JCB ACTIVE FUND IS A PORTFOLIO OF LONG ONLY AAA AND AA+ RATED EXPLICITLY GUARANTEED GOVERNMENT BONDS. SINCE INCEPTION ANNUALIZED RETURNS ARE CURRENTLY 6.57% NET OF ALL FEE’S.

• HOPE FOR THE BEST AND PLAN FOR THE WORST
• RBA TO PAUSE FOR 2016, RESUME RATE CUTS IN Q1, 2017
• TRUMPED – HOW HIGH CAN MEXICANS POLE VAULT IN RIO?
• PAUL CHIN JOINS JCB INVESTMENT TEAM

We did it your honour! Has it really been seven weeks since BREXIT? "What BREXIT"? we hear you say.

Long seasoned markets professionals really worried about BREXIT, ourselves included. Collectively between JCB management and our advisory board we have hundreds of years of markets or corporate experience, having occupied senior roles in large financial institutions and corporations over long time frames. Collectively we really worried and hosted a conference call in the days after, dusting off the crisis playbook. We had a plan to have substantial plans if required. Good investment process would be critical. We hoped for the best but planned for the worst.

To date, all that worry has all been in vein. Vacant political posts in the UK have been filled and BREXIT looks to be a very slow and drawn out process. Unless you own GBP assets (which has hurt) there has been little negative impact for Australian investors. In fact, perversely, it was a great opportunity with many asset classes rallying on immediate Central Bank support for markets.

The incredible resilience of markets this year had caught many by surprise. We have written about policy vs fundamentals previously and how ample liquidity and low interest rates can keep on keeping on, despite the financial building blocks of today's markets being untested over time. It is not growth and prosperity that is driving asset values, but immense central bank support and stimulus. The longer this goes on the more accepted and mainstream it becomes. Intuitively there seems a danger to this complacency. Tepid fundamentals matter in the end but the current global policy mix remains very supportive for all asset markets. Asset quality remains critical and will really matter when we hit the end of the policy super highway. Predicting when that day comes is futile, as it could be many years away. We are dealing with policy that has never been utilised before and learning some of the side effects as we go (middle class distress and growing wealth equality) It has an end point, but for now asset owners remain prosperous.

The RBA delivered as we expected in early August, completing our 50 bps of expected cuts in 2016. We believe a period of pause and assess will see out the year before they are drawn into cutting again an additional 50 bps in 2017 due to currency appreciation and continued weak inflation, remaining below the RBA target range of 2-3%. The RBA still retain an easing bias keeping a November cut a possibility, but the hurdle is high for a further move on current data. Many commentators have vastly re rated RBA cash rate estimations over this 2016 cutting cycle with Morgan Stanley, JP Morgan, Macquarie and NAB all now calling for 1.00% RBA rates into 2017.

Trump. So how high can Mexicans pole vault in Rio? We have written about Trump gaining momentum in a world effected by nationalism (producing BREXIT, Le Pen, Italian northern league, Pauline Hanson etc) This global wave of anti-establishment populism can carry Trump to the White House if he can stay out of his own way. It's been a torrid few weeks with criticism of fallen US Muslim soldier, abusing crying babies and refusing to address Paul Ryan and John McCain, the lifeblood of Republican Party. Markets are not taking Trump seriously at this stage. It is early to write him off but he must avoid Trumping himself. If he learns from these slips and stays tighter lipped, expect a bounce in polling numbers and nervousness from markets.

Finally we are pleased to welcome Paul Chin to the investment team at JCB. Paul joins after a 20 year asset management career with BGI San Fransisco (now Blackrock) and Vanguard in Melbourne. This takes the JCB investment team to 52 years of investment experience, of which 30 years has been in international markets.

JCB is a conservative fund manager, with capital preservation and risk adjusted returns being our core tenants. If we cannot find compelling risk adjusted opportunities to invest your money we will not allocate, preferring benign low duration short dated bonds with little risk. Our models and processes considered the moves around BREXIT to be excessive and as such we sold some longer dated bonds after strong performance, looking to re set when markets cooled. As at July's close that return to "fair" value had not been completed and we have under-performed our index over the month, albeit whilst generating strong absolute returns of 3.20% net of fee's over the last 3 months. Indexes are funny things, having portfolios at maximum risk at all points in the pricing cycle. They represent the opportunity set of a market place. We fundamentally disagree with passive index investment and aim to run the least amount of risk for our returns, a process that has delivered to date with the JCB active fund using only 80% of market index risk to outperform the index since inception. This makes our return profile stronger over time. At the time of writing we have outperformed in August as the market has cooled. We now believe the bond market to be at fair value for current monetary policy settings. We have added some spread risk to the portfolio over July looking to earn additional carry over the quieter European Summer period.