Review of previous minutes and action points 

Minutes from the previous meeting held on 25th October 2018 were agreed by the Committee as a true and accurate record.

Economic Outlook 

The Committee had a full discussion regarding the current economic situation and financial markets and the following is an overview of the main points discussed.

  • Stock markets in the US have now joined other falling markets. Tech stocks and big consumer names are under the most pressure following some downgrades in their future growth expectations. Some of the big US tech names are down by c.20% – c.40% since their peak, while China’s tech giant, Tencent, is down by almost 50% since its peak. These companies’ shares have been priced using high earnings growth expectations, which are now under pressure from tightening monetary conditions as well as the rise of protectionist policies in the US.
  • Following on from this development, value and quality names are more likely to perform better in relative terms, as their earnings streams tend to be more stable and their valuations are less stretched.
  • The recent increase in market volatility reduced the 12 months correlations of developed equity markets from highly positive to slightly positive or even negative in some Going forward, volatility in equities is likely to persist as the flow of cheap money is being reduced.
  • While monetary conditions remain relatively loose, there is no imminent threat to some weaker businesses who rely heavily on borrowings, however, there could be a rise in distressed companies if monetary conditions were to tighten further.
  • While equities are volatile, they continue to provide price certainty for investors, while some areas of the bond market are now relatively illiquid, and while their return profiles appear to be relatively stable, investors are facing an increasing risk of price uncertainty in the event of significant outflows.
  • Highly leveraged corporate loans have been rising gradually, with covenant conditions becoming weaker. Some of these riskier loans are now re-packaged and sold to investors as Collateral Loan Obligations (CLOs). The rise of these riskier issues has been fuelled by the demand for higher yield coming from retail investors, who see bonds as a relatively low-risk instrument and equities as a relatively high-risk instrument.
  • Compared to the 2007/2008 financial crisis, this time around institutional investors and banks tend not to hold high risk bonds on their balance sheets, hence retail investors are expected to be hit the hardest if the number of corporate default cases increases.
  • In the current market environment, bonds generally provide poor value for risk, and while equity markets do not look particularly cheap, they continue to be more attractive than bonds.
  • The UK now looks good value compared to other equity markets. Over two years, UK equities underperformed the Global ex US equity index by c.20%, while US equities outperformed by 20%.
  • Due to a high degree of globalisation, UK and US companies generate their earnings in the same global pool of resources, hence these extreme performance differentials are likely to narrow in the future.

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 reviewed StatPro reports and confirmed that the relative Value at Risk ratios for all three Clarion funds were below 100% and stress tests were in line with expectations.

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 was a touch below the sector, however it outperformed over 4 weeks. The strategy’s overweight equity allocation was the main detractor from returns over the period as the underlying equity funds fell by c.5% – c.7% over 12 weeks, however the overall fund selection in bonds and equities was positive and partly offset the weaker asset allocation effect.

Over the long term and since inception the fund has comfortably outperformed the sector average.

The underlying bond fund selection continues to be strong and the tilt towards short-dated corporate bonds has benefited the strategy, as all underlying short-duration corporate bond funds are within the first quartile of the returns distribution of the IA £ Corporate Bond sector.

In equities, the active allocation to global equity funds had a positive effect on the fund’s overall performance, as global equity funds generally outperformed UK equity income strategies over 12 weeks. The Committee is pleased to see improvements in the performance of the Henderson Global Equity Income fund, however the IP Global Equity Income strategy has continued to lag the market. The M&G Global Dividend continued to perform strongly and remains in the first quartile among its peers over 12 months.

The fund selection in the UK looked good as all underlying UK funds now sit within the first and second quartiles of the returns distribution of the IA UK Equity Income sector. Over 12 weeks, the Threadneedle UK Equity Income and Aviva UK Equity Income funds lagged the sector, however, the Committee raised no immediate concerns over their performance as both strategies have been strong long-term holdings and performed well over 12 months as well as over 4 weeks.

The Committee acknowledged the increased level of volatility in the equity market and agreed that no changes to the portfolio should be made under current market conditions. Overall the Committee are happy with the performance of the Prudence fund as well as its underlying holdings.

prudence fund performance november 2018

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

MGTS Clarion Meridian 

The Meridian portfolio was also marginally behind the sector over 12 weeks, and similarly to the Clarion Prudence fund, the overweight equity allocation was the main detractor from relative returns. performance over the longer term remains strong and since inception the fund has comfortably outperformed the sector average.

