I had high hopes for 2023 in investment markets at the start of the year but that quickly subsided when inflation kept going up and so did interest rates, and both of these factors have a massive impact on investment portfolios.

Below is a chart of the rise in interest rates during the year peaking at 5.25%. This is great for deposits and for a brief period in the summer you could buy a 1 Year Guaranteed Growth Bond with NS&I at 6.2%. Surprisingly this didn’t last long as 285,000 people snapped the Governments hands off for this short lived opportunity.

In the wider investment field though, rising interest rates are bad news for people who have money invested in fixed interest securities. Gilts, corporate bonds and high yield bonds are all the same type of investment. You lend money to an institution (Government, bank or company) for a set period of time and they guarantee an income return fixed at outset (coupon) for that set period of time. At maturity they will give you back the investment subject to the institution being solvent enough to do so. The riskier the institution the higher the level of coupon they have to offer you to encourage you to invest. They are then traded and the capital value fluctuates on a daily basis. Basically the higher the interest rate goes the lower the capital value falls and the yield on the bond increases. So if a 10 year gilt is launched with a coupon at 3% with an offer price of 100p then if the capital value of the bond falls to 80p then the current or running yield of the bond would increase to 3.75% (3/0.8).

Below is a chart of the yield on a 10 year UK gilt over the last couple of years and you can see that yields peaked at just under 5% in October 2023 and then started to fall.

When the blue line of yield goes up the value of your holding in gilts has fallen. The last point of the graph is the most important. From November 2023 the graph falls quite a lot (c1.5%) which means capital value of the gilt has risen.

In the chart below, over 12 months, you can see the capital values of various bond types and as you can see from November they all rose substantially. The red gilt line rose around 8% from the end of October to the end of December. So bond capital values are inversely proportional to bond yields.

Why did this happen? Well inflation took a large unexpected fall in November which the market took as a sign interest rates would fall quicker than previously thought. Yields on bonds fell as the capital values rose which benefited most of our clients. At the same time the UK stock market rose 9.51% over the same period of time (graph below) to at least end on a positive note. Normally bond prices and stock market prices don’t move in the same direction but the end of 2023 they certainly did.

The Magnificent Seven

In the US the S&P 500 rose a respectable 19% over the year. However, this was mainly due to the performance of the largest 7 companies who are all tech companies known collectively as the Magnificent Seven. Companies such as Facebook, Microsoft, Amazon, Google rose by an unbelievable 71% in 2023. If you took these seven out of the S&P 500 then the other 493 companies rose by only 6% last year, which is pretty much in line with the UK.

Managed Portfolios

Last year saw the launch of the second range of Managed Portfolios that MPA have designed with a third party investment house. The reasoning behind these launches is to use our scale to design portfolios that we think will fill the gaps there are in the market place. In 2022 we launched MPA Inspire in conjunction with Hymans Robertson, a Glasgow based investment house that has been managing investments for final salary schemes for well over 100 years. We wanted a range of portfolios that could be used in drawdown that had lower volatility than its peers and at a reasonable cost. This year, in conjunction with Portfolio Metrix, we launched a passive range of portfolios called MPA Inform and an ethical range called MPA Educate.

MPA Inform uses passive instruments such as trackers and ETFs to get market exposure at a reasonable price. MPA Educate is a hybrid of passives and some active funds that are classed as ESG Friendly. This is a low cost portfolios that complies with investing in an ESG way (Ethical, Social and Governance).

So far they have all performed credibly and are gaining a lot of traction with our clients and are available on platforms such as Quilter, abrdn, Transact and Aviva.

Below is a chart of MPA Inspire and MPA Inform against its peers on our best buy list at the same risk rating of 5.

Over a short period of time they have done very well. MPA Inspire has 4 risk rated portfolios with an all in price of c0.55% pa and MPA Inform has 5 portfolios with an all in price of c0.33% pa.

If you are interested to learn more, please speak with your adviser.

So What’s New for 2024?

I think there will be more of the same in that inflation will control interest rates. This will affect the bond market and therefore portfolio performance.

At some stage I would expect interest rates to fall, as there are elections coming up, and this will have a positive effect on portfolios. Therefore, I am hoping for and expecting a better year in comparison to 2023. Fingers crossed.

Phil J McGovern FPFS

Chartered Financial Planner

Managing Director

This article is cannot be classed as advice. It is our review and reflections of last year and the year ahead. If you require specific tailored advice to your personal circumstances please speak to one of our authorised and qualified advisers