Clarion Investment Diary May 2021

Minutes of the Clarion Investment Committee held at 1pm on 6^th May 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 8^th April 2021 were agreed by the Committee as a true and accurate record.

Economic commentary and market outlook

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

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

Global stock markets achieve a V-shaped recovery post Covid-19 lows. The post-Covid V-shaped recovery shows how dangerous panic selling can be, with investors who sold down their portfolios around the bottom of the market in March/April 2020 missing out on the recovery that followed shortly after.

China economy achieves V-shaped recovery whilst Europe and USA follow an upward “W”. US/China relations deteriorate.

Covid-19 stimulus now exceeds $15 trillion with a further $2 trillion US package. Money supply during the Covid pandemic has grown exponentially and there is a high likelihood of it being inflationary at least in the short term. The rise in the US money supply was the biggest ever seen and is expected to create inflationary pressures once the velocity of money increases as economies open up.

While central banks still indicate that interest rates are more likely to stay low, factory prices are rising, which is projected to feed through to consumers in the following months.

Inflation risk moves firmly into focus as bond yields move higher. Higher inflation is expected to translate into higher bond yields, leading to weaker bond prices and having a negative effect on the valuations of growth stocks, which tend to correlate with long-dated bond issues.

Rises in bond yields prompted underperformance of index tracking funds, which did not have the opportunity to re-position their portfolios and reduce exposure to long-dated bonds. Over 6 months, the yield on 10-year Gilts increased by c.40bps, which led to a significant change in valuations of long-dated bonds, with the longer duration bonds falling by c.20%.

Big Tech dominates and bloats the US stock market and begins to underperform despite earnings surprising to the upside. There are signs that the market sees tech stocks peaking, with Apple, Tesla and other major tech giants reporting huge increases in earnings, but their share prices fail to outperform the market.

Vaccine strategy provides light at the end of the tunnel, but risks of variants remain. There is evidence that vaccination programmes work, with Israel, UK and Chile providing good case studies, showing a sharp reduction in deaths and critically ill patients among the vaccinated part of the population.

Europe lags in vaccination programme while the US, Israel and the UK move forward.

Growth to value rotation continues in a “jumpy” fashion.

Strategy

Our overweight position in UK equities is based on the attractive valuations and the potential relative outperformance as the largely service based economy re-opens. The major UK indices have an inherent bias towards value companies badly affected by the pandemic, and the impressive vaccination rollout could see the UK emerge from social restrictions faster than many peer economies.

Our underweight US position is also based on valuations, as most US outperformance has been from the dominant tech stocks which make up the top quartile of the indices. The market forces underpinning the successful run of these stocks through the pandemic were disturbed in Q1 of this year as the yield on US treasuries rose from c.0.9% to c.1.75% with a fall in capital values of long dated bonds of circa 20%. This increase in yields saw high growth companies and some tech stocks fall in conjunction as the possibility of justifying the eye-watering p/e ratios lessened in the face of easy capital drying up.

Our bond positioning is biased towards short-dated corporate debt. As investors have sought outperformance by either increasing duration exposure or settling for lesser credit quality, spreads have tightened, with central bank interference a constant element. Small increases in inflation would see longer-dated bonds suffer adversely, as the inflation panic in Q1, where 10-year treasuries lost c.9%, demonstrated. The inverse performance correlation of these long bonds against equities is also not as apparent as in in the past. Our selection ought to outperform as yields rise; and offers above inflation income for an appropriate level of risk in challenging fixed-income markets.

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

Strong allocation and selection attribution within the Prudence has led to the fund outperforming over 12 months compared to its strategic benchmark. In particular, the funds allocation to the IA Global sector and the selection effect of the Fixed Interest holdings stands out as the main contributors.
Over 6 months, Prudence has performed in line with its sector whilst outperforming its strategic benchmark by circa 2.2%.
The portfolio currently has a bias to UK Equity Income funds and as a consequence, lacks exposure to UK growth. This has worked well over the last 6 months; however, the committee are of the view to correct the position to achieve greater diversity moving forwards. In that regard, it was agreed that we would sell the ‘Threedneedle UK Equity’ to be consistent with the holdings in the other portfolios and introduce the Slater Growth holding at 5%.
In similar vein to the above, it was agreed to replace the ‘Vanguard FTSE UK All Share’ for the ‘BlackRock UK Equity Tracker’ in order to balance out the portfolio’s weighting to UK value and growth assets.
To remain consistent across all portfolios, it was agreed to complete a straight swap of the ‘JPM Japan’ fund for ‘Baillie Gifford Japanese’. The committee were in agreement with this on the basis the Baillie Gifford fund has more of a balanced strategy to growth and value stocks as opposed to JPM which has a bias towards growth. Further to this, the Baillie Gifford fund has comfortably outperformed JPM over a 12-month period.
Fund size is currently £18.35m.
Performance over 1 year is 13.86% compared the UK FTSE 100 index which has returned 22.01%.

