Sunil Krishnan from Aviva Investors highlights the key themes for multi-asset investors to monitor in 2024.

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The decade so far has been a turbulent period for the global economy. The pandemic roiled markets and interrupted the smooth working of supply chains. In February 2022, just as economies started reopening after COVID-19 lockdowns, Russia’s invasion of Ukraine added significant inflationary pressures. Central banks launched an aggressive monetary tightening cycle to tackle rising prices, which radically altered the market landscape. The economic effects are still playing out.

We see scope for further disruption in 2024. Billed as the biggest election year in history, 2024 will bring a sequence of major elections across the world, with the outcome in many cases too close to call. Central banks must decide if and when to cut rates, now that inflation has started to fall in many economies.

The hype surrounding generative artificial intelligence (AI) technology is set to continue, affecting equity markets. And questions remain over China’s economic policies and growth trajectory. So how will these four themes affect investors with a multi-asset focus?

1. Politics will be a dominant theme in 2024, as four billion people – 41 per cent of the world’s population – go to the polls. The US and Taiwanese elections might have the biggest effect on markets

The US, UK, India, Indonesia, Russia, Taiwan: some of the world’s most populous and economically important countries are set for general elections in 2024 – although not all of these votes will be deemed free and fair.

The UK general election is expected towards the end of the year (it could happen as late as January 2025). Our view is that in the possible event of a change in government, this might result in longer-term policy changes – for example on fiscal spending and tax policy – but UK politics will likely not have a big impact on global markets in the near term. The US presidential and Taiwanese elections are potentially more consequential.

In the US, the candidate most likely to disrupt existing economic arrangements is former president Donald Trump, who is running for the Republican nomination and enjoys a strong lead in early polling ahead of the vote in November 2024. This is something investors need to take seriously. Keen to avoid the disorganisation seen in his first term, Team Trump has been busy recruiting aides who can take hold of the agenda from the start. The focus is on areas where the White House has a freer hand to enact change, such as trade policy and regulation.

A key domain where Trump could have a “day-one” effect is climate. He has previously pledged to repeat the first-term US withdrawal from the Paris Agreement and signalled he would unwind the Biden administration’s Inflation Reduction Act (IRA), a significant decade-long programme of spending to support the green transition.

There is also a geopolitical angle. Trump-era foreign policy was erratic and transactional but benefited from a broadly peaceful and stable backdrop. Since then, the world has become more volatile due to the wars in Ukraine and Gaza, alongside China’s more assertive stance in East Asia.
To that end, Beijing is taking a strong interest in the outcome of Taiwan’s presidential election in January, as the ruling party candidate Lai Ching-te faces opponents more open to rebuilding relations with China.

If Lai were to win on a strong anti-China platform, that might motivate Beijing to act. Although it is unclear what such action would entail, it would no doubt be a source of uncertainty and potentially involve other major powers, notably the US. The US has given security guarantees to Taiwan; it would be alarming if those guarantees were to be tested.

Political risk is an ever present for global investors, but the range of possible outcomes appears wider next year. We are likely to see more volatility in popular safe havens, such as gold and the US dollar, around the time of key events.

2. The market expectation is for interest-rate cuts across major economies next year. The odds of a “soft landing” are much higher than they were six months ago and 2024 is likely to be a better year for bond returns

Market expectations are for five interest rate cuts in the US and euro zone in 2024, and three in the UK.

These expectations are based on two factors. Firstly, the consensus is that inflation in most regions will still be ahead of central bank targets, but much closer to those targets than today. Secondly, because interest rates have been rising for a while, this may have a braking effect on economic activity and central banks may need to cut rates to support growth.

It is reasonable to think we are at the peak for interest rates, but it is still sensible to be cautious about how quickly they might fall. Even forecasts that have inflation coming down still anticipate core inflation will be above headline inflation. If we get any shocks or volatility in commodity prices, key drivers of headline inflation, allied to above-target core inflation, we could potentially end up with positive inflation surprises. This is not our central case but in such a scenario, expected cuts in rates may not materialise. The risk may be underappreciated by markets.

Nevertheless, the slowing of inflation has increased the odds of a soft landing, which are now much higher than six months ago. The economic data varies between countries, however. Earlier this year, the US saw a slowdown in its housing market and is now seeing a moderation in the jobs market. Wages have slowed but are still strong relative to history. Overall, while tighter monetary policy is having an effect, the signs for growth are not alarming. The base case is that the rise in the unemployment rate will be less than one per cent (although it should be noted that it is difficult, when an economy starts to slow, to keep unemployment under control).

