Category: Financial Planning, Investment management

Committee Members in attendance

Review of previous minutes and action points

Minutes from the previous meeting held on 13th December 2018 were agreed by the Committee as a true and accurate record.

Economic outlook

The Committee discussed the current economic backdrop and market outlook, the main points of which were as follows:

• Markets have started 2019 on a positive note after suffering some falls in Q4 of 2018.
• The US equity market fell harder than other global equities in Q4 resulting in similar losses to other markets by the end of the year. Although valuations are now cheaper post falls, some US stocks are still priced for perfection and even a small change in future expectations could lead to further falls.
• US stocks are still under pressure from the trade war with China, government shutdown (now resolved, albeit temporarily) and a strong dollar. All these factors could lead to a further repricing of US equities if future growth expectations become weaker.
• Asia and Emerging Markets continue to look relatively strong and both regions showed significant resilience during the most recent sell offs. Although at a somewhat slower pace, China continues to grow while its economy undergoes rebalancing from being export-oriented and towards a more consumer focused one. At a slower pace China’s economic growth is likely to be more sustainable over the longer term.
• Asia and Emerging Markets benefit from a bigger and younger population which is expected to drive the future economic growth.
• The second half of 2018 showed that the widely accepted belief that bonds and equities are negatively correlated might not hold true under the new market environment. Bonds used to be a relatively low risk asset in the past due to the low level of volatility and high yield, however, yields on most government bonds are now currently below inflation.
• At current rates, most sovereign bonds produce a negative real return and are expected to diminish the long-term values of investors’ portfolios.
• Under these market conditions equities with high yields, such as those in the FTSE 100 index, are expected to be lower risk given that even under flat market conditions they can generate positive real returns.
• The UK equity market is likely to provide good value to investors who are prepared to look beyond Brexit.
• UK large-cap equities pay a high dividend yield and c.60% of the FTSE All Share index derives its earnings from overseas. Due to these characteristics, UK equities are likely to perform well under a soft-Brexit scenario on the back of lower political risk. They should also hold up well in the event of a hard-Brexit scenario due to the overseas exposure, while during flat markets they are likely to outperform in real terms due to the high dividend yield.
• The possibility of a Corbyn led Labour government is the only scenario which would be significantly detrimental to UK assts. However, prospects of this risk materialising are relatively slim and in this event the inevitable fall in the value of sterling is likely to provide a significant boost to corporate earnings.
• Overall, corporate earnings remain strong and investors who felt positive at the beginning of 2018 when valuations were relatively high, should find themselves in a better position in 2019 as fundamentals remained largely unchanged while assets have become cheaper.

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 action was required.

The Committee have noticed that stress tests for the Clarion Prudence and Clarion Meridian portfolios showed as amber (above the lower threshold) on StatPro reports. This is in line with the overweight equity position currently held in both portfolios, hence the Committee raised no immediate concerns.

DK presented the new risk reports developed by Margetts including the new investment and borrowing powers report and the volume report which estimates liquidity of underlying holdings. The Committee agreed that the volume report should be included in the IC meeting pack going forward and also requested DK to provide a report showing the frequency of compliance checks made by Margetts and whether there have been any soft or hard limit breaches in between Clarion IC meetings.

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

Management of the Clarion Funds

MGTS Clarion Prudence

Over 12 weeks the fund has marginally lagged the sector. This was mainly due to the underweight allocation to longer dated government bonds, which have outperformed short dated corporate bonds over the period. The fund’s overweight exposure to UK equities had a positive contribution over the period as the IA UK Equity Income sector outperformed the IA North America sector over 3 months. The underlying fund selection was the major contributor to returns and helped to offset most of the weaker asset allocation effect.

Overall, selection of the underlying UK equity and bond funds remained strong, however all global funds lagged the IA Global sector over the period. Only one bond fund ended the year in the 3^rd quartile among its sector peers, while all other underlying bond holdings were in the 1^st quartile. In the UK, only one active holding was in the third quartile over 12 months, while the rest of active UK funds held in the portfolio were in the first and second quartiles.

The Committee were pleased with short-term improvements in the performance of the three global funds which currently represent c.15% of the portfolio. The Committee discussed the weaker performance of the Invesco Perpetual Global Equity Income fund in more detail. This strategy has struggled to keep up with the sector over the last 12 months and the Committee felt that there were some better investment options available.

