Category: Financial Planning, Investment management

The Clarion Investment Committee met on 12 September 2024. The following notes summarise the main points of consideration in the Investment Committee discussions but have been updated to include commentary on recent events and the wider implications for financial markets.

Economic, Political and Business Snapshot

Economics

• The US Federal Reserve lowered its benchmark interest rate target by 0.5 percentage points to 4.75%–5%, the first cut since 2020.
• Global stock markets reacted positively to the news, with the S&P 500 reaching record highs on the day following the announcement.
• The US Securities and Exchange Commission unanimously approved certain stocks to be quoted in half-cent increments ($0.005) from November 2025, saying it would lower costs for investors.
• The Bank of England held interest rates at 5% reflecting a “gradual approach” to cutting rates. Markets expect further rate cuts this year.
• UK inflation remained steady at 2.2% in the 12 months to August, slightly above the 2% target. Services inflation rose more than expected, from 5.2% to 5.6%, suggesting continued domestic inflationary pressures.
• UK public sector debt reached 100% of GDP for the first time since the 1960s.
• UK retail sales rose in August by 1%, driven by “unseasonably strong” food and clothing sales and warmer weather.
• UK consumer confidence fell in September to the lowest level since January 2024. GfK, who compiles the index, commented that “consumers are nervously awaiting the Budget decisions on 30 October”.
• UK house buyer enquiries increased by 19% in August compared with the same month last year.
• UK house prices grew 1.6% in the 12 months to July, according to official data, while prices in London fell by 0.4%.
• Government spending on health-related benefits in the UK has increased 34% in real terms since the pandemic, while spending in similar countries has fallen, according to new research from the Institute for Fiscal Studies.
• The UK-EU Trade and Cooperation Agreement has had a ‘stifling effect’ on bilateral trade, according to researchers at Aston University who estimate that UK goods exports are 27% below where they would have been in a ‘no-Brexit counterfactual’.
• New EU car registrations fell sharply by 18.3% in August compared with August last year, with registrations in Germany falling by 27.8%.
• German economic sentiment worsened more than expected in September, according to ZEW, underscoring the country’s current economic weakness.
• The Bank of Japan left interest rates unchanged at 0.25%, citing a modest economic recovery despite “high uncertainties” regarding activity and prices.
• The People’s Bank of China held its key lending rate at 3.45%, in line with expectations.
• Canada opened North America’s first rare earth processing centre amid concerns over China’s dominance in the sector.

Business

• The European Court of Justice ruled that Apple must pay a €13 billion tax bill to Irish authorities after a 2016 court ruling of ‘unlawful aid’ was upheld.
• Heathrow Airport registered record passenger numbers over the summer, with their busiest-ever day recorded in August. Manchester and Stansted airports reported similar passenger records.
• The UK’s Competition and Markets Authority expressed concerns over the proposed merger between mobile networks Vodafone and Three UK and will now examine remedies.
• Gold mining company AngloGold Ashanti agreed to a £1.9 billion purchase of London-listed rival Centamin.
• Italian bank UniCredit announced it holds a 9% stake in German bank Commerzbank, sparking rumours of a takeover bid, according to the Financial Times.
• Property listing company Rightmove rejected a £5.6 billion bid from the Australian REA Group, saying the bid was “wholly opportunistic and fundamentally undervalued”.
• Significant share price gains in artificial intelligence-related companies are hiding weaker performance across the wider technology sector, according to an analysis by the Financial Times.
• Rating agency Fitch further downgraded property company Canary Wharf Group’s credit rating to “highly speculative” amid refinancing risks.
• Amazon Web Services announced an £8 billion investment in UK data centres over five years.
• Revenues for UK television production companies fell £392 million in 2023 amid declining advertising incomes.
• Losses at UK retailer John Lewis Partnership almost halved in the six months to July to £30 million, compared with £59 million last year.
• A “new and improved deal” has been agreed between the UK government and steelmaker Tata, including a £500 million grant contributing to a new electric arc furnace. Approximately 2,500 jobs will still be lost at the Port Talbot site due to closure of the existing furnaces.
• A proposed bill on renter’s rights was introduced by the UK government that included outlawing ‘no fault’ evictions.
• The Wall Street Journal reported that US freight trains are getting longer, with some almost four miles long.

