Minutes of the Clarion Investment Committee held at 1pm on 11TH June 2021 by video link. Committee Members in attendance:

 

Sam Petts (SP) IC Chairman/Investment Manager
Keith Thompson (KWT) Chairman (Clarion Investment Management)
Adam Wareing (AW) Operations Director & Compliance Director (Clarion Investment Management)
Jacob Hartley (JH) Associate Financial Planner (Clarion Wealth Planning)
Dmitry Konev (DK) Senior Analyst (Margetts Fund Management)
Toby Ricketts (TR) CEO (Margetts Fund Management) / Investment Manager
Elizabeth Chapman (EC) Analyst (Margetts Fund Management)

 

Apologies from:

Ron Walker (RW)                        Managing Director – Clarion Investment Management

 

Review of previous minutes and action points

Minutes from the previous meeting held on 6th May 2021 were agreed by the Committee as a true and accurate record.

Economic commentary and market outlook

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

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

  • Stimulus injected during the Covid-19 pandemic is set to reach $20trn.
  • Countries that had previously lagged in the vaccine rollout are catching up and new vaccines continue to be developed and approved.
  • A synchronised ‘V’-shaped recovery in all global economies has resulted in a spike in demand and caused volatility in asset prices.
  • For the decade that followed the credit crisis, economic growth has been slow and stammered, with central banks reluctant to tighten monetary policies.
  • The resulting asset price inflation and low yield environment during this time benefitted fixed interest and growth stocks while value stocks underperformed.
  • Having been on a downward trajectory since the ’80s and driven by QE and the outbreak of covid, bond yields are currently lower than they have ever been.
  • BoE is buying c.£4bn worth of bonds each week and currently owns around 31% of the entire Gilt market, bringing Gilt yields down to an artificially low level.
  • Market participants are predicting inflation to rise above the BoE’s and the Fed’s targets; if this occurs, it would mean that these central banks will be less likely to be able to continue their asset-buying programmes.
  • An environment of rising yields is also likely to result in the underperformance of companies that benefit from a low yield environment, such as large growth stocks (which dominate the US indices) and the outperformance of value stocks (which are the main component of UK indices).
  • While growth stocks with compounding earnings, such as Amazon and Google are likely to perform strongly regardless of this environment, many unprofitable tech companies could underperform and passive index-tracking funds, which indiscriminately hold both, risk underperforming actively managed funds in such a scenario.
  • Diversification is of key importance in order to mitigate the risk of equity styles underperforming at the same time.

KT questioned how value stocks could be defined, assuming they are cheaper stocks with a higher yield. The generalisation of value and growth can be misleading as they can sometimes offer less potential/return going forward.

TR Defined a value stock as one that has modest but predictable future earnings and a low P/E ratio, as the visibility of the earnings on a value stock must be high. Some more established businesses, such as oil and industrial companies and banks are often treated as value stocks as they have predictable business models and tend to trade on low P/E ratios. Apple is arguably a future value stock as its revenue growth is likely to slow down, just as Microsoft is arguably a utility business. Many growth stocks will become value stocks.

SP was concerned that Japan was still lagging on its vaccine rollout, as the portfolios are overweight to Japan, and asked the Committee’s view on reducing this allocation.

TR did not view the overweight allocation to Japan as an issue as covid cases in Japan were very low.

KT queried the Committee’s view on increasing exposure to gold within the portfolios.

TR felt that, if cryptoassets were to fall out of favour, gold would be a beneficiary.

SP added that a negative real yield environment also tended to benefit gold prices.

Strategy

Our developed equity positioning is well placed to benefit from economies reopening following successful vaccination rollouts. The UK is biased towards value equities in its major indices, and ought to see a robust rebound from pent-up consumer demand for services.

Our US positioning, with recent additions in US Smaller Companies, also ought to capture the upside from increased domestic spending during the future recovery following fiscal stimulus measures. One of our concerns over the outperformance of US tech stocks has been the possibility of headwinds that would impact earnings multiples. The recent emergence of a taxation blueprint and the possibility of regulation for the wild frontier of technology could have an impact on the earnings of companies such as Facebook, Alphabet and Twitter which could in turn affect their current high valuations.

