high yield European corporate bonds. Furthermore we prefer a high position in pure euro money market funds Deka-GeldmarktPlan TF and Deka-Institutionell Geldmarkt Garant TF (A).”

“During the last month we didn’t make any change to our portfolio. Low turnover in the portfolio is a goal of our activity, especially considering the present conditions of financial markets, marked by persisting high volatility. We think that the portfolio is well diversified and that the selected fund managers have the skill to withstand the persisting global financial crisis, like Graham French (M&G Global Basics), Tom Stubbe Olsen (Nordea European Value) and Chris Palmer (Gartmore Emerging Markets Equities).”

“In September, returns on our portfolio were mostly negative, penalised by European and Asian equities. The only assets that supported were Euro fixed income investments and Volatility. Let’s mention the particular resilience of Uniglobal Minimum Variance Europe which benefits from its defensive stance. We trimmed our position on high yield from 5 per cent to 3 per cent in order to reduce our bias toward credit given the current context. The sale enabled us to finance an increased position in Ecofi Quant Trésorerie Dynamique that aims to outperform cash.”

“The portfolio has been launched last month and we remain confident in the underlying managers despite the prevailing volatile market environment. However we decided to slightly change the allocation. We redeemed our position in emerging markets. At this time we do not want to continue being exposed to these high beta markets. The proceeds have been reinvested in the already existing US equity funds, which increases our overall allocation to US equity markets.”

“At the time of writing, it is pretty clear that hedge funds did poorly in September. The full damage will not be known for a number of weeks as prices are released and fund of funds subsequently release their prices. They have been hit by changing regulations (ban on short selling), the collapse of Lehmans (returns of –100 per cent for some funds as Lehmans ‘borrowed’ their assets), which acted as prime broker for some funds and a rush to raise cash as they anticipate large redemptions. We believe we have avoided most of the disasters but this episode will scar many investors for some time and fundamentally change the investment world.”

“Asset management in general, and fund selection in particular, have been all about how secure is your money, lately. This has to be appreciated with regards to each asset class, obviously, but the management company and the custodian have to be scrutinised as well. Thus, the changes in our portfolio mainly reflect this overall “flight to quality”. The main addition is the Powershare EuroMTS Cash 3 Months: it is only made up of EuroZone Sovereign short term, with a cash portfolio (ie not a swap replication), and the custodian is as sound as you can expect.”

“Constituent funds were hit by a poor macro backdrop and one that has been difficult for virtually every asset class bar those that are "risk free" in nature. It is therefore not a surprise that JPM Emerging Mkts was the worst performer but part of this will be down to the natural resource/commodity based content. Artemis European also struggled in this area. Quant-based funds are struggling in these sentiment driven markets. The Artemis fund remains poorly positioned in its peer group. Threadneedle Asian is another that is struggling in absolute and peer group terms and the de-coupling myth dies down.”

“What a month! Such turbulent conditions make strategy perhaps more important than fund selection over short periods and our overall defensiveness helped out. Anticipating continuing difficult conditions we have become more cautious in the short term in the fixed income environment adding to government bonds versus corporates. Within fund selections, Coupland Cardiff Japan is replaced by Morant Wright to introduce a further degree of balance sheet safety into what remains nevertheless one of our more favoured market areas. Relatively speaking, fund selection results were generally good within sector.”

Each month in PWM, 12 top European asset allocators reveal how they would spend €100,000 in a fund supermarket for a fairly conservative client with a balanced strategy