Category: Financial Planning, Investment management

Committee Members in attendance

Review of previous minutes and action points

Minutes from the previous meeting held on 21st January 2019 were agreed by the Committee as a true and accurate record.

Economic outlook

The Committee discussed the current economic and political environment and the implication for financial markets and the following is a brief summary. The key elements were as follows:

• Following on from the recovery in markets in January, equity markets have again performed strongly in February, with the IA Asia Pacific ex Japan sector posting the best results. Sentiment improved at the start of this year because of the more dovish stance of the Federal Reserve Bank of America ( Fed) and the progress in trade talks between the US and China.
• Given that the economic situation did not change materially from December to January, the Committee believe that the Fed’s December hike in interest rates was more politically driven and provoked by the comments of President Trump.
• The Committee are of the opinion that the economic backdrop will be positive this year, despite the news of slowing GDP growth in certain parts of the world.
• Lower rates of GDP growth are likely to promote longer term economic stability and prolong this current cycle of growth. High levels of growth often lead to valuation bubbles, while slower growth is likely to reduce rates of credit growth and lowers the chances of overheating, inflationary pressures and overvaluation. Countries with a balanced economy and a higher proportion of national income coming from internal consumption are likely to benefit more from steadier growth.
• Countries which rely heavily on exports, such as Germany, are likely to underperform as the growth rate of their exports slows. Germany’s economy narrowly missed a technical recession in the second half of 2018, with zero growth over the last two quarters. Germany continues to run a budget surplus and a relatively tight fiscal policy which restricts local consumption and contributes to the Country’s reliance on incomes deriving from exports.
• Under the current rules, the European Central Bank had no choice but to halt the QE program as the amount of German bonds in the ECB’s balance sheet had reached the maximum limit allowed by European Law.
• Apart from prospects of low levels of growth, Europe also has a lot of political tensions among its member states as each state wants to preserve its independence and be a part of a union at the same time.
• Valuations in Europe are currently low, but given the potential risks outlined above, current levels could be well justified.
• In the UK there was no significant progress on Brexit and a short-term delay can be expected as neither side seems close to concluding an agreement before the 29^th of March.Theresa May pushed another Brexit vote out to the 12^th of March. If the vote fails, she will offer MPs two separate votes; one on an exit without a deal and the second on an extension to the article 50 negotiation process beyond the 29^th of March.
• Meanwhile the consumer market in the UK remains resilient to political risks, driven by stronger earnings growth and a tighter labour market. The UK government recorded a surplus in January, which was above expectations, driven by a higher level of tax receipts. On the other hand, investments in the corporate sector stalled as companies delayed any significant decisions until there was more clarity about future trading relationships.
• UK businesses need clarity for future planning, whether there is a deal or a no-deal scenario and a significant delay to Brexit negotiations could be detrimental to both consumer and corporate confidence levels.

Review Risk Management, Eligibility and Investment and Borrowing Powers

DK presented a template of a new risk report developed by Margetts. The report will show net and gross leverage levels for each of the Clarion funds, the frequency of compliance checks conducted by the Margetts risk team (expected to be daily), indicate whether compliance checks have been delayed on any particular day and list all soft and hard limit breaches registered over the period. The new report will replace the old eligibility and investment and borrowing powers reports and the Committee are unanimously approved its use going forward.

DK explained that due to system migration, investment limit reports are currently unavailable, but Margetts are working on their development in the new system. There will be no StatPro reports going forward and all risk data will be generated in-house by Margetts.

In principle, the Committee agreed that all portfolios are managed in line with expectations and raised no concerns.

Management of the Clarion Funds

MGTS Clarion Prudence

The fund’s performance improved further in February and it is now in line with the IA Mixed Investment 20-60% Shares sector over 12 weeks. The portfolio’s overweight equity position was the major contributor to stronger relative returns as markets turned positive in 2019.

Fund selection was generally stronger among equity funds and weaker among bond strategies. Most of the portfolio’s underlying bond funds have a short-duration bias and have underperformed their respective sectors as bond yields slipped lower. The Committee have no concern regarding this positioning and expect monetary conditions to become tighter over the longer-term causing short dated bonds to perform better than long dated bonds.

