Category: Financial Planning, Investment management

Economic & Market Review. 

The main discussion points were as follows:

• In the 3 months to end July the US S&P 500 Index returned 12% in sterling terms with 50% of this return being currency related due to the stronger US dollar against the Pound. The FTSE 100 returned c. 4% and Gilts returned c. 0.8%. Asian and Emerging Market IA sectors were weaker performers. The IA £ Corporate Bond sector underperformed Gilts, by around 0.87%.

• The US economy continues to perform very well and leads the world in a number of areas with strong corporate earnings and a wave of share buy backs which are positive for the US stock markets. It was noted however that the yield curve is flat with 10-year vs 2-year bond yield spreads in the US almost level which means that borrowing costs are the same for both short and long term loans. This could be a warning sign that the economy will slow or even tip into recession sometime in 2019. The yield curve will be monitored carefully at future meetings.
• The UK economy is the slowest of the major developed markets due to Brexit uncertainty and China’s growth is slowing.
• The current political uncertainty was discussed in detail by the Committee and a detailed account of political risk and how this can impact on the economy and stock markets has been given special attention and is published separately to these minutes.
• The BoE increased interest rates in August by 0.25% even though UK economic data was softer than earlier in year when rates were held steady. Comments by Mr Carney, Governor of the BoE, suggests that future interest rate increases will be small and measured and likely to be no more than 0.25% per annum. The UK seems destined for an extended period of interest rates well below the historical norm.
• A soft Brexit remains the likely outcome even though David Davis, the Brexit Secretary, and Boris Johnson, the Foreign Secretary, have now resigned. Unfortunately, negotiations look likely to continue for some time to come and it will always remain a difficult deal to agree as we don’t know what the Europeans will allow as concessions. The UK is likely to remain in the EU in one way or another especially as demographic changes in the electorate will favour a pro-EU stance in the longer term. If a soft Brexit is not achieved then a very hard Brexit is the next most likely outcome.

• It was noted that tracker funds continue to receive substantial inflows of new money, mostly due to strong short-term performance, rather than low fees. Investment returns could however falter in the future because the strategy of a tracker fund is to allocate investment based on market capitalisation rather than actual value. When value rather than growth orientated investment strategies become more popular the performance of some index tracking funds may suffer. It was also noted that as Growth to Value rotation gathers traction, the US market could be the most vulnerable.

• The Committee discussed the Elon Musk recent tweets about taking Tesla private, which was a violation of US stock market rules. Mr Musk’s behaviour is erratic, Tesla is not making money and is not sustainable in its current form. Tesla’s build quality is not as good as some competitors charging similar or even lower prices. More established manufacturers will also increase competition. Tesla shares have fallen almost 20% since Mr Musk’s tweet with short sellers making profits of more than $1 billion dollars.

• Although Clarion do not hold any GAM funds, it was noted that a GAM bond fund manager had been suspended recently due to accusations of insider dealing. The company was forced to suspend fund trading and withdrawals for mainstream bond funds. This is likely to affect GAM’s wider business. The GAM Star Credit fund is down around 5% since it peaked earlier this year.
• Some Investors appear to have moved up the risk scale and also the “stupidity” curve and have invested large amounts into high yield bonds, which at the moment offer little extra payment for the extra risk and lower liquidity they exhibit. The problem is that lenders are lending too cheaply, and lot of debt is now held by retail investors and private equity rather than banks.
• The IA £ Corporate Bond sector has been flat over 12 months, even though many bonds yield up to 4% and even more in some cases. The Committee agreed that many bond funds are unlikely do better than cash.
• There are also risks in Absolute Return funds such as Standard Life GARS Fund which continues to suffer from substantial withdrawals due to a loss of confidence. On a smaller scale, the City Financial Absolute Equity fund has fallen around 20% from its peak and is now back to the level it was 3 years ago. The fund size is much smaller than in previous years. We do not hold either of these funds in the Clarion Portfolio Funds and Model Portfolios and have for many years avoided exposure to this type of esoteric type of fund which have a tendency to suffer from periods of poor performance for no apparent reason.
• The Committee continue to prefer quality equities over bonds and cash with the US, UK, and Asia preferred over Europe.

Review Risk Management, Eligibility and Investment and Borrowing Powers

The Committee reviewed risk management, eligibility and investment & borrowing powers reports and confirmed that these were in order and no actions were required.

Upon reviewing the risk data for the Clarion funds, the Committee noted that the relative Value at Risk (VaR) ratios for all three Clarion funds remain green, low risk, and are below 100% VaR relative to the benchmarks. For the stress tests, Clarion Prudence is closest to but comfortably below the warning level whilst Clarion Meridian and Explorer are well below the warning levels.