DK proposed replacing the Invesco fund with another global equity income strategy with a current tilt towards the UK. TR proposed reducing the global exposure in favour of the UK, given the relatively attractive valuation of the latter. KT agreed with TR and proposed selling down the Invesco Perpetual holding, topping up the UK exposure and reinvesting the remainder in the other two global strategies. The Committee agreed with the KT’s suggestion and decided to top up the fund’s exposure to the UK by 3% and allocate the remaining proceeds among the other two global funds.

Overall, the Committee are happy with the performance of the Prudence fund and no other changes have been proposed.

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

MGTS Clarion Meridian

The performance of the Meridian portfolio has improved over the shorter term and it is now less than 1% behind the IA Mixed Investment 40-85% Shares sector over 3 months. While the strategy’s overweight to the UK and underweight to the US were the two biggest detractors from performance in October and early November, in the second half of November and in December, the US equity market underperformed creating a positive asset allocation effect.

The fund selection in Asia Pacific was very strong, with both funds outperforming the IA Asia Pacific ex Japan sector over 12 weeks and over 12 months. The First State Asia Focus fund was the best performing holding in the portfolio over three months and the Committee were pleased to see it perform well during the recent period of market falls.

Selection in other geographical areas was weaker over three months, however most funds remain within the first and second quartile relative to their sector peers over 12 months. The Committee were pleased with improving performance of the SVM UK Growth and SLI UK Equity Income Unconstrained funds. Both strategies have a higher exposure to small and mid-cap UK businesses and as a result, they are highly influenced by changes in the market expectations of Brexit. The Committee feel that both funds performed in line with expectations and anticipate that they will  outperform their respective sectors under a soft Brexit scenario.

The Committee discussed the BMO Select European strategy in more detail. Despite some short-term improvements in the performance of this fund, the fund’s characteristics have changed in 2018 when its portfolio became more concentrated and tilted towards growth stocks. The Committee feel that this strategy is no longer suitable for the Clarion Meridian portfolio and decided to replace it. DK proposed replacing the BMO fund with the Fidelity European strategy. This fund does not have a definitive tilt and historically it often performed in line with the sector during periods of rising markets and outperformed during periods of weaker markets. The Committee agreed that this strategy will suit the portfolio well and decided to phase out of the BMO fund and into Fidelity in two steps. Margetts will be instructed to sell half of the BMO holding and reinvest it in Fidelity immediately. The second half will be processed after the next Investment Committee meeting.

Given a high level of political risk being priced in the UK equity valuations it was felt that there is a significant opportunity for investors to realise the value imbedded in the long-term performance of UK stocks. TR proposed reducing the US exposure, which is likely to be one of the most overvalued markets at the moment both in absolute terms and from the UK investor’s perspective given the current strength of the US dollar relative to the British pound. It was agreed that the proceeds should be reinvested in a FTSE All Share index tracking fund, which is likely to perform well under most Brexit scenarios. The Committee decided to reduce the US exposure by 2% and reinvest the proceeds in the UK.

Overall the Committee are happy with the performance of the Clarion Meridian fund and made no other changes at this stage.

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

MGTS Clarion Explorer

The fund continued to perform strongly and was ahead of the IA Flexible Investment sector by c.2% over 12 weeks. Over this period the strategy benefited from a very strong fund selection while asset allocation was marginally negative.

Over 12 months only two underlying funds were in 3^rd or 4^th quartiles of return distributions within their sectors. Fund selection in Asia and Emerging Markets was the strongest as all underlying Asia and EM funds outperformed their sectors. Over 12 weeks the Aberdeen Asia Pacific Equity and Hermes Global Emerging Markets funds were the two best performing holdings in absolute terms, returning c.7.7% and c.7.9% respectively.

The Committee took a note of the weaker performance profile of the BlackRock European Dynamic strategy. DK believes that this is likely to be due to the weaker performance of some major industrial names in Europe in which the fund is overweight, however it was agree that further investigation behind the reasons for the underperformance before the next Investment Committee meeting was warranted.

