Clarion Investment Diary November 2022

The Clarion Investment Committee met on the 10^th November. The following notes summarise the main points of consideration in the Investment Committee discussions.

Economic snapshot and political snapshot

The following notes summarise the key points discussed by the investment committee at the meeting on the 10^th of November. (These notes are as at the date of the Investment Committee, since which time we have had the much-anticipated Autumn Budget Statement from the UK Chancellor. The broad themes of this Statement, a programme of fiscal tightening by a combination of increased taxation and spending cuts, have been well telegraphed as being a “Balanced plan to Stability”. The implications of the tax increases and spending cuts have been factored into the committee’s investment decisions & strategy.)

There has been a ‘great normalisation’ of developed markets following central banks raising interest rates. The era of ‘cheap money’ has come to an end, and we are seeing a move to the fair value of assets. Capital destruction has been especially present in high multiple stocks and those based on the hope of future earnings. The commercial property sector also looks somewhat susceptible.
Market fundamentals are more important to an investment thesis going forward and the potential options for investors have widened. In the low-rate environment, investors had no alternative to equity, but following the rises in bond yields, bonds are now a viable option in portfolios. The US has been expensive on a valuation basis for some time and investors are now recognising this in sell-offs.
There were expectations for long-term yields to track back to the 4% long-term average over three to five years, but this has happened over three to five weeks. The UK yield curve is looking more ‘normal’ and upwards sloping, which is usually an indication we are coming out of a recession, rather than going into one. Long and medium duration bonds are beginning to look more attractive compared to the short-dated side and high yields can help soften the capital loss in bonds. The US yield curve has not reciprocated this shape yet suggesting higher recession risks. The FTSE 100 forward PE ratio is below its long-term average, while the S&P 500 is not, suggesting a higher risk of re-pricing for the US equity market.
There could be future opportunities in small and mid-cap funds. They have been priced in for a deep recession, which might not happen and should be monitored. There could still be some sell-offs in the area, but it will be beneficial to look for signs of improvement.
The UK and US are priced for a big earnings recession, but nominal earnings are unlikely to fall with inflation so high. Stock prices are unlikely to sway massively should nominal earnings hold up as stock prices are judged in nominal terms too. A recession at this point would be in control of the central banks, it’s possible they would leave the economy on the edge of recession (but not quite in the territory) while combatting inflation.
Europe has been successful in reducing dependence on Russian gas. Before the invasion of Ukraine in February, Russia accounted for 40% of total European natural gas supply and 10% of all energy use. A year ago, weaning Europe off this vital source of energy would have been unthinkable. Yet in recent weeks Europe’s use of Russian gas has been running at around 20% of pre-invasion levels.

Europe has stepped up imports of liquid natural gas (LNG) from Qatar, the US, Nigeria and Algeria. Pipeline supply of gas from Norway has risen while Germany has brought back idled brown coal production and pushed back the planned closure of nuclear power plants. EU production of electricity from solar and wind rose at record rates between March and September.