Most of the underlying UK equity funds outperformed the IA UK Equity Income sector over 12 weeks, with only two strategies, the Aviva Investors UK Equity Income and Royal London UK Equity Income funds, being weaker over the period. Both funds are strong long-term performers and the Committee did not raise any significant concern over the relatively short-term period of underperformance.

It was noted, however, that the Aviva UK Equity Income strategy is one of the more expensive funds in the portfolio. The Committee agreed to review this position at the next IC meeting and will consider a list of potential replacements.

Among global equity funds, the Henderson Global Equity Income strategy looked relatively weak. The Committee discussed the rationale behind the purchase of this fund. It was agreed that due to an income mandate the Henderson strategy has a higher allocation to Europe, whereas the IA Global sector has a much higher exposure to North America. European equities have lagged the US for some time which has been the main drag on the fund’s performance. The Committee agreed to keep this fund in the portfolio at this stage as it provides additional diversification alongside the M&G Global Dividend strategy which holds much higher exposure to the US.

Overall, the Committee are happy with the performance of the Prudence fund with long term performance remaining strong as demonstrated by the graph below. No other changes have been proposed.

The Committee approved the strategy and confirmed it is in line with the mandate.

MGTS Clarion Meridian

The short term performance of the Meridian fund has improved and long term performance remains strong. The stronger relative short term performance was due to the themes which have also been experienced in the Prudence fund. The overweight equity position has contributed to relative returns, while short-duration bias in bonds had a negative effect.

The Committee discussed the BMO Select European fund, which has recovered some of its previous underperformance but failed to significantly outperform the newly added Fidelity European strategy. It was agreed that the remaining BMO holding will now be sold and the proceeds will be reinvested in the Fidelity European strategy.

The Committee noted an improvement in the performance of the Fidelity Institutional South East Asia strategy and weaker relative returns of the First State Asia Focus fund. The Fidelity strategy has a higher exposure to more cyclical Chinese companies and tends to outperform during market rises, while the First State fund tends to invest more in less cyclical businesses, hence it usually outperforms during periods of market falls. The Committee has no concerns about either of these holdings as both performed in line with expectations and compliment each other.

Performance profiles of the SLI UK Equity Income Unconstrained and SVM UK Growth funds  were discussed in more detail. Both funds have underperformed their respective sectors over 12 weeks. DK explained that both strategies have a tilt towards more domestically focused mid and small-cap companies, which are highly sensitive to the progress of Brexit negotiations.

It was agreed that the performance of the SVM Fund is likely to recover strongly if Brexit negotiations are concluded with a deal, however the Committee were concerned about the SLI strategy. It was also felt that after the merger with Aberdeen, some Standard Life funds have been under pressure and that the management structure of the group is not very stable. The Committee agreed to look at potential replacements for the SLI fund and will discuss available options at the next IC meeting.

Overall the Committee are happy with the performance of the Clarion Meridian fund and made no other changes at this stage.

The Committee approved the strategy and confirmed it is in line with the mandate.

MGTS Clarion Explorer

The fund’s performance remained strong relative to the IA Flexible Investment sector over both the long term and the short term. The portfolio continues to benefit from the revaluation of equities and an uplift in Asia and Emerging Markets in particular, areas to which the fund is overweight. The underlying fund selection continues to be strong, with most funds outperforming their respective benchmarks over 12 weeks.

Out of 9 underlying holdings in Asia and Emerging Markets, 6 outperformed their respective sectors over 12 weeks. All of the three funds with weaker relative returns are more defensive and while their relative performance was weaker during market rises in January and February 2019, they outperformed during market falls in the second half of 2018.

The Committee are pleased with the improving performance of the BlackRock European Dynamic strategy. This fund currently holds overweight positions in the Industrials and Technology sectors, hence the performance is more cyclical. The fund has lagged the IA Europe ex UK sector in 2018, but has outperformed in 2019 as equity markets recovered.

The Committee noted the weaker relative performance of the Jupiter European fund, which is now behind the sector over periods of 2 weeks and 6 months. However the fund’s performance is very strong over 12 months with a positive return of c.5.4% over the period.