In the euro zone, slowing growth has been more evident in the industrial manufacturing sectors, perhaps connected to reduced demand from a sputtering Chinese economy and challenges in the construction and real estate sectors.

The outlook for inflation and interest rates should allow for a better period for government bonds in 2024

All things considered, the outlook for inflation and interest rates should allow for a better period for government bonds in 2024. The last three years have seen cumulative negative returns for bond markets, which has led investors to question their role in a diversified portfolio.

However, two important things have happened. Firstly, yields on bonds have risen, particularly on longer-dated bonds. Secondly, now that we are approaching the end of the tightening cycle, cash may not offer the high returns it does currently for much longer.

The ideal time for bonds is when there is a sharp drop-off in growth and challenges for risk assets. The combination of peaking interest rates and the extra yield on offer in bonds may attract investors looking to lock-in higher yields for a longer period, rather than be faced with reinvestment risk from holding cash.

3. AI could allow a broader range of companies to significantly improve productivity, supporting global equity markets

Revenues were a key concern for equity investors in 2023. The big unknown was the extent to which central bank tightening would affect people’s willingness to spend on companies’ goods and services.

The reality is that it was a decent year for global equities, underpinned by continued strength in corporate revenues. There were also concerns about costs, bearing in mind the strong rise in commodity and labour prices, but profit margins held up reasonably well. In the second half of the year, large companies even managed to expand those margins. However, the contribution to overall market returns from the biggest tech companies – whose revenues stand to benefit from the advent of generative AI – has been significant.

Looking ahead to next year, a soft landing, particularly when accompanied by lower borrowing costs, would be a favourable outcome for many companies. But AI is likely to remain a significant factor in market performance. This technology is not going away; the question is whether the gains will be spread beyond a clutch of leaders in Silicon Valley. If AI leads to better productivity among a wider range of companies, that could help profitability and boost equity markets across the board.

One trend across the world since the Global Financial Crisis has been a steady decline in productivity – which creates challenges for companies in terms of how they maintain profits.

In the medium-term, the rollout of AI, along with other major technological advances in areas like healthcare, could reinvigorate productivity and open up the potential for continued profit growth among companies, without necessarily being accompanied by a significant reacceleration of inflation. While this is likely to be a medium-term story, we may start seeing signs of these trends shaping the fortunes of individual stocks in 2024.

4. China’s growth might accelerate next year, but concerns around property and demographics remain

The failure of China to show a meaningful recovery in economic growth was one of the biggest surprises of 2023. In late 2022, there was a strong consensus among investors that China would see a significant resurgence in activity with its post-COVID reopening, after the government imposed stringent lockdowns throughout the pandemic. But the reality has been disappointing. Despite the People’s Bank of China stressing in November the country was still on course to hit its full-year GDP growth target of five per cent, many in the market had hoped for more.1

There are two main reasons for this. Firstly, state intervention in the corporate sector has led to big challenges in terms of foreign direct investment into China. The number of international companies looking to make physical investments into China has dropped quite steeply.

Secondly, China is struggling with ongoing problems in the heavily indebted property sector. We have not seen a meaningful recovery in sales activity and prices since the pandemic. This has financial implications for property developers, which rely heavily on forward sales of houses for liquidity, and local governments, which depend on land sales to boost revenues.

Beijing has introduced many small measures to support the property market, but they have not been effective. This has raised the question of whether China has now essentially put economic growth and prosperity onto the backburner in favour of other priorities, like national security and reducing financial leverage.

While we shouldn’t forget the lasting impact of China’s focus on non-economic objectives, we are probably approaching a stage where the pace of economic stimulus is likely to increase rather than decrease into the new year. We expect the authorities will put more capital to work to support growth and perhaps ease off on some of their concerns about financial leverage and speculation.

More stimulus and faster Chinese growth would support global demand in the short-to-medium term, particularly among emerging markets. However, longer-term challenges around the property sector and rapidly ageing demographics are not going away. We would expect to see them re-emerge as dominant themes after any early sugar-rush from stimulus measures.

Reference

  1. “China’s 2023 growth target within reach – central bank governor”, Reuters, November 8, 2023.