For all the disruption, higher energy prices cause, they are a necessary corrective to over-dependence on Russian gas. Higher prices are altering patterns of demand and usage and driving investment in infrastructure from renewables to gas pipelines. Last week the International Energy Agency said that the crisis caused by Russia’s invasion will accelerate the clean energy transition.
Results from US mid-term elections saw the Republican Party take back control of the US House of Representatives and the Democrats maintained control of the US Senate. Former US president Donald Trump said he would run again in 2024 although candidates backed by former president Donald Trump in the mid-term elections are widely judged to have underperformed.
Some of the major US technology companies announced large staff layoffs in recent days, with Meta announcing 11,000 job cuts as the company’s bet on the metaverse continued to weigh heavily on finances. Shares in the company are down by over two thirds since the turn of the year. Twitter, now delisted from the NYSE following its purchase by Elon Musk, also sacked around half of its workforce as it looked to stem the ongoing losses the company is racking up. Many of the layoffs were made with minimal notice and the company could face stiff penalties in some countries with strong labour rights as a result. The US jobs market remains robust on surface data but some of these announcements suggest that the Federal Reserve’s policy tightening is finally beginning to bite and jobs growth figures will contract.
The validity of cryptocurrency as an alternative asset class took a substantial hit in the apparent liquidity failure of the FTX exchange. Its FTT token collapsed in value as rival exchange Binance announced it was liquidating all of its FTT reserves, which seems to have led to panic selling and a collapse in value, followed by the inability of FTX to process withdrawals. A hedge fund specialising in cryptocurrencies called Alameda tied to the FTX owner Sam Bankman-Fried owned the majority of FTT tokens in circulation and had pledged the tokens as collateral against loans, which will have triggered margin calls. Binance initially announced they were going to take over FTX but as it stands this rescue is in doubt, which could see FTX collapse with liabilities of $8bn, with major investors such as BlackRock potentially on the hook for substantial losses. The impact on wider cryptocurrency markets has been brutal.
It seems that markets have now found their quantitative easing limit. The global financial crisis destroyed capital valuations and the balance sheets of banks which were then alleviated by central banks increasing money supply. With the period of easy money period now over, markets will put pressure on central banks to balance the books and live within their means. Borrowing costs will increase and consequently we can expect normalisation of bond yields and more indebted companies to struggle. This normalisation of yields has happened much faster than expected in the UK, and last week we saw high multiple growth stocks hit while the old economy value stocks relatively outperformed. Elsewhere, in the US, valuations fell below their long-term average.
The risk versus return relationship of bond and equities has inversed this year following rises in bond yields. Bonds, which were deemed as low risk instruments, have performed worse than their higher risk peers despite the bear market in the equity market. Inflation is showing signs of slowing. US figures in August indicated a decline from their July peak. And as base effects feed out of the headline figure, we could expect inflation falls to continue in the coming months although pockets of acceleration are likely to occur.

For a fuller version of Clarion’s Economic and Stock Market Commentary, written by Clarion Group Chairman Keith Thompson, please click here

Strategy

Bonds continue to look poor value as inflation remains high and there are no apparent signs of policy tightening slowing, with the Federal Reserve and Bank of England hiking at 75 basis points in their last policy meetings. Central bank balance sheet reductions are in progress which will impact long dated bonds with additional quantities to trade and fewer buyers. The medium-term end of the yield curve trades at attractive yields with reduced impact from external factors, and the investment committee prioritise capital allocation accordingly.

US equities continue to demonstrate a disparity between the mega-cap tech stocks at the top of the major indices and the more robust domestically focused companies further down the market cap. Tech stocks continue their slow bleeding from elevated multiples and have given back their outperformance from the pandemic in the tighter financial conditions. With the dollar strong against other currencies and consumer sentiment and spending still positive, domestically focused equities in the US look appealing. The committee continue to focus on this area of the US market.

UK equities continue to trade at a discount to other developed equity markets, with many attractive companies capable of withstanding tough conditions (e.g., dividend cover ratio for the FTSE 100 is projected at over 2 for the next two years). The possibility of recession appears priced in and any surprise in economic conditions to the upside could see a sharp recovery. The committee continue to overweight UK equities on this basis.

Asia Pacific equities offer a contrarian opportunity with the divergence of central bank policy in the region compared to tightening conditions elsewhere. Short-term headwinds are evident in China’s Zero-Covid policy and the decline of the property development industry but over the longer-term valuations look attractive and ought to be supported by central bank policy and improving consumer demographics with an increasing middle class.

The committee remain positive for the prospects of emerging markets for the reasons mentioned in previous diaries namely demographics and because they are home to one of the most sought-after electronic components of the decade – the semiconductor chip. Emerging Markets are also likely to become beneficiaries of the drift away from doing business with China.

In view of the heightened level of global economic uncertainty, after careful deliberation, there was unanimous agreement to only make very minor changes to the Clarion portfolios. The key themes can be summarised below:

Minor increases in allocation to cash from fixed interest and international equities.
No net increase in equity exposure, although still committed to the diversification of equity holdings globally.
Slightly underweight US with a preference for smaller cap companies over growth style companies.
Slightly underweight Asia & Japan and overweight UK.
Increasing duration in fixed income with a move from short date bonds to medium dated corporate bonds. The committee decided to open a position in the Artemis Corporate Bond fund (medium duration) and sell the L&G Short Dated Sterling Corporate Bond Fund.
The committee conducted a full and thorough review of the IA Japan Sector and analysed funds in the growth, core and value styles. The committee looked at the past performance of various funds and concluded that the low predictability of the performance of funds in the sector was a detractor and an index tracker was the best option. The L&G Japan index fund had the lowest Ongoing Charges Figure, and it was therefore decided to exit the Baillie Gifford Japan Fund in favour of the L&G Japan index Fund.

