Clarion Investment Diary September 2022

The Clarion Investment Committee met on Wednesday 14^th September. The following notes summarise the main points of consideration in the Investment Committee discussions.

Economic Snapshot

The UK’s energy support package announced earlier this month is a huge response to the cost-of-living crisis, costing roughly twice as much as the COVID furlough scheme. Supporters see it as bold and necessary. Critics condemn it as untargeted and risky for Britain’s finances. What they agree on is that, in terms of cost and reach, this is a shock and awe policy move.

The package caps annual household energy bills at £2,500 over the next two years. This is on top of the £400 energy bill discount announced earlier in the year.
Energy prices for businesses will see an ‘equivalent cap’ for six months with the government identifying and supporting businesses deemed vulnerable beyond six months. Energy companies are being provided with up to £40bn in support to reduce the risks of a liquidity crunch in the event of a sharp rise in wholesale gas prices.
The government have signalled a tax revolution to try to boost flagging economic growth. This will involve a reversal of the rise in national insurance rates, a halt to the planned rise in corporation tax and a range of other measures to encourage economic activity. A lower tax regime to stimulate growth seems slightly at odds with the Bank of England’s current strategy of raising interest rates to slow down the economy to reduce inflationary pressures.
The UK economy grew by a slower-than-expected 0.2% in the month of July and UK unemployment fell to 3.6%, the lowest level since 1974.
Inflation in the UK fell to an annual rate of 9.9% in August helped by cheaper petrol prices and retail sales in the UK fell by 1.6% driven by the continued squeeze on consumer spending
A shortage of housing stock drove UK house prices up by 15.5% in the year to July, the fastest annual rise since May 2003
UK train passenger numbers have reached 95% of pre-pandemic levels, outlining the sector’s recovery, according to the transport booking app Trainline
US inflation rose to 8.1% in the 12 months to August despite a fall in energy costs last month
Yields for two-year US Treasury notes rose sharply to 4% as markets expect the Fed to tighten policy more aggressively
The euro area monthly industrial production fell by 2.3% in July, the biggest fall since the pandemic and worse than forecasted by economists
German GDP is expected to shrink in 2023 by 0.3% as high energy costs are “wreaking havoc” on the economy, according to the Ifo Institute
Industrial output rose by 4.4% in China in the year to August and retail sales were up by 5.4%, both widely beating expectations
Russia’s central bank cut interest rates to 7.5% as the economy deals with the impact of international sanctions
UK corporate insolvencies rose by 43% in the 12 months to August
Global shipping company FedEx issued a profit warning last week and its chief executive Raj Subramaniam said “global volumes declined as macroeconomic trends significantly worsened later in the quarter”
Housebuilder Redrow, despite returning to pre-pandemic levels of profitability, warned that inflation could cool the UK housing market
Premium drink producer Fever-Tree reported a 30% fall in profits for the first half of 2022 as its production was hit by labour shortages in the US and higher gas prices
Swedish multinational home appliance manufacturer Electrolux issued a profit warning as demand for its appliances fell in the US and Europe
US airline Delta predicted strong demand for travel this holiday season as consumer travel patterns were returning to pre-pandemic levels
The German government discussed increasing its stake in the energy company Uniper as it struggles with the higher wholesale energy prices. The government has taken control of the assets of Rosneft, the Russian oil company, including the Schwedt refinery north-east of Berlin
The world’s largest chipmaker Samsung committed to achieving carbon neutrality by 2050 and investing $5bn to reduce its reliance on fossil fuels
In the biggest acquisition of a venture capital backed US company in history, software company Adobe agreed to buy the interactive design application company Figma for $20bn

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

Strategy

Bonds remain broadly unappealing as an asset allocation choice in a rising interest rate and high inflation environment, where capital losses at the long end of the yield curve appear likely. In the UK and US the risk/reward factoring of bonds point to the shorter end of the curve which is inverted at current yields. Quantitative tightening ought to have a more substantial effect on longer dated bonds as these comprise the majority of central bank balance sheets. The investment committee continue to allocate fixed interest exposure to short-duration and tactical bonds which ought to outperform on a relative basis in the current environment.

We hold a neutral position in North American markets with exposure at the lower end of the major indices and smaller companies, which offer more attractive valuations in comparison to some of the larger cap tech stocks.

From an investment perspective, the US has led global markets throughout the pandemic and is home to some of the largest and most profitable companies in the world. This year has seen a steady decline in valuations similar to the rest of the world. This was mainly centred around rising inflation and interest rates. We will continue to have some exposure to US big tech as we see such holdings acting more like consumer staples.

The more highly rated less profitable US tech companies are potentially more at risk from further falls due to Federal Reserve intervention.

UK equities trade at attractive relative valuations on a historical basis, and the tilt towards lower rated value stocks should aid outperformance in the current environment. Revenue is increasingly derived from overseas across both the FTSE100 and FTSE 250, meaning many companies are less reliant on the domestic economy and could benefit from the stronger dollar as income is converted back to sterling.

Asia Pacific equities have short-term headwinds as Covid continues to cause problems, particularly in China. The property development market in China is also an unsolved lingering issue. Over the longer term the ability to continue loosening monetary policy in the region and lower inflation pressure bodes well for potential equity outperformance.

We are positive for the prospects of emerging markets for demographic reason and also because they are home to the one of the most sought-after electronic components of the decade – the semiconductor chip. We liken the current unprecedented demand for semi-conductor chips to the demand for oil in the 1970’s. This demand will be ever increasing the closer we get to a fully digital and more autonomous world.

So many of the world’s products now require either a memory chip or a logic chip and there are only a handful of companies that currently produce these. Consequently, the US is racing to expand chip manufacturing in America to help their domestic companies continue to operate competitively. However, due to the scale of the task, it will be a long time until US companies no longer rely on emerging market producers to meet their demand for semi-conductor chips. Given the above, we continue to strongly believe that the demand for logic chips will only increase year on year, especially as we enter the age of Artificial Intelligence, where semi-conductor chips are relied upon even more heavily.

We believe the future trend will be competition amongst companies to secure a supply of these exceptionally sought-after chips in order to continue producing their products. Consequently, we believe the companies producing semiconductor chips will continue to perform exceedingly well.

We avoid investments with a single country remit investing into China, India, Russia and Brazil.

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 reflected in the strategic benchmark review can be summarised below:

Minor increases in allocation for the lower risk profiles to cash from fixed interest and international equities
No net increase in equity exposures, although still committed to the diversification of equity holdings globally
Some minor re-balancing activities to re-centralise the benchmarks within their respective risk boundaries across profiles 2 – 7

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

September 2022

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

Clarion Funds & Discretionary Models:

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 Model

There were no changes made to the Defender portfolio in September 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 & Model

There were no changes made to the Prudence portfolio in September 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:

	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%

ARC Sterling Balanced Asset PCI -6.63% 11.84%

Changes to the Navigator Fund & Model

There were no changes made to the Navigator portfolio in September 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 & Model

There were no changes made to the Meridian portfolio in September 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 & Model

There were no changes made to the Explorer portfolio in September 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 Model

There were no changes made to the Voyager portfolio in September 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 Model

There were no changes made to the Adventurer portfolio in September 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 model

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

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.

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.