Emerging Markets have a reasonable bull case in the reflationary trade, as commodities increase in price. Our positioning is tilted away from China and should benefit from the pickup in global trade as economies re-open.

In bonds, our short-dated bias has helped to insulate investors from rising yields, as concerns over inflation weigh on bond prices. The income from these short-dated bond funds remains above inflation, while reducing credit and duration risk.

We expect bond yields to rise further this year, which would acutely affect longer-dated bonds. Duration has crept higher over recent years in bond index trackers, which means their sensitivity to interest rate rises and inflation are increased. The risk of capital loss for bonds that already yield close to zero is all too clear. Our short-dated positioning ought to outperform in this environment.

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

  • Attribution analysis for Prudence over 12 months showed positive Allocation and Selection effects, producing an overall positive Cumulative effect.
  • Over the last quarter, Prudence returned 0.70% ahead of the IA Mixed Investment 20-60% Shares and performed approximately in line with the sector over 6 months and 1 year.
  • The Hermes Global Emerging Markets strategy marginally underperformed the IA Global Emerging Markets sector over the last six months, however, one-year performance remains positive. The Committee will continue to monitor the strategy’s performance and review if necessary.
  • The M&G Global Dividend strategy has performed strongly during the Covid market recovery, performing in line with or ahead of the IA Global sector over one-four weeks and three and six months.
  • The large-cap Artemis Income strategy has underperformed the IA UK Equity Income sector over four weeks and three-six months during a period where small and mid-cap strategies have had a stronger performance.
  • The committee is happy with the current portfolio and agreed that no changes are required at this juncture.
  • Fund size is currently £16.36m
  • Performance over 1 year is 10.58% compared the UK FTSE 100 index which has returned 20.15%

MGTS Clarion Prudence – Historical Performance

The chart below shows the performance of the above fund since inception. The table below that shows the discrete annual performance to the last quarter end.

Prudence Fund June 2021 Clarion Wealth Planning

  31/03/20 to 31/03/21 31/03/19 to 31/03/20 31/03/18 to 31/03/19 31/03/17 to 31/03/18 31/03/16 to 31/03/17
MGTS Clarion Prudence R Acc 17.96% -7.89% 3.87% -1.24% 9.59%
IA Mixed Investment 20-60% Shares 19.83% -7.19% 2.86% 0.83% 12.90%

 

MGTS Clarion Navigator

  • Attribution analysis for Navigator showed positive Allocation and Selection effects, resulting in an overall positive Cumulative effect.
  • Navigator performed approximately in line with the IA Mixed Investment 40-85% Shares sector over three months and was circa 0.90% and 1.30% behind over six months and one year respectively. The reason for the slight underperformance is due to the fact the fund takes less risk than the sector average.
  • Inflationary forces were evident in the performance of the underlying bond holdings, with stronger performance from the Royal London Global Index Linked strategy over one-12 weeks.
  • The Man GLG UK Income and SLI Global Emerging Markets Income strategies marginally underperformed in recent months, however both funds were ahead of their respective sectors over one year.
  • The performance of the Stewart Investors Asia Pacific Leaders fund, which has a higher allocation to India, has improved over four and 12 weeks.
  • It came to the attention of the committee that the ‘Vanguard FTSE UK All Share’ fund was only held in the Navigator portfolio and therefore deemed an outlier. In light of the changes at the recent committee meetings whereby we have attempted to simplify the portfolio funds, it was agreed to complete a straight swap of the aforementioned Vanguard fund in place of the ‘Artemis Income’ fund. The Artemis fund was favoured due to superior performance of late, along with the additional diversification this fund brings to the portfolio.
  • The committee is satisfied with the remainder of the portfolio and agreed that no further changes are required at this juncture.
  • Fund size is currently £37.91m
  • The unit price as of the 25th June 2021 was 113.42; showing a 13.42% increase having been launched at 100p on the 11th May 2020.