To summarise, the committee agreed the following changes to the Prudence fund:

Sell all JPM Japan (5%)
Sell all Vanguard FTSE UK All Share (4%)
Sell all Threadneedle UK Equity Income (5.50%)
Reduce Man GLG Income by 0.50%
Buy Slater Growth (5%)
Buy Baillie Gifford Japanese (5%)
Buy BlackRock UK Equity (5%)

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.

MGTS Prudence graph May

	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

The Navigator fund has continued to outperform its strategic benchmark since the initial investment into the fund in June 2020. The outperformance has mainly derived from the underlying fund selection, especially within the Fixed Interest element of the portfolio.
Over 6 months, Navigator has outperformed its strategic benchmark by circa 2%, whilst lagging by circa 1.7% against its sector over the same time period. The outperformance of the sector compared to the fund is expected, given that the less risk is taken within the fund compared to the sector average.
The ‘Artemis Target Return Bond’ fund was introduced into the portfolio last meeting, with a subsequent reduction in our short duration holding. So far, this move has been successful with the Artemis fund returning 0.98% over four weeks, compared to the short duration holding which returned 0.22%.
Overall, the Bond funds within the portfolios looked strong compared to their respective sectors, with outperformance in all instances over 12 weeks.
We have seen the performance of the ‘Merian Gold & Silver’ fund curtail over the last 2 weeks, however, over 4 weeks, the performance remains strong with the fund returning 7.79%.
The committee have slight concerns on how trackers will perform in the next few months as momentum continues in stocks with a greater weighting. In that regard, it was agreed to reduce the allocation in the ‘Vanguard FTSE UK All Share Tracker’ by 1%, whilst increasing the allocation within the active ‘Slater Growth’ fund by the same amount.
Fund size is currently £29.67m.
The unit price as of the 13^th May 2021 was 110.73; showing a 10.73% increase having been launched at 100p on the 11th May 2020.

To summarise, the committee agreed the following changes to the Navigator fund:

Sell all Fidelity Index US (5%)
Sell all JPM Japan (6%)
Reduce Vanguard FTSE UK All Share by 1%
Increase Slater Growth by 1%
Buy Baillie Gifford Japanese (6%)
Buy Vanguard US Equity Index (5%)

MGTS Clarion Navigator – Historical Performance

Whilst the Navigator fund launched on 11^th May 2020, the fund didn’t 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 behind the sector when, in fact, the Navigator fund was unable to 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 11^th May 2020. The table shows the performance between 11th May 2020 and the end of the previous quarter.

MGTS Explorer fund graph May

	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

The Meridian fund has outperformed its strategic benchmark over 1 year. In similar vein to Prudence, this has mainly derived from the funds allocation to the IA Global sector and the selection effect of the Fixed Interest holdings.
Over 6 months, Meridian has outperformed both its strategic benchmark and sector by 3.30% and 0.50% respectively.
‘LF Blue Whale Growth’ has proved to be the top performer in Meridian over 4 weeks, returning 8.05%. Over this period, the fund has outperformed its sector by 4.49%.
The ‘Jupiter Gold & Silver Fund’ was initially introduced at 2%, with the view to increasing this to 3% when an opportunity arose. The committee have agreed to sell the Vanguard FTSE UK All Share’ fund in favour of allocating a further 1% to Jupiter, whilst also increasing ‘Slater Growth’ and ‘BlackRock UK Equity’ by 2% and 1% respectively.
Fund size is currently £70.70m.
Performance over 1 year is 21.41% compared the UK FTSE 100 index which has returned 22.01%.

To summarise, the committee agreed the following changes to the Meridian fund:

Sell all Vanguard FTSE UK All Share (4%)
Sell all Fidelity Index US (4%)
Increase Vanguard US Equity Index by 2%
Increase Artemis US Smaller Companies by 2%
Increase Slater Growth by 2%
Increase BlackRock UK Equity by 1%
Increase Jupiter Gold & Silver by 1%

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.

MGTS Meridian fund graph May

	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

The Explorer fund has outperformed its strategic benchmark over 1 year.
Over 6 months, Explorer has outperformed both its strategic benchmark and sector by 4.40% and 0.40% respectively.
‘Artemis US Smaller Companies’ has consistently been the strongest performing fund in the portfolio within North America, outperforming the two other holdings over 4, 12, 24 and 52 weeks. In light of this, it was agreed to increase the allocation by 2% whilst selling ‘Fidelity Index US’ in its entirety. With the remaining 2% available following the sale of Fidelity, it was agreed to allocate this to ‘Vanguard US Equity’ to ensure our weighting in North America is split evenly.
Fund size is currently £50.22m.
Performance over 1 year is 24.23% compared the UK FTSE 100 index which has returned 22.01%.

To summarise, the committee agreed the following changes to the Navigator fund:

Sell all Fidelity Index US (4%)
Increase Artemis US Smaller Companies by 2%
Increase Vanguard US Equity Index by 2%

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.

MGTS Explorer fund graph May

	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 11^th June 2021 although in the interim period the Committee intend 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.