 

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Except where stated as otherwise, the source of all information is Aviva Investors Global Services Limited (AIGSL). Unless stated otherwise any views and opinions are those of Aviva Investors. They should not be viewed as indicating any guarantee of return from an investment managed by Aviva Investors nor as advice of any nature. Information contained herein has been obtained from sources believed to be reliable, but has not been independently verified by Aviva Investors and is not guaranteed to be accurate. Past performance is not a guide to the future. The value of an investment and any income from it may go down as well as up and the investor may not get back the original amount invested. Nothing in this material, including any references to specific securities, assets classes and financial markets is intended to or should be construed as advice or recommendations of any nature. Some data shown are hypothetical or projected and may not come to pass as stated due to changes in market conditions and are not guarantees of future outcomes. This material is not a recommendation to sell or purchase any investment.

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By Baillie Gifford

Opportunities like this are rare. In recent years, companies in Scottish Mortgage have faced combined headwinds from slowing growth, reducing earnings estimates and multiple compression. As we move into 2024 and beyond, those headwinds are being replaced by tailwinds.

Growth at a company level remains strong. Profitability is improving well. And to supercharge this, companies in the trust are underpinned by strong structural drivers. We have long said that what matters in the long term for companies is not where interest rates or inflation is; it is deep underlying structural change that generates returns.

Lessons from the past

This quote is from our 2009 Annual Report when Scottish Mortgage had just suffered a c.40% drawdown:

“ We will only abandon our contentions and our stocks when their long run prospects have deteriorated rather than when the dreadful mood of the markets has hurt their immediate valuations.”

We also stated, “The survivors of this shock may be in dominant positions for years to come”. In the following five years, Scottish Mortgage delivered a nearly 200% return for shareholders, powered by companies such as Amazon, Illumina, Google and Tencent.

Being truly long-term matters

Going back to first principles, the purpose of Scottish Mortgage is to identify, own and support the world’s most exceptional growth companies.

We find companies that have sufficient opportunity to deliver outlier returns and we own them for long enough without interference so that the return accrues to our shareholders.

The key takeaway: our philosophy has not changed. We know our approach will never consistently be in favour. We should not deviate from it to avoid short-term headwinds.
If patient ownership of growth companies was easy, more people would be doing it. That is why Scottish Mortgage is different. And why now is exciting.

Structural forces powering change and opportunity

Today, the portfolio is poised for growth amidst digitalisation, the shift towards a post-hydrocarbon economy, AI, and healthcare advancements. These transformational forces are helping our companies generate impressive fundamental growth and give us optimism for the coming years. Here are just a few examples.

Digitalisation: A game-changer

We see digitalisation as a transformative force, especially in underbanked regions. MercardoLibre exemplifies this, dominating Latin America’s digital space with its online marketplace and financial services. Similarly, Pinduoduo’s direct-to-consumer model in China and Coupang’s digital retail in South Korea showcase the potential for growth unrecognized by markets.

Sustainable solutions

Our belief that sustainability also creates opportunity is evident in private company investments like Northvolt’s battery production, Climeworks’ carbon capture, and Solugen’s chemical industry decarbonisation. These companies address broader climate challenges beyond transportation, tapping into the growing demand for renewable energy and sustainable technologies.

AI: A new technology paradigm is born

AI will have a transformative impact, with OpenAI’s ChatGPT marking the start of a new technological paradigm. AI’s potential to enhance platform business models and physical world applications is significant. Roblox and Meta’s ability to leverage AI for content creation and targeted advertising underscores the importance of embracing growth opportunities in this field.

Healthcare: Innovations for better outcomes

Moderna’s success with mRNA technology in vaccines signals a higher likelihood of breakthroughs in various clinical programs, including cancer. AI’s role in diagnostics and healthcare, as seen with Tempus’s genome sequencing and treatment recommendations, points to a future of more effective medicines. Recursion’s drug discovery and 10x Genomics’ cell sequencing further illustrate the potential for significant advances.

Investing in exceptional companies for long-term impact

To conclude, Scottish Mortgage remains focused on a select group of exceptional companies that promise outsized impact over time. The optimism for the portfolio’s future is grounded in the convergence of powerful structural forces which are expected to drive continued growth and profitability over the coming decade.

By Mark Coles, Business Development Director – Head of National Accounts, Evelyn Partners

Artificial intelligence (AI) is much more than designer robots, promising to bring automation and digitisation – and significant disruption – to multiple industries. It could deliver solutions to some of the world’s largest problems, from climate change to worsening demographics, but others see a darker side as AI grows in sophistication.

Computing power

AI requires vast computer power to store and analyse data. Governments across the world are investing in supercomputers. The UK recently entered this supercomputer arms race, with the latest budget promising £1 billion to help develop an exascale supercomputer (1.), that will have 1,000 times more speed and power than today’s most advanced computers. However, it is playing catch-up – China already has 170 supercomputers (2.).

As well as its