Investment commentary April 2017

"Investing is simple, but not easy". So says one of the world's greatest investors, Warren Buffett. At Flying Colours, we try to keep investing simple - aiming to compound equity and fixed income returns over the long-term. We think many fund managers try to over-complicate investing. They spend their time trying to unearth the next big thing, or latest fad, rather than focus on things that matter, like valuations and company fundamentals. This has stood us in good stead over the past two years, but markets seem like they are approaching a crossroads.

When we look at the market today, there are two features that stand out - record low volatility and high valuations. Many investors have been sitting on the sidelines, watching markets rising nervously, but volatility is the lowest it has been for decades, and equity markets, and valuations, have been grinding ever higher. April saw something of a turning point in markets, with risk assets like commodities and Chinese equities propping up the table of returns.

Brent Crude fell 5.0% in sterling terms, and commodity sensitive markets, like Brazil and Russia, were among the losers. At the same time, European equities continued their revival. The MSCI Europe rose 1.7% in the month, led by France and Spain. By contrast, the US equity market, where valuations are the most stretched, fell 0.81% and continued the underperformance that began at the start of the year. One of the hardest markets to value is the government bond market and the nervousness was seen in the commodity sector could also been seen in the government bond space. The UK gilt market returned 1.7% in the month and again showed its propensity to offer diversification in difficult markets. So, despite the low yields on offer, we still hold government bonds in our defensive portfolios. Finally, we would highlight the performance of financials in April. Both bank equity and debt were among the better performers in the month, and we continue to favour the market (through some of the fund managers we have selected) due to the good valuations here.

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