The Committee looked at the performance of the two Japanese fund which have lagged the IA Japan sector over 12 weeks. While the weaker relative performance of the Lindsell Train Japanese Equity strategy was mainly due to the currency hedging, the Schroder Tokyo fund remains unhedged. The historic performance chart indicates that over 12 months the Schroder Tokyo strategy performed in line with expectations, outperformed during negative markets and underperformed during positive markets. It was noted that the manager of the Schroder Tokyo fund will change in the summer and DK will write a review on this fund shortly.

The Committee are pleased with the overall performance of the Explorer strategy and proposed no other changes at this meeting.

The Committee approved the strategy and confirmed it is in line with the mandate.

Management of the Clarion Models

Model A

• Sell 1.00% Janus Henderson Global Equity Income I Acc (2.75%)
• Sell 1.00% M&G Global Dividend I Acc GBP (2.75%)
• Buy 0.50% Threadneedle UK Equity Income ZNA GBP (7.50%)
• Buy 0.50% Franklin UK Equity Income W Acc (7.50%)
• Buy 1.00% Aviva Inv UK Equity Income 2 (7.50%) 

Model B

• Sell 1.00% Janus Henderson Global Equity Income I Acc (4.50%)
• Sell 1.00% M&G Global Dividend I Acc GBP (4.50%)
• Buy 1.00% Threadneedle UK Equity Income ZNA GBP (8.50%)
• Buy 1.00% Aviva Inv UK Equity Income 2 (8.50%) 

Model C

• Sell All (5.00%) Invesco Global Equity Income Z Acc (0.00%)
• Buy 0.50% Aviva Inv UK Equity Income 2 (7.50%)
• Buy 0.50% Franklin UK Equity Income W Acc (7.50%)
• Buy 1.00% Janus Henderson Global Equity Income I Acc (5.50%)
• Buy 1.00% M&G Global Dividend I Acc GBP (6.00%)
• Buy 1.50% Royal London UK Equity Income M Acc (8.00%)
• Buy 0.50% Threadneedle UK Equity Income ZNA GBP (7.50%)

Model D

• Sell 0.50% Janus Henderson Global Equity Income I Acc (4.50%)
• Sell 0.50% M&G Global Dividend I Acc GBP (4.50%)
• Sell 2.00% Fidelity Index US P (6.00%)
• Buy 2.00% Vanguard FTSE U.K. All Share Index A Acc GBP (7.50%)
• Buy 0.50% Standard Life Investments UK Equity Income Unconstrained Plat 1 Acc (7.00%)
• Buy 0.50% Franklin UK Equity Income W Acc (7.00%)

Model E

• Sell All (6.00%) BMO Select European Equity 2 Acc (0.00%)
• Sell 2.00% Fidelity Index US P (4.00%)
• Sell 1.00% Janus Henderson Global Equity Income I Acc (3.25%)
• Buy 2.00% Vanguard FTSE U.K. All Share Index A Acc GBP (8.50%)
• Buy 1.00% Vanguard FTSE UK Equity Income Index Acc (7.00%)
• Buy 6.00% Fidelity European W Acc (6.00%)

Model F

• Sell All (4.00%) BMO Select European Equity 2 Acc (0.00%)
• Sell 2.00% Fidelity Index US P (6.00%)
• Sell 2.00% Vanguard US Equity Index Acc (6.00%)
• Buy 3.00% Vanguard FTSE U.K. All Share Index A Acc GBP (8.00%)
• Buy 1.00% Vanguard FTSE UK Equity Income Index Acc (8.00%)
• Buy 4.00% Fidelity European W Acc (4.00%)

Fund focus

DK provided a review of the Fidelity Short-Duration Bond fund. The key points are noted below.

• This is a relatively simple short-duration bond strategy, with a mixed top-down and bottom-up investment process.
• Since inception the fund had performed strongly relative to the benchmark.
• The manager does not use derivatives for duration and credit risk management.
• Compared to the sector the portfolio currently has a higher exposure to credit risk and tends to underperform the benchmark during periods of widening credit spreads.

AOB

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