The Committee agreed that all portfolios are managed in line with expectations and raised no concerns.

Management of the Clarion Funds

MGTS Clarion Prudence

The fund outperformed the sector by c.0.2 percentage points over 3 months and outperformed the strategic benchmark by c.0.7 percentage points. The fund’s short duration bond exposure outperformed the corporate bond sector over the period, and the portfolio’s value/income bias has also helped relative performance. The active allocation to global equity funds was a major contributor to the fund’s strong performance, as Sterling weakened over the period, so these funds outperformed the UK equity income holdings.

On average the underlying global funds returned c.6% over 12 weeks, with the M&G Global Dividend strategy being the strongest, with c.8.6% returns. The Invesco Perpetual Global Equity Income fund was the weakest global equity strategy over the period, which was mainly due to its overweight allocation to Europe and a general tilt to ‘Value’.

The Majedie UK Income fund remains on the watchlist and will continue to be reviewed at future meetings. It was noted that the fund continues to perform well but the committee are still concerned that the forthcoming change of manager and investment style, although still a few months away,may eventually affect performance so the fund will remain under review.

Performance of all the other holdings in this portfolio are in-line with expectations.

A proposal was put forward to take some profits from the strong performance of the global funds created partly by the good returns from the US stock market and a weaker Sterling over recent months. After strong debate it was agreed to reduce global equities from 20.5% to 17.5% in favour of increasing UK equities from 35.5% to 38.5%. It was agreed to sell 1% from each of the global equity funds and invest 3% into the Vanguard FTSE UK Equity Income Index fund. This would increase exposure to the UK at a time of weakness and was seen as a two-way bet on Brexit and possible UK political uncertainty. It will also marginally reduce the ongoing fund charge of the Prudence Portfolio Fund.

There were no other changes proposed to the fund and the Committee are pleased with the overall performance of this strategy.

The Committee approved the strategy and confirmed it is in line with the mandate. 

MGTS Clarion Meridian

Over 12 weeks the strategy’s performance was c.0.6 percentage points ahead of the sector. Compared to the sector, the fund’s overweight allocation to equities was the main contributor to stronger relative returns. The US was the strongest equity market over the period, with both US index tracking funds delivering over c.11% returns in absolute terms. The allocation to a global equity fund was the second strongest contributor, as the M&G Global Dividend fund returned c.8.6% over the period.

The Committee were pleased to note that the First State Asia Focus fund has outperformed the sector over 3 months, by c.3.4 percentage points. This fund was retained in the portfolio following previously weaker periods and it was pleasing to note that this decision had been vindicated. The Fidelity South East Asia fund has performed slightly weaker over recent weeks due to its higher China weighting, however the Committee were happy that these funds work well together.

The bond allocation has been average, and the F&C European Growth & Income fund has had a weaker few weeks relative to the sector, but it has underperformed by only c.1.0 percentage point, and the Committee have no concerns.

In general, international equities performed more strongly than the UK over the period. This performance differential between international and domestic equities can be linked to the recent c.10% depreciation of sterling against the dollar. The overall fund selection has been good and only 1 underlying fund was below the 2^nd quartile over 12 months.

The Committee noted that the M&G Global Dividend exhibited strong relative performance over 3 months, and that the Rathbone Income fund has outperformed after a weaker period several months ago.

As with Clarion Prudence, it was agreed to take profits from the stronger performing global funds created partly due to a very strong US stock market and a weaker Sterling over recent months It was agreed to reduce the Global and North American equity exposure by 1% and 2% respectively. This would be achieved by selling 1% from each of M&G Global Dividend, Vanguard US Equity Index and Fidelity Index US funds. The amount raised would be invested equally in the UK equity funds to take advantage of recent weakness in the UK market.

Overall the Committee are happy with the performance of the Clarion Meridian fund and made no further changes.

The Committee approved the strategy and confirmed it is in line with the mandate.

MGTS Clarion Explorer 

The fund has performed strongly and was ahead of the sector by c.0.9 percentage points, but behind the benchmark by c.1.2 percentage points over 3 months. The allocation to the US and the fund selection in Europe, Global and Japanese allocations were the major drivers of the fund’s performance over the period. The fund selection was generally strong across the portfolio, with only two underlying holdings falling below the 2^nd quartile over 12 months.

The Committee are pleased with the Henderson Emerging Market Opportunities and JPM Emerging Markets Income funds, which have outperformed the IA sector over 3 months. The SLI Global Emerging Markets Income fund looks slightly behind the IA sector but it was recognised that this may be due to a valuation timing issue which makes it difficult to compared to most other funds. The Jupiter European and BlackRock European Dynamic funds have displayed strong outperformance against the IA sector over 3 months, with Jupiter outperforming by c.7.2 percentage points.
It was noted that the two Japanese holdings complement each other, as the Schroder Tokyo fund is unhedged and Lindsell Train Japanese fund is the GBP hedged share class.