The fund selection in Asia continues to be strong and both Asian funds outperformed the IA Asia Pacific ex Japan sector over 12 weeks and over 12 months. The First State Asia Focus strategy was the best performing underlying equity holding over 12 weeks.

In bonds, all underlying bond funds outperformed their respective sectors over 12 weeks, with the Royal London Short Duration Credit strategy being the strongest. The Committee noted that the Kames Investment Grade Bond fund was yet to be replaced with the BlackRock 1-10 Year Corporate Bond strategy. However, the switch has not been executed due to the relatively high volatility in bond markets experienced over the last month, and the decision to sell will be made once prices have found a relatively stable level.

The Committee discussed the weaker performance of the BMO Growth and Income strategy (previously known as F&C Growth and Income). It was accepted that this fund has a tilt towards growth stocks and was hurt by some of its positions in healthcare and consumer discretionary companies. While it has underperformed the sector over 12 weeks, over the previous 12 weeks the fund was ahead of the sector. The Committee agreed to monitor this fund closely going forward and will discuss it again at the next IC meeting.

In the UK, the selection among UK Equity Income funds was relatively strong and the Committee are pleased to see the Rathbone Income fund showing its defensive qualities as recent market falls have helped it to recover some of its earlier relative underperformance.

Fund selection among the UK All Share funds was somewhat weaker, with both active strategies underperforming the IA UK All Companies sector. The SVM UK Growth fund was the weakest underlying holding over 12 weeks, however the Committee are aware of the underlying risks associated with this fund and its sensitivity to the UK’s local market conditions, hence no immediate concerns were raised. The Committee took a close look at the performance of the JPM UK Dynamic fund and agreed that while this fund has underperformed the sector during the recent market falls, its longer-term performance is in line with the Committee’s expectations.

The Committee discussed whether the portfolio’s exposure to the UK All Companies sector should be diversified further with the addition of a value-oriented fund. The Jupiter UK Special Situations fund was proposed as a potential new addition to the portfolio. The Committee agreed that this is a good strategy and could fit in well when placed against the SVM UK Growth fund, given that the two funds tend to perform very differently and outperform under different market conditions. The Committee decided not to act on this suggestion at this stage but will discuss it in more detail at the next IC meeting.

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

meridian fund performance november 2018

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

MGTS Clarion Explorer 

Over 12 weeks, the fund performed in line with the IA Flexible Investment sector. While the broadly negative performance of global equity markets detracted from the strategy’s relative returns over the period, the positive fund selection effect was significant enough to offset this difference.

Long term performance is positive over most time periods and the Fund performance is comfortably ahead of the sector average since inception.

Over the quarter, the positive fund selection effect was most significant among the underlying Asia and Emerging Markets holdings. Over 12 weeks all but one Asia and Emerging Markets funds have outperformed their respective sectors. The JPM Emerging Markets Income and Aberdeen Asia Pacific Equity funds were the two best performing funds among the underlying Emerging Markets and Asian holdings respectively.

In Europe, the Committee questioned the performance of the BlackRock European Dynamic fund as it has underperformed the IA Europe ex UK sector over 12 weeks and over 12 months. The BlackRock fund’s performance looks especially poor when compared to another underlying European fund, Jupiter European, which performed exceptionally well over 12 months. The Committee looked at the performance profile of the BlackRock strategy and concluded that it was generally in line with expectations. The Committee decided to continue to monitor this fund’s performance going forward and review it at the next IC meeting.

In Japan, a suggestion was put forward to consider removing the hedged share class on the Lindsell Train Japanese fund and replacing it with the non-hedged share class. It was felt that if the Brexit deal is unsuccessful, Sterling could depreciate significantly, which would create a headwind to the performance of hedged share classes. The Committee decided not to take any action at this stage and agreed to discuss it again at the next IC meeting.

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

explorer fund performance november 2018

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

Management of the Clarion Models 

No changes were made to Clarion Models.

AOB 

No other business.

Action Points

Action to be taken by Action Point Review Point
Fund Analyst To replace Kames Investment Grade Bond with BlackRock 1-10 Year Corporate Bond. Next IC
All Discuss the BMO Growth and Income fund. Next IC
All Discuss the viability of adding Jupiter UK Special Situations in Meridian. Next IC
Fund Analyst Review BlackRock European Dynamic. Next IC
All Discuss whether the hedged position in Japan should be sold. Next IC

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