Tags: funds, investment, MGTS Clarion Explorer, MGTS Clarion Meridian, MGTS Clarion Navigator Portfolio, MGTS Clarion Prudence
Category: Investment management

Minutes of the Clarion Investment Committee held at 1pm on 14^th January 2021 by Video Link.

Committee members in attendance: –

*Apologies from Ron Walker, Founding Director, Clarion

Review of previous minutes and action points

Minutes from the previous meeting held on 10^th December 2020 were agreed by the Committee as a true and accurate record.

Economic commentary and market outlook

Please click here to access the January Economic and Stock Market Commentary written by Clarion Group Chairman, Keith Thompson.

The following notes summarise the main points discussed by the Investment Committee.

2021 is expected to be a year of recovery, catch-up and accommodation.

The IC expects 2021 to be a better year for the global economy than most envisage. GDP growth in many major economies will surprise on the upside, with those that suffered the sharpest downturns in 2020 generally rebounding fastest.

While recently renewed restrictions in many developed market economies will weigh on economic activity in the first half of this year, behaviour should quickly return to normal once the vaccine rollout allows for these measures to be relaxed or removed.

The outlook for much of emerging Asia is comparatively upbeat, while the slow rollout of vaccines will limit recoveries in Latin America and Sub-Saharan Africa. Tourism-dependent economies will feel the benefits of receding virus fears and oil exporters will gain from increased travel.

Risk assets will gain more ground and the US dollar will weaken against a backdrop of a recovering global economy and continued accommodative monetary policy.

2021 will be a year of two halves for developed market economies.

The next few months will be hard as the United States and Europe suffer from renewed coronavirus related restrictions. Large increases in coronavirus infections in October and November forced many governments to tighten restrictions towards the end of last year. While these measures showed some signs of beating back the resurgence of new cases, especially in continental Europe, progress has stalled or even gone into reverse more recently, despite restrictions remaining in place.

But the good news is that last years’ experience shows that the economy can rebound quickly when lockdowns are lifted. Effective vaccines have shone a light at the end of the tunnel and the vaccine rollout will allow restrictions to be removed in major advanced economies in the second quarter of 2021. After that, behaviour should quickly return to normal and consumers will spend some of their pent-up savings, causing a sharper recovery than generally anticipated.

Talk of impending fiscal austerity in advanced economies apart from the United States seems overdone and higher public debt loads are sustainable. Inflation might rise somewhat this year as activity recovers, particularly in the United States. But central banks are likely to look through this given the ongoing shift towards tolerating above target inflation for limited periods. Overall, inflation will remain very low by historic standards and the Investment Committee do not expect any sustained upward pressure on prices for the foreseeable future. The European Central Bank is expected to extend its net asset purchases until the end of 2022. Meanwhile, the latest language from the Fed suggests that its net asset purchases will continue for several more years. If downside risks were to materialise, it might lengthen the average maturity or increase the pace of its purchases.

China’s rebound from the Covid-19 shock has been swifter and stronger than anticipated and this robust performance looks set to continue. While the sharp and unexpected contraction in the first quarter of 2020 pulled China’s annual growth down to the lowest in decades, the strength of its subsequent rebound has been just as noteworthy. Indeed, China will be one of very few economies to grow at all in 2020. While state-led investment and exports have driven the recovery so far, a stronger labour market should continue to push up consumer spending too. The Investment Committee expects that the strength of this recovery will pave the way for some policy tightening by the People’s Bank of China next year, making it the only major central bank to raise rates. Yet this policy reversal is unlikely to derail the recovery and it is expected that China’s economy will remain a global outperformer this year.

The sharper-than-anticipated global economic recovery is unlikely to prompt a rise in bond yields. Asset purchase programmes and other tools have afforded central banks greater control over long-term interest rates and it is likely that they will strive to keep them down.

This will support further gains in equities this year and the positive rotation in favour of the sectors that suffered most during the crisis should continue. After a pandemic-driven rollercoaster of a year in financial markets, risk assets have rallied since the start of November, thanks to the results and fading of uncertainty around the US election and, more importantly, news about effective vaccines for Covid-19. At the same time, the yields of safe government bonds have risen only slightly, while the US dollar has weakened, especially against riskier currencies. This pattern is expected to continue this year.

Strategy

Many of the potential hurdles that lay in the path of market recovery from the depths of the Covid-19 pandemic have been resolved with a Brexit deal having been finally agreed in late December, a new US President finally being inaugurated after much drama and not one but three vaccines receiving regulatory approval. The stage is set for a bullish run in equities, particularly for the “losers” of the pandemic most likely to benefit from the vaccine distribution. The UK indices are more biased towards these companies than other contemporaries, with a host of stocks covering the battered travel, leisure and services industries. With a Brexit deal now secured, overseas investors have confidence in the outcome of their decisions in a way not possible since the middle of 2016. These factors, along with the UK’s quick start in vaccine approval and distribution so far, should see the UK outperform on a relative basis compared to other equity markets.