Global and political developments

• Former president Donald Trump is safe as the FBI investigates what could have been an assassination attempt against him in Florida.
• Snap polls showed that most voters saw vice-president Kamala Harris as the victor in the TV debate with former US president Donald Trump.
• Donald Trump ruled out another presidential debate against Kamala Harris.
• The Mexican Senate approved controversial judicial reforms amid widespread protests and concern among foreign investors.
• The UK will require a £10 travel permit on visiting citizens from more than 40 countries in 2025, including the US and EU.
• UK foreign secretary David Lammy and US secretary of state Antony Blinken travelled to meet president Volodymyr Zelensky in Ukraine to discuss using long-range missiles to strike further into Russian territory.
• Russian president Vladimir Putin said that Moscow would see the use of these long-range missiles as “direct participation” of NATO countries.
• The Spanish government blocked a €619 million takeover of Madrid-based train manufacturer Talgo by a Hungarian consortium on security grounds. Spain is concerned that technology that could be used for Ukraine’s reconstruction could fall into the hands of Hungary’s pro-Russian government, the Financial Times
• China has increased the retirement age for both men and women, the first time since 1978.

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

Commentary & Strategy

The main theme of the Investment Committee meeting on 12 September was to review the benchmark allocations recommended by Dynamic Planner for the forthcoming year. This was undertaken to incorporate the ever-changing investment landscape and resulted in some significant changes to the trusted asset model in terms of both asset classes and benchmark allocations.

The process adopted to review the benchmark allocations is objective and is based on forward-looking data, taking inputs from organisations like the World Bank, IMF, and OECD. There was a great deal of discussion around a number of key areas by Committee members. This led to a unanimous decision to adopt the changes recommended by Dynamic Planner as set out below.

A productive discussion also took place regarding a reduction in ‘home bias,’ as the higher allocation to UK assets are generally referred to.

To reflect the changing landscape of global investments, the committee is making the following changes to the asset classes used in the benchmark asset allocations.

First, the global investment grade bonds asset class will be removed from the benchmark asset allocation and replaced with two new asset classes: global investment grade sovereign bonds and global investment grade corporate bonds. The primary reason for this change is to harmonise the way we look at the UK and global fixed income markets. Splitting the asset class into its component parts also allows for enhanced diversification and increased opportunity to take advantage of the relative risk-return characteristics of the two asset classes.

Second, property has been removed from the benchmark allocation. Property as an asset class has faced difficulties since the Brexit vote in 2016, compounded by the pandemic. Most of the property funds with daily liquidity were severely affected by redemptions, resulting in the “gating” of these vehicles. As many clients were unable to redeem their investments, property was retained as an asset class within the benchmark allocations. With these issues recently resolved, the investment solutions in the property space have been closed. As a result, illiquid property is not really an investable asset class anymore and has therefore been removed from the asset allocation. This change also improves the liquidity of the overall benchmark allocations.

Finally, listed infrastructure has been added as an asset class. Globally, governments, supranational organisations and companies have identified a growing infrastructure investment gap. In the UK, the government has also identified infrastructure as a path to sustainable growth for the economy. As an asset class, infrastructure has numerous desirable characteristics, including stable cashflows linked to inflation and low correlation to broader markets. The asset class also provides exposure to attractive long-term themes, offering exposure not only to traditional infrastructure, such as transportation but also to evolving areas, such as clean energy and digital infrastructure. While most infrastructure investment is through private markets, more liquid exposure can be gained through listed infrastructure companies that invest in, build, and operate infrastructure assets.

Changes to the benchmark allocations

Historically, our investment benchmark has been heavily skewed towards domestic equities and fixed income compared to global standards. Currently, UK equities constitute around 30% of our equity portfolio, while globally they account for only 4-5%. This mismatch is due to the decreasing presence of UK equities in the MSCI All Country World Index (ACWI) and the primarily global nature of listed UK companies.

The Committee believes that while we shouldn’t match the MSCI ACWI’s proportion of UK equities, we need to align more with global trends. UK mid and small-cap companies, which benefit most from local economic policies, form a minor part of the UK benchmark, not justifying a higher allocation to UK equities. Additionally, the UK’s economic challenges make global fixed income investments more attractive.

We are also incorporating listed infrastructure into our benchmarks due to its stable cash flows and potential for higher earnings with similar volatility to global equities. Consequently, we are shifting some investments from property to listed infrastructure.

In the medium-risk funds, elevated yields in fixed income assets present an opportunity to reduce cash holdings in favour of global fixed income.

Lastly, concerns about China’s structural issues and geopolitical tensions prompted a debate about reallocating Asia Pacific ex-Japan and emerging market equities. However, complexities in changing asset class profiles led us to maintain the current mix, with future reviews planned.

Changes to asset allocation will be implemented following the next IC meeting.