It was agreed that there was less of a case to reduce US exposure in the Explorer portfolio, especially as there are no UK holdings in which to invest the proceeds. The portfolio looks well placed and has performed well despite the underperformance of Chinese equities in recent months.

There were no changes proposed to the portfolio and the Committee are pleased with the overall performance of this strategy.

The Committee approved the strategy and confirmed it is in line with the mandate.

Long term performance of the Clarion Portfolio funds remains strong and is comfortably ahead of the relative sector average and benchmark as demonstrated by the supporting graphs which also add support to the argument that it is “time in the market” rather than “timing the market” which produces the best investment returns. 

Management of the Clarion Models 

The Clarion fund asset allocations used for the model blends were updated.

In Clarion Prudence, the Global equities allocation was reduced by 3.5%, and the UK equity income allocation increased by 3.5%.

In Clarion Meridian, the Global equities allocation was reduced by 3%, and the UK equity income and UK All Companies allocations were increased by 1.5% each.

No changes were made to Clarion Explorer.

These changes result in the following changes to the model portfolios. 

Model A

• Sell 0.75% M&G Global Dividend GBP I Acc (4.25%)
• Sell 0.75% Henderson Global Equity Income I GBP Acc (4.25%)
• Buy 0.50% Franklin UK Equity Income W Acc (6.50%)
• Buy 0.50% Aviva Investors UK Equity Income 2 £ Inc (6.50%)
• Buy 0.50% Threadneedle UK Equity Income Z Acc GBP (6.50%) 

Model B

• Sell 1.50% M&G Global Dividend GBP I Acc (6.50%)
• Sell 1.25% Henderson Global Equity Income I GBP Acc (6.50%)
• Buy 0.75% Franklin UK Equity Income W Acc (7.75%)
• Buy 0.50% Aviva Investors UK Equity Income 2 £ Inc (7.50%)
• Buy 1.50% Threadneedle UK Equity Income Z Acc GBP (7.50%) 

Model C

• Sell 1.00% M&G Global Dividend GBP I Acc (6.00%)
• Sell 1.50% Henderson Global Equity Income I GBP Acc (5.50%)
• Sell 1.00% Invesco Perpetual Global Equity Income Z Acc (6.00%)
• Buy 1.00% Franklin UK Equity Income W Acc (7.00%)
• Buy 0.50% Aviva Investors UK Equity Income 2 £ Inc (6.00%)
• Buy 1.00% Threadneedle UK Equity Income Z Acc GBP (7.00%)
• Buy 1.00% Royal London UK Equity Income M Acc (6.50%) 

Model D

• Sell 1.00% M&G Global Dividend GBP I Acc (6.00%)
• Sell 1.00% Henderson Global Equity Income I GBP Acc (6.00%)
• Buy 0.50% Franklin UK Equity Income W Acc (6.00%)
• Buy 0.50% SLI UK Equity Income Unconstrained Platform 1 Acc (6.00%)
• Buy 0.50% Threadneedle UK Equity Income Z Acc GBP (6.50%)
• Buy 0.50% Royal London UK Equity Income M Acc (6.50%)

Model E

• Sell 0.75% M&G Global Dividend GBP I Acc (4.50%)
• Sell 0.25% Henderson Global Equity Income I GBP Acc (4.25%)
• Buy 0.50% Franklin UK Equity Income W Acc (6.00%)
• Buy 0.50% SLI UK Equity Income Unconstrained Platform 1 Acc (5.50%)
• Buy 0.50% Rathbone Income I Acc (5.50%)

Model F

• Sell 1.00% M&G Global Dividend GBP I Acc (6.00%)
• Buy 0.25% Schroder Tokyo Z Acc (3.75%)
• Buy 0.25% Lindsell Train Japanese Equity B Sterling Hedged Inc (3.75%)
• Buy 0.50% SVM UK Growth Instl (4.50%)

Model G

• No changes 

Disclaimer:

• Past performance is no guarantee of future performance. The value of an investment and the income from it can fall as well as rise and investors may get back less than they invested.
• Risk factors should be taken into account and understood including (but not limited to) currency movements, market risk, liquidity risk, concentration risk, lack of certainty risk, inflation risk, performance risk, local market risk and credit risk.
• The Funds are sub-funds of the MGTS Clarion Portfolio Fund, which is a Non-UCITS Retail Scheme, authorised and regulated by the Financial Conduct Authority. The MGTS Clarion Portfolio Fund is an umbrella investment Company with Variable Capital.

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