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CEDRIC BUCHER: Hello and welcome to the Architas Quarterly Investment Review. My name is Cedric Bucher, Head of Business Development. As always I’m joined by Caspar Rock, our Chief Investment Officer.

CASPAR ROCK: Hello.

CEDRIC BUCHER: Caspar, could we start with a brief summary of what happened in the investment markets in the second quarter of 2014?

CASPAR ROCK: Overall, it was a positive quarter in general and it was a market where risk worked so equities went up. Within the markets, there were two clear trends. The first is that emerging market equities outperformed developed market equities, and that’s the first time it’s happened probably in about 18 months. The second thing is within the developed market equities there’s been a change in the kind of company that’s been outperforming. So in the previous probably 18 months or so small and medium sized companies and faster growing companies have tended to outperform, but during this quarter what we saw is that cheap companies have done better than those faster growing ones we’ve seen perform previously.

CEDRIC BUCHER: What would you say were the key events in the second quarter?

CASPAR ROCK: I went to a conference in Paris and they had two ex-central bankers talking. One of them was Mervyn King from the Bank of England and the other one was Ben Bernanke from the Federal Reserve, and the common theme was that you as market participants should listen to central bankers, because they’re there and they’re trying to help you. So some of the messages coming out of central banks during the quarter I think were actually quite important.

Let’s think first about the ECB and what they’ve been doing. So in Europe you’ve got weak growth and weak inflation. So what the ECB’s trying to do is to encourage growth and get a bit more inflation back in the system. They haven’t done very much for a couple of years, but they’ve had a very big change of policy in June, which was to effectively cut deposit rates to being negative. So when you save money you’re actually being charged for the privilege. At the margin what that might do is to encourage you to spend a little bit more quickly than you otherwise would, and that may encourage inflation and growth, which is what the Europeans need.

But then again contrast that with what’s been going on at the Bank of England, where Mark Carney has been giving guidance in different ways about the path of interest rates over the next couple of years. What he’s been saying is that interest rates will rise and he’s been trying to guide about to the level they’re going to rise to. So he’s preparing the ground so people aren’t surprised that interest rates rise when they do.

The net effect of that is that the pound has got stronger, which is great if you’re going on holiday in the next couple of months because your holiday will have got a little bit cheaper if you’re going abroad, but it does mean the competitive position of the UK economy is slightly tougher.

CEDRIC BUCHER: Caspar, how has all of this impacted the quarterly performance of the Architas investment funds?

CASPAR ROCK: During the quarter, as I’ve been talking about earlier, you’ve seen good performance from equity markets, they were generally all positive. Whereas fixed income has been broadly flat during the quarter, and this has led to performance within the passive range that means that all seven funds rose during the quarter, but the higher risk profile ones did better because they have a higher equity weighting.

If I now turn to the blended funds, they too were all up during the quarter. However, they did marginally lag their passive benchmarks, the passive funds. If I now move onto the active funds, they all delivered good positive returns during the quarter. They also marginally lagged the passive funds, but on the whole they outperformed their peer groups, which is a good performance for the active range.

CEDRIC BUCHER: So overall quite a good quarter for investors. What is your and your team’s view and outlook for the rest of the year?

CASPAR ROCK: The first thing to think of is that we’ve been through very strong rises in equity markets for the last four or five years, good returns, but right now what you’re seeing is the fluctuations in individual share prices being very small, and that’s what is called volatility, and the volatility of markets is at multiyear lows. So naturally we’re looking for what could be round the corner, what are the issues that could trip up equity markets from their continued rise? There are a couple of issues that we worry about.

I think the first one is around when interest rates will rise. So at the moment the expectation is that in the UK interest rates will rise in the first quarter of 2015, but just imagine what would happen if they rose in the third or fourth quarter of this year, how would that affect expectations?

The second thing is geopolitics. If you look at something like the oil price it’s traded in a very narrow range for a long time until ISIS made their moves into Iraq. Since then it’s moved outside of its trading range, so oil has become more volatile.

Then finally the third issue is around a growth disappointment, which is probably most likely to come out of the eurozone. We have the upcoming bank stress test there and that could upset what is currently quite a contented state of affairs and might preclude or stop the market from rising as much as they have in the past.

CEDRIC BUCHER: Caspar, thank you very much for your insights today.

CASPAR ROCK: My pleasure.

CEDRIC BUCHER: That’s all. As always you can find a full copy of the quarterly investment review on the Architas website. Thank you.

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