A new market cycle has begun with a rapid normalisation of interest rates and higher inflation expectations. Cash is unattractive as inflationary pressures are structurally long term due to falling trust amongst leading global economies. Continuing to hold a diversified portfolio of high-quality assets is important to protect and grow the value of savings over the long term. 

Continuing to hold a globally diversified portfolio of high-quality assets over the longer term remains the appropriate method for allocation of investor capital.

Keith W Thompson

Clarion Group Chairman

November 2022

Creating better lives now and in the future for our clients, their families and those who are important to them.

Clarion funds & discretionary portfolios:

Defender Managed Portfolio

The chart below shows the historical performance of the Defender Portfolio against a relevant benchmark since the start of the available data.

The table below shows the annualised performance to the last quarter end:

	30/09/21 30/09/20 to to 30/09/22 30/09/21
CIM DT03 Defender Portfolio	-9.90% 7.42%
ARC Sterling Cautious PCI	-10.13% 6.33%
IA Mixed Investment 0-35% Shares	-12.00% 6.02%

Changes to the Defender Portfolio

The Baillie Gifford Japanese Acc fund was removed from the portfolio (5.00% to 0.00%)
The L&G Short Dated Sterling Corporate Bond Index Acc fund was removed from the portfolio (4.20% to 0.00%)
The iShares Japan Equity Index Acc was added to the portfolio (0.00% to 5.00%)
The Artemis Corporate Bond Acc fund was added to the portfolio (0.00% to 4.20%)

Prudence Fund & Managed Portfolio

The chart below shows the historical performance of the Prudence Portfolio against a relevant benchmark since the start of the available data.

The table below shows the annualised performance to the last quarter end:

	30/09/21 to 30/09/22	30/09/20 to 30/09/21	30/09/19 to 30/09/20	30/09/18 to 30/09/19	30/09/17 to 30/09/18
MGTS Clarion Prudence X Acc	-12.39%	11.63%	-2.00%	1.83%	2.90%
CIM DT04 Prudence Portfolio	-12.56%	11.66%	-1.23%	2.54%	2.93%
ARC Sterling Cautious PCI	-10.13%	6.33%	1.52%	3.40%	1.29%
IA Mixed Investment 20-60% Shares	-10.56%	12.21%	-1.19%	4.01%	2.60%

Changes to the Prudence Fund & Portfolio

The Baillie Gifford Japanese Acc fund was removed from the portfolio (5.00% to 0.00%)
The L&G Short Dated Sterling Corporate Bond Index Acc fund was removed from the portfolio (4.50% to 0.00%)
The iShares Japan Equity Index Acc was added to the portfolio (0.00% to 5.00%)
The Artemis Corporate Bond Acc fund was added to the portfolio (0.00% to 4.50%)

Navigator Fund & Managed Portfolio

The chart below shows the historical performance of the Navigator Portfolio against a relevant benchmark since the start of the available data.

The table below shows the annualised performance to the last quarter end:

	30/09/21 to 30/09/22	30/09/20 to 30/09/21
MGTS Clarion Navigator X Acc	-12.48%	14.17%
CIM DT05 Navigator Portfolio	-12.77%	14.32%
IA Mixed Investment 40-85% Shares	-10.15%	16.63%

ARC Sterling Balanced Asset PCI -11.13% 10.93%

Changes to the Navigator Fund & Portfolio

The Baillie Gifford Japanese Acc fund was removed from the portfolio (5.00% to 0.00%)
The L&G Short Dated Sterling Corporate Bond Index Acc fund was removed from the portfolio (3.30% to 0.00%)
The iShares Japan Equity Index Acc was added to the portfolio (0.00% to 5.00%)
The Artemis Corporate Bond Acc fund was added to the portfolio (0.00% to 3.30%)

Meridian Fund & Managed Portfolio

The chart below shows the historical performance of the Meridian Portfolio against a relevant benchmark since the start of the available data.