Other topics of discussion were as follows:

• Notwithstanding the recent market volatility, the Investment Committee are maintaining their strategic position of being underweight US stocks and overweight Asia & Emerging Markets.
• The Investment Committee have become increasingly cautious on the outlook for the US economy, concerned by unsustainably low consumer savings rates as well as by high levels of personal debt. The US government has its own debt issues too. It will need to tackle its fiscal deficit at some stage, providing a further drag on economic growth.
• The Investment Committee believe that inflation will persist and whilst it is likely to dip below 2% in the next few months, the long-term average is expected to be around the 3% level due to wage inflation.
• A higher interest rate and higher inflation environment will become the new norm.
• US big tech and large-cap stocks are likely to underperform because of the current unsustainable high valuations. Liquidity has been the most significant driver of returns to date but there remains a downside risk to high PE stocks.
• It will take a full economic cycle for the inflationary effects of printing money after the global financial crisis and Covid to dissipate.
• The only change to the underlying funds at this meeting was to commence a gradual selling down of the property holdings. Extensive research into a number of funds will also now take place so that in due course the portfolio funds and model portfolios can be aligned to the new benchmark allocations.

Since December 2023, there has been a tilt towards evidence-based factor investing, which involves a disciplined approach backed up by significant amounts of Nobel Prize-winning economic research. Factor investing involves trusting the market but tilting the investment choice towards smaller companies, value companies (those trading at a discount) and profitable companies. The evidence shows that over the long term, these types of investments outperform the typical index tracking and actively managed funds.

Clarion is accessing these factor-based investments through Dimensional Fund Advisors. At present, Dimensional are the only investment manager in the UK that offers this type of investment. Since inclusion, investment performance has been impressive, costs have decreased, and it is likely that we will look to introduce more factor-based funds into the portfolios as and when appropriate.

The Clarion funds are well positioned to take advantage of the latest economic conditions and performance year to date has been as follows:

• Explorer has returned 8.64% against the RTMA Risk 5 Growth sector average of 8.38% and the IA Flexible sector average of 6.81%
• Meridian has returned 7.74% against the RTMA Risk 5 Growth sector average of 8.38% and the IA Mixed Investment 40-85% Shares sector average of 7.16%
• Navigator has returned 6.93% against the RTMA Risk 4 Balanced sector average of 7.01% and the IA Mixed Investment 40-85% Shares sector average of 7.16%
• Prudence has returned 5.24% against the RTMA Risk 3 Moderate sector average of 5.79% and the IA Mixed Investment 20-60% Shares sector average of 5.72%

The performance of the CURRENT portfolios back tested over five years is shown in the chart below. This is assuming that we made the recent changes five years ago and then adopted the buy and hold approach favoured when using evidence-based factor investing.

Clarion Funds & Discretionary 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:

Changes to the Defender Portfolio     

• ARC Time Social Long Income was reduced by 1.5% from 3.0% to 1.5% ahead of the anticipated removal of property as an asset class. The proceeds were put into cash.

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:

Changes to the Prudence Fund & Portfolio    

• ARC Time Social Long Income was reduced by 1.5% from 3.0% to 1.5% ahead of the anticipated removal of property as an asset class. The proceeds were put into cash.

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:

Changes to the Navigator Fund & Portfolio    

• ARC Time Social Long Income was reduced by 1.5% from 3.0% to 1.5% ahead of the anticipated removal of property as an asset class. The proceeds were put into cash.

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:

Changes to the Meridian Fund & Portfolio   

•  ARC Time Social Long Income was reduced by 1.5% from 3.0% to 1.5% ahead of the anticipated removal of property as an asset class. The proceeds were put into cash.

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:

Changes to the Explorer Fund & Portfolio 

• ARC Time Social Long Income was reduced by 1.5% from 3.0% to 1.5% ahead of the anticipated removal of property as an asset class. The proceeds were put into cash.

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:

Changes to the Voyager Portfolio     

• ARC Time Social Long Income was reduced by 1.5% from 3.0% to 1.5% ahead of the anticipated removal of property as an asset class. The proceeds were put into cash.

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:

Changes to the Adventurer Portfolio    

• There were no changes to the Adventurer portfolio in September 2024

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:

Changes to the Pioneer Portfolio    

• There were no changes to the Pioneer portfolio in September 2024

Holding a globally diversified portfolio of high-quality assets is important to provide resilience and grow the value of savings over the long term and remains the appropriate method for allocation of investor capital. Cash is unattractive as inflationary pressures, although moderating, look to be structurally long term.

 

Keith W Thompson

Clarion Group Chairman

September 2024

 

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.

 

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