MGTS Clarion Navigator – Historical Performance

Whilst the Navigator fund launched on 11th May 2020, the fund did not receive any cash inflows until 5th June 2020 meaning that no investments were made before this date.  You can identify this period as the Navigator fund growth appears flat whilst the sector grew over this period. This gives the impression that the fund lagged the sector when, in fact, the Navigator fund did not participate in any market growth during this period.

However, we also manage a Navigator discretionary portfolio containing almost identical investments to the Navigator fund and this was invested during this period. The chart below compares the performance of this portfolio against both the Navigator fund and the sector since 11th May 2020. The table shows the performance between 11th May 2020 and the end of the previous quarter.

Navigator Fund June 2021 Clarion Wealth Planning

  11/05/20 to 31/03/21
MGTS Clarion Navigator X Acc 9.67%
CIM DT05 Navigator Portfolio 17.02%
IA Mixed Investment 40-85% Shares 17.98%

 

MGTS Clarion Meridian

  • Attribution analysis for Meridian showed positive Allocation and Selection effects leading to an overall positive Cumulative effect.
  • Meridian marginally underperformed the IA Mixed Investment 40-85% Shares sector over three months but was 1.80% ahead over six months and one year.
  • The majority of underlying funds outperformed their respective sectors over four and 12 weeks.
  • As seen within Navigator, both the Man GLG UK Income and SLI Global Emerging Markets Income strategies marginally underperformed over one-12 weeks but were ahead of their respective sectors over one year.
  • The Baillie Gifford Japanese strategy lagged the IA Japan sector over one-12 weeks, but its one-year performance remains positive. The committee agreed to monitor this closely over the next few weeks.
  • The committee is happy with the current portfolio and agreed that no changes are required at this juncture.
  • Fund size is currently £78.78m
  • Performance over 1 year is 16.75% compared to the UK FTSE 100 index which has returned 20.15%

MGTS Clarion Meridian – Historical Performance

The chart below shows the performance of the above fund since inception. The table below that shows the discrete annual performance to the last quarter end.

Meridian Fund June 2021 Clarion Wealth Planning

  31/03/20 to 31/03/21 31/03/19 to 31/03/20 31/03/18 to 31/03/19 31/03/17 to 31/03/18 31/03/16 to 31/03/17
MGTS Clarion Meridian R Acc 29.63% -10.01% 4.27% -0.40% 16.80%
IA Mixed Investment 40-85% Shares 6.44% -7.99% 4.30% 1.54% 17.11%

 

MGTS Clarion Explorer

  • Attribution analysis for Explorer showed positive Allocation and Selection effects and an overall positive Cumulative effect. The positive Selection effect was primarily as a result of the portfolio’s choice of short duration bonds as opposed to long duration.
  • Explorer was behind the IA Flexible Investment sector over three and six months but outperformed by 1.90% over one year.
  • The underlying Asian and Emerging Markets strategies have had a weaker performance over one-four weeks but looked stronger over the longer term.
  • The performance of the Artemis US Smaller Companies fund is expected to improve as smaller companies benefit from the effects of fiscal stimulus.
  • The committee is happy with the current portfolio and agreed that no changes are required at this juncture.
  • Fund size is currently £51.90m
  • Performance over one year is 19.53% compared the UK FTSE 100 index which has returned 20.15%

MGTS Clarion Explorer – Historical Performance

The chart below shows the performance of the above fund since inception. The table below that shows the discrete annual performance to the last quarter end.

Explorer Fund June 2021 Clarion Wealth Planning

The chart below shows the performance of the above fund since inception. The table below that shows the discrete annual performance to the last quarter end.

  31/03/20 to 31/03/21 31/03/19 to 31/03/20 31/03/18 to 31/03/19 31/03/17 to 31/03/18 31/03/16 to 31/03/17
MGTS Clarion Explorer R Acc 34.25% -9.05% 4.23% 3.50% 27.04%
IA Flexible Investment 29.10% -8.14% 3.31% 2.36% 19.06%

 

Model Portfolios

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

The next Investment Committee Meeting is on 15th July 2021 although in the interim period the Committee intends to conduct slightly shorter conference calls as considered appropriate.

 

Risk Warnings

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.

 

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