Clarion Investment Diary August 2022

The Clarion Investment Committee met on Thursday 18^th August 2022. The following notes summarise the main points of consideration in the investment Committee discussions.

Economic Snapshot

European gas prices hit new record highs as fears of a shortfall over the winter continued to grow.
A zinc smelter in the Netherlands and an aluminium smelter in Slovakia are set to close, the latest smelters to do so as the energy-intensive sector battles high energy costs.
The German government announced it would cut VAT on gas from 19% to 7% in a bid to support household finances.
German producer price inflation soared to a record 37.2% in the year to July, its highest since at least 1949. The rise in factory gate prices was driven in large part by a 105% increase in the cost of energy.
The IMF estimates that energy exporters in the Middle East are likely to gain an additional $1.3tn in oil revenues over the next four years due to elevated energy prices.
The UK economy shrank by 0.1% from the first to the second quarter. The fall in activity is partly explained by the winding down of COVID-19-related programmes.
UK inflation rose to a 40-year high of 10.1% in July with food prices at 12.7%.
UK consumer confidence hit another record low, reflecting the expectation of consumers that their finances will worsen in the year ahead.
The number of UK job vacancies fell for the first time since the summer of 2020 in the three months to July.
The interest rate paid by the UK government to borrow for two years rose from 2.0% to 2.5% last week, as investors increasingly expect a faster pace of interest rates from the Bank of England.
Random testing performed by the ONS suggested that the incidence of COVID-19 in the UK continued to decline in the week ending 6 August.
The Turkish central bank cut interest rates from 14% to 13% despite inflation running at almost 80%. President Recep Tayyip Erdogan has long been a proponent of lower interest rates despite years of above-target inflation.
The Norwegian central bank raised rates for the second time this year and indicated that further rate rises are expected.
Minutes from the meeting of Federal Reserve policymakers last month suggested that interest rates were likely to remain at elevated levels “for some time”.
US housing starts – widely seen as a lead indicator for the US economy – were down 8.1% from a year earlier in July, their lowest level since early last year, as the sector feels the chill of higher mortgage interest rates.
The Sichuan province of China is experiencing a heatwave that has led to a sharp rise in electricity demand at a time when low water levels are suppressing hydroelectric generation. This has resulted in factory closures.
Cineworld, the world’s second-largest cinema operator, is reportedly considering filing for bankruptcy. The cinema sector was among the worst affected by the pandemic.
UK supermarket Iceland announced that it would provide interest-free loans of up to £100 to low-income shoppers in a bid to help struggling consumers.
In the UK, last week saw further strikes by railway workers, London Underground workers, criminal barristers and dockworkers at Felixstowe.
Students in the UK received their A-level results. Average grades have fallen following a sharp increase during the pandemic when grades were estimated due to exams not running.
Perenna, a UK specialist lender, has been granted a licence to offer mortgages with a fixed rate for up to 50 years for the first time.
Heathrow, the UK’s busiest airport, announced that it would extend its controversial 100,000 passengers a day cap from 11 September to 29 October in a bid to prevent disruption and cancellations.
The International Monetary Fund cut its forecasts for global growth this year and next and marked up its forecasts for inflation. The fund warned that “the risk that we may have a global recession has increased.”

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

Strategy

The Investment Committee have been identifying the risks of rising inflation and interest rates for a considerable time, being actively discussed at the monthly meetings and reflected in decisions taken. This month is no different.

The IC remains confident that its capital market assumptions & asset allocation strategies are valid in these market conditions. Following the rapid economic bounce back from Covid lockdowns, the IC had become increasingly concerned about the impact of rising inflation expectations taking hold. With UK inflation currently running at over 10% the highest level experienced for more than 40 years, it is understandably grabbing the headlines.

The corrosive impact of inflation on living standards and reduction in spending power of accumulated wealth should not be underestimated, even when at modest levels. So, what can be done when the Bank of England is warning of inflation reaching 13% and staying at ‘very elevated levels’ throughout much of next year, before eventually returning to its long-term 2% target in 2024?

Interest rates are already on the rise, with the biggest UK increase in 27 years announced earlier this month (the Bank of England base rate now stands at 1.75%). Similar measures to put up borrowing costs are happening elsewhere around the world, with the US Federal Reserve having hawkishly raised rates to a range of 2.25% to 2.5%, and the European Central Bank delivering its first interest rate hike in over a decade, taking the eurozone out of negative rates.

The current combination of stagnating economic growth and rising inflation, referred to as ‘stagflation’, is particularly troublesome for asset allocators. Tightening monetary policy to tackle stubbornly high inflation, at a time when the economy is already slowing, can be a very difficult tightrope for central banks to walk, if recession is to be avoided. This unwelcome scenario has been a risk of growing concern for the IC, even back when market consensus expected inflationary pressures to be temporary in nature.

A drawn-out stagflationary environment would create the most serious challenge for the multi-asset portfolio benchmarks. This is mainly due to the potential impact of sharply rising interest rates on bond values and their increasing correlation with equities. The latter has been magnified as yields have been driven to rock-bottom levels, due to unprecedented monetary stimulus post the 2008/09 Financial Crisis.

Using long-term trend analysis and research sources, the strategic asset allocation decisions taken by the IC over a number of years can be summarised below:

Managed reduction in long-duration bond exposures
Continuing global diversification trend
Prudent increases in short-duration bond allocations.

The multi-asset benchmarks, which have been running since 2008 have experienced periods of considerable market stress, but these decisions have helped prove them to be extremely resilient and perform in line with our long-term expectations.

As we navigate these prevailing cross-currents of acute economic and geo-political uncertainties, the IC will continue its laser focus on ensuring the benchmarks remain best positioned for long-term investors looking for protection of their wealth against both inflation and volatility.

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

Keith W Thompson

Clarion Group Chairman

August 2022

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

Clarion Funds & Discretionary Managed 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:

	30/06/21 30/06/20 to to 30/06/22 30/06/21
CIM DT03 Defender Portfolio	-6.88% 7.80%
ARC Sterling Cautious PCI	-5.21% 7.25%
IA Mixed Investment 0-35% Shares	-8.57% 6.86%

Changes to the Defender Managed Portfolio

There were no changes made to the Defender portfolio in August 2022

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:

	30/06/21 to 30/06/22	30/06/20 to 30/06/21	30/06/19 to 30/06/20	30/06/18 to 30/06/19	30/06/17 to 30/06/18
MGTS Clarion Prudence X Acc	-8.97%	12.32%	-1.60%	0.69%	2.35%
CIM DT04 Prudence Portfolio	-9.06%	12.26%	-1.27%	1.43%	3.56%
ARC Sterling Cautious PCI	-5.21%	7.25%	1.66%	2.37%	1.41%
IA Mixed Investment 20-60% Shares	-7.09%	12.74%	-0.63%	2.89%	2.44%

Changes to the Prudence Fund & Managed Portfolio

There were no changes made to the Prudence portfolio in August 2022

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:

ARC Sterling Balanced Asset PCI-6.63%11.84%

	30/06/21 to 30/06/22	30/06/20 to 30/06/21
MGTS Clarion Navigator X Acc	-9.53%	15.12%
CIM DT05 Navigator Portfolio	-10.01%	16.14%
IA Mixed Investment 40-85% Shares	-7.16%	17.29%

Changes to the Navigator Fund & Managed Portfolio

There were no changes made to the Navigator portfolio in August 2022

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:

	30/06/21 to 30/06/22	30/06/20 to 30/06/21	30/06/19 to 30/06/20	30/06/18 to 30/06/19	30/06/17 to 30/06/18
MGTS Clarion Meridian X Acc	-11.58%	19.62%	-0.98%	0.73%	5.00%
CIM DT06 Meridian Portfolio	-12.00%	19.73%	-0.51%	3.26%	5.36%
ARC Steady Growth PCI	-7.67%%	15.87%	-0.51%	3.54%	4.92%
IA Mixed Investment 40-85% Shares	-7.16%	17.29%	-0.11%	3.62%	4.85%

Changes to the Meridian Fund & Managed Portfolio

There were no changes made to the Meridian portfolio in August 2022

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:

	30/06/21 to 30/06/22	30/06/20 to 30/06/21	30/06/19 to 30/06/20	30/06/18 to 30/06/19	30/06/17 to 30/06/18
MGTS Clarion Explorer X Acc	-11.98%	22.72%	-1.22%	5.33%	6.96%
CIM DT07 Explorer Portfolio	-12.73%	22.46%	-1.09%	5.69%	8.60
ARC Equity Risk PCI	-8.92%	20.57%	-1.13%	4.02%	6.36%
IA Flexible Investment	-7.09%	19.48%	0.31%	2.95%	5.04%

Changes to the Explorer Fund & Managed Portfolio

There were no changes made to the Explorer portfolio in August 2022

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:

30/06/21

30/06/22

30/06/20

30/06/21

CIM DT08 Voyager Portfolio

-14.46%

24.81%

ARC Equity Risk PCI

-8.92%

20.57%

Changes to the Voyager Managed Portfolio

There were no changes made to the Voyager portfolio in August 2022

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:

30/06/21

30/06/22

30/06/20

30/06/21

CIM DT09 Adventurer Portfolio

-15.60%

25.54%

ARC Equity Risk PCI

-8.92%

20.57%

Changes to the Adventurer Managed Portfolio

There were no changes made to the Adventurer portfolio in August 2022

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:

30/06/21

30/06/22

30/06/20

30/06/21

CIM DT10 Pioneer Portfolio

-15.18%

26.74%

ARC Equity Risk PCI

-8.92%

20.57%

Changes to the Pioneer Managed Portfolio

There were no changes made to the Pioneer portfolio in August 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.