To be consistent throughout all strategies in the Clarion range, KT proposed reducing the fund’s exposure to the US in favour of the UK. The Clarion Explorer portfolio has no existing UK funds and TR proposed raising 4% from the US to facilitate the purchase of a new UK holding. The Committee supported TR’s proposal and agreed to reduce the fund’s allocation to the US by 4% and reinvest it in the UK using the Vanguard All Share tracker fund.

The Committee looked at the weaker relative performance of the Lindsell Train Japanese strategy, which has its currency exposure hedged back to Sterling. While this fund looked relatively disappointing over 3 months, its longer-term performance is strong. The recent strengthening of the Japanese Yen had a negative effect on the fund’s valuation, however this cannot explain the magnitude of the overall underperformance. The Committee agreed not to make any changes at this stage and acknowledged the relatively high historic volatility of Japanese equities.

The Committee are pleased with the overall performance of this strategy and proposed no other changes at this meeting.

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

Management of the Clarion Models

Model A

• Sell 1.00% Janus Henderson Global Equity Income I Acc (2.75%)
• Sell 1.00% M&G Global Dividend I Acc GBP (2.75%)
• Buy 0.50% Threadneedle UK Equity Income ZNA GBP (7.50%)
• Buy 0.50% Franklin UK Equity Income W Acc (7.50%)
• Buy 1.00% Aviva Inv UK Equity Income 2 (7.50%) 

Model B

• Sell 1.00% Janus Henderson Global Equity Income I Acc (4.50%)
• Sell 1.00% M&G Global Dividend I Acc GBP (4.50%)
• Buy 1.00% Threadneedle UK Equity Income ZNA GBP (8.50%)
• Buy 1.00% Aviva Inv UK Equity Income 2 (8.50%) 

Model C

• Sell All (5.00%) Invesco Global Equity Income Z Acc (0.00%)
• Buy 0.50% Aviva Inv UK Equity Income 2 (7.50%)
• Buy 0.50% Franklin UK Equity Income W Acc (7.50%)
• Buy 1.00% Janus Henderson Global Equity Income I Acc (5.50%)
• Buy 1.00% M&G Global Dividend I Acc GBP (6.00%)
• Buy 1.50% Royal London UK Equity Income M Acc (8.00%)
• Buy 0.50% Threadneedle UK Equity Income ZNA GBP (7.50%)

Model D

• Sell 0.50% Janus Henderson Global Equity Income I Acc (4.50%)
• Sell 0.50% M&G Global Dividend I Acc GBP (4.50%)
• Sell 2.00% Fidelity Index US P (6.00%)
• Buy 2.00% Vanguard FTSE U.K. All Share Index A Acc GBP (7.50%)
• Buy 0.50% Standard Life Investments UK Equity Income Unconstrained Plat 1 Acc (7.00%)
• Buy 0.50% Franklin UK Equity Income W Acc (7.00%)

Model E

• Sell All (6.00%) BMO Select European Equity 2 Acc (0.00%)
• Sell 2.00% Fidelity Index US P (4.00%)
• Sell 1.00% Janus Henderson Global Equity Income I Acc (3.25%)
• Buy 2.00% Vanguard FTSE U.K. All Share Index A Acc GBP (8.50%)
• Buy 1.00% Vanguard FTSE UK Equity Income Index Acc (7.00%)
• Buy 6.00% Fidelity European W Acc (6.00%)

Model F

• Sell All (4.00%) BMO Select European Equity 2 Acc (0.00%)
• Sell 2.00% Fidelity Index US P (6.00%)
• Sell 2.00% Vanguard US Equity Index Acc (6.00%)
• Buy 3.00% Vanguard FTSE U.K. All Share Index A Acc GBP (8.00%)
• Buy 1.00% Vanguard FTSE UK Equity Income Index Acc (8.00%)
• Buy 4.00% Fidelity European W Acc (4.00%)

Fund focus

DK provided a review of the Fidelity European fund. The key points are noted below.

• The fund aims to perform in line with the sector during positive markets and outperform during negative markets.
• The current manager has managed this mandate since 2009.
• The investment process is primarily bottom-up, with a focus on stocks with sustainable dividend growth.
• Intra-stock correlations play a significant part in portfolio construction and the manager often calibrates positions to avoid unwanted exposure to a specific part of the market.
• To enter the portfolio a company should demonstrate positive fundamentals, its ability to generate cash and have a strong balance sheet.

AOB

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Action points

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