The table below shows the annualised performance to the last quarter end:

	30/09/21 to 30/09/22	30/09/20 to 30/09/21	30/09/19 to 30/09/20	30/09/18 to 30/09/19	30/09/17 to 30/09/18
MGTS Clarion Meridian X Acc	-13.52%	16.76%	0.00%	0.99%	6.39%
CIM DT06 Meridian Portfolio	-14.02%	17.08%	0.93%	3.36%	5.31%
ARC Steady Growth PCI	-12.02%	15.04%	-0.16%	3.82%	5.15%
IA Mixed Investment 40-85% Shares	-10.15%	16.63%	-0.19%	4.20%	5.35%

Changes to the Meridian Fund & Portfolio

The Baillie Gifford Japanese Acc fund was removed from the portfolio (5.00% to 0.00%)
The L&G Short Dated Sterling Corporate Bond Index Acc fund was removed from the portfolio (2.40% to 0.00%)
The iShares Japan Equity Index Acc was added to the portfolio (0.00% to 5.00%)
The Artemis Corporate Bond Acc fund was added to the portfolio (0.00% to 2.40%)

Explorer Fund & Managed Portfolio

The chart below shows the historical performance of the Explorer Portfolio against a relevant benchmark since the start of the available data.

The table below shows the annualised performance to the last quarter end:

	30/09/21 to 30/09/22	30/09/20 to 30/09/21	30/09/19 to 30/09/20	30/09/18 to 30/09/19	30/09/17 to 30/09/18
MGTS Clarion Explorer X Acc	-14.01%	18.75%	0.86%	4.48%	8.58%
CIM DT07 Explorer Portfolio	-14.97%	19.03%	1.21%	3.97%	9.27%
ARC Equity Risk PCI	-13.49%	19.42%	-0.25%	3.84%	6.53%
IA Flexible Investment	-9.19%	18.30%	0.88%	3.24%	5.37%

Changes to the Explorer Fund & Portfolio

The Baillie Gifford Japanese Acc fund was removed from the portfolio (6.00% to 0.00%)
The iShares Japan Equity Index Acc was added to the portfolio (0.00% to 6.00%)

Voyager Managed Portfolio

The chart below shows the historical performance of the Voyager Portfolio against a relevant benchmark since the start of the available data.

The table below shows the annualised performance to the last quarter end:

30/09/21

30/09/22

30/09/20

30/09/21

CIM DT08 Voyager Portfolio

-16.47%

19.86%

ARC Equity Risk PCI

-13.49%

19.42%

Changes to the Voyager Portfolio

The Baillie Gifford Japanese Acc fund was removed from the portfolio (6.00% to 0.00%)
The iShares Japan Equity Index Acc was added to the portfolio (0.00% to 6.00%)

Adventurer Managed Portfolio

The chart below shows the historical performance of the Adventurer Portfolio against a relevant benchmark since the start of the available data.

The table below shows the annualised performance to the last quarter end:

30/09/21

30/09/22

30/09/20

30/09/21

CIM DT09 Adventurer Portfolio

-15.98%

18.32%

ARC Equity Risk PCI

-13.49%

19.42%

Changes to the Adventurer Portfolio

The Baillie Gifford Japanese Acc fund was removed from the portfolio (6.00% to 0.00%)
The iShares Japan Equity Index Acc was added to the portfolio (0.00% to 6.00%)

Pioneer Managed Portfolio

The chart below shows the historical performance of the Pioneer Portfolio against a relevant benchmark since the start of the available data.

The table below shows the annualised performance to the last quarter end:

30/09/21

30/09/22

30/09/20

30/09/21

CIM DT10 Pioneer Portfolio

-14.63%

18.18%

ARC Equity Risk PCI

-13.49%

19.42%

Changes to the Pioneer Portfolio

There were no changes made to the Pioneer portfolio in November 2022

Risk Warnings

The content of this article does not constitute financial advice and you may wish to seek professional advice based on your individual circumstances before making any financial decisions.

Any investment performance figures referred to relate to past performance which is not a reliable indicator of future results and should not be the sole factor of consideration when selecting a product or strategy. The value of investments, and the income arising from them, can go down as well as up and is not guaranteed, which means that you may not get back what you invested. Unless indicated otherwise, performance figures are stated in British Pounds. Where performance figures are stated in other currencies, changes in exchange rates may also cause an investment to fluctuate in value.