We also maintain our overweight position to Asian equities based on their successful response to the initial wave of the virus, where economic indicators have returned to normal except for tourism. These countries have had a head start in their return to growth and, with most western countries still struggling with varying degrees of lockdowns until vaccines are sufficiently rolled out, at least another quarter of relative outperformance is likely. Equity valuations are not cheap based on long-term historical metrics but, in the circumstances, they are attractive.

Central banks continue to lead bond markets by the nose, squashing the long end of the yield curve to ensure cheap long-term borrowing is available to pay for the costs of the pandemic. This makes bond markets in effect quasi-nationalised, with present valuations only reasonable to pay for investment if negative interest rates are expected to be implemented more widely. We maintain our exposure primarily in sterling denominated short-dated corporate bonds, which offer reduced duration and credit risk, and an above inflation yield. In the event of bond yields rising as the pandemic comes to an end, these will also outperform long-dated bonds.

Review risk management, eligibility and investment and borrowing powers

The Committee reviewed risk reports and confirmed that all Clarion funds have been run in line with expectations. The Committee confirmed that there have been no breaches recorded for any of the funds included in the Clarion range.

Management of the Clarion Funds: Prudence, Navigator, Meridian and Explorer

MGTS Clarion Prudence

• The last quarter has seen Prudence outperform its sector by +0.80% whilst marginally underperforming its DT strategic benchmark by -0.40% over the same period.
• The fund outperformance versus its sector mainly derived from our allocation attribution within the IA Global sector. A detractor from this is that our selection attribution was down because of our fixed interest holdings, but overall, the last quarter has been positive for the Prudence fund.
• The ‘First State Asia Focus’ holding has now produced a negative return over 1, 2, 4, 12, 24 and 52 weeks. The fund, due to its defensive nature, performed well during the market downturn as a result of COVID-19, however performance lagged on the subsequent recovery. The underperformance hasn’t been of much significance and the committee believe the fund to remain appropriate for Prudence given its low-risk mandate.
• The outperformance of the long duration bond holdings within the Prudence portfolio continues to be cancelled out by the underperformance of the short duration holdings over a 12-week period.
• The inclusion of the Royal London Sterling Credit has proved to be a good addition to the portfolio, returning 1% over the last quarter. This fund is the strongest within the portfolio behind ‘Baillie Gifford’ which has returned 1.50% over the same period.
• Royal London Global Index Linked has underperformed in the last 1 and 2 weeks. This is the longest duration fixed interest holding within the portfolio and as a result has suffered on the back of the short-term movements in yields.
• Overall, the committee remain pleased with the performance of Hermes Global Emerging Markets. Over 12 months, this fund has returned 7.94%, proving to be one of the portfolios top performers.
• M&G Global Dividend and Man GLG UK Income continue to gather momentum due to the recent shift from ‘growth’ to ‘value’, with these funds returning 4.73% and 4.09% over the last quarter respectively. These two holdings are the portfolio’s best performers over 12 weeks.
• At December’s investment committee meeting, concerns were raised over the ‘Fidelity European’ fund which had consistently underperformed against its sector over the last couple of quarters. Following the market volatility experienced as a result of COVID-19, this holding held up relatively well but simply did not benefit as much on the recovery. The ratio of underperformance to outperformance is unfavorable for this fund and the committee believe now is the opportune moment to remove this fund from across the Clarion range of funds. Having conducted research pre meeting, it was agreed that the ‘BlackRock Continental European’ would be suitable replacement which is to take effect immediately.
• The rest of the portfolio remains in good shape and the committee agree that no changes are required at this stage.
• Fund size is currently £23.40m.
• Performance over 1 year is up at +2.50% compared to a fall in the UK FTSE 100 index of circa -8.97%

MGTS Clarion Navigator

• The fund performance remains in line with both its sector and benchmark since the fund launch at the start of May 2020.
• The committee have been really pleased with the performance of ‘Artemis Global Select’, with the fund outperforming ‘Fundsmith Equity’ over 12 months. Leading to this outperformance is how the fund adapted on the rotation from growth to value along with a reallocation of equities from the US to Asia. Further to this, the fund has deployed further monies into green energy assets and is working on increasing the overall environmental efficiency within the portfolio.
• Whilst ‘Fundsmith Equity’ remains up over 12 months, in recent weeks, we have seen this fund consistently underperform versus ‘Artemis Global Select’. Considering this, it was agreed that we would now take the opportunity to reduce our holding in Fundsmith by 1% across all portfolios and redistribute this to Artemis.
• At last month’s meeting, it was agreed that we would remove Buffettology from within our portfolios given that the fund had suffered as a result of the rotation from growth to value and the funds lack of resilience to claw back some of the losses made as a result of the rotation. It was agreed that ‘Baillie Gifford UK Equity Focus’ would be the most suitable replacement for a straight swap, however, since making this decision, it became apparent that this fund was not available for distribution. Having conducted a review of alternatives available in the market, it was agreed that we would instead deploy the funds into the ‘Slater Growth’ fund. This investment focuses on UK small to mid-cap companies in a similar manner to Buffettology, but with a much smaller and manageable FUM.
• In line with Prudence, we are completing a straight swap of ‘Fidelity European’ with ‘BlackRock Continental European’.
• No further changes are required to the portfolio at this juncture.
• Fund size is currently £22.10m; an increase of circa £11.32m from the last committee meeting carried out in December following a number of large inflows.
• The unit price as of the 22^nd January 2021 was 110.33p; showing a 10.33% increase having been launched at 100p on the 11th May 2020.

Due to the fact that the Navigator Fund has only been operating for a short period of time, we are unable to provide a useful performance graph of the fund versus its relevant benchmark

MGTS Clarion Meridian

• Meridian has underperformed against its benchmark by 0.50% over the last quarter whilst outperforming its sector by 1.10%.
• Meridian has outperformed its sector due to its allocation attribution within the IA Global sector along with Asia (excluding Japan). The biggest detractor on performance was our fund selection in the Bond element of the portfolio.
• Merian Gold and Silver was the strongest performing fund within Meridian over 4 weeks, returning 10.56%. This upward movement has mainly derived from the fund’s exposure to Silver.
• Both Emerging Markets holdings with Meridian continue to be very strong and work well together given their individual bias’s to growth and value. Both funds have adapted very well to the rotation in investment styles and are proving to be a strong part of the overall portfolio.
• In line with Navigator, the committee have agreed to replace ‘Buffettology ‘with ‘Slater Growth’. At the same time, the fund is to complete a straight swap of ‘Fidelity European’ for ‘BlackRock Continental European’ and reduce the allocation within ‘Fundsmith Equity’ by 1% and deploy this into ‘Artemis Global Select’ fund.
• The remainder of the portfolio remains in good shape and the committee agree that no further changes are required at this stage.
• Fund size is currently £60m.
• Performance over 1 year is up at +56 compared to a fall in the UK FTSE 100 index of circa -8.97%

MGTS Clarion Explorer

• Over the last quarter, Explorer has returned 11.40%, outperforming both its benchmark and sector by 2.50% and 3.00% respectively over the same timeframe.
• The outperformance has mainly been driven by the fund’s allocation to UK and Global equities along with strong fund selection within Emerging Markets.
• Performance of the funds within the Asia Pacific (ex-Japan) element of the portfolio has been mixed, with two out of the four funds providing a positive return over the quarter.
• Schroder Asian Income has been the strongest performing holding within the Asia Pacific (ex-Japan) sector in recent weeks. This performance has been driven by the fund’s high exposure to India which has done well on the COVID-19 recovery.
• It was agreed that the 4% allocation in ‘Fidelity European’ would be removed from the portfolio. 0.50% of this is to be distributed to the ‘Hermes Europe’ fund which has endured a period of strong performance of late, due to a number of large outflows. The remaining 3.50% that is to be raised from the sale is to be allocated into ‘BlackRock Continental European’ fund.
• In similar vein to Navigator and Meridian, it was agreed that considering recent performance, we would allocate an additional 1% to ‘Artemis Global Select’ by reducing our allocation in ‘Fundsmith Equity’.
• During last month’s meeting, ‘Lindsell Train Japanese’ was raised as a concern due to the fund’s consistent underperformance. Whilst holding the ‘hedged’ share class of this fund has proved to be beneficial compared to the ‘unhedged’ share class, the fund has fallen by -4.53% over the last two weeks alone and currently sits at the largest loss within the portfolio over a 12-month period.

The committee believe that now is the right time to remove this fund from the portfolio and agreed that ‘Baillie Gifford Japan’ is the most appropriate replacement for a straight swap.

• A hedged version of the ‘Baillie Gifford Japan’ fund is not available at this time. To maintain our hedged position within Japan to mitigate the impact of movements in Sterling and the Yen, it was agreed we would covert ‘JPM Japan’ into the hedged share class of this fund.
• The rest of the portfolio remains in good shape and no other changes are required at this stage.
• Fund size is currently £19.31m.
• Performance over 1 year is up at +28% compared to a fall in the UK FTSE 100 index of circa -8.97%

Model Portfolios

It was agreed to make appropriate changes to the model portfolios to reflect the changes to the Portfolio Funds detailed above.

Next Investment Committee Meeting is on 11^th February 2020 although in the interim period the Committee intend to conduct slightly shorter conference calls as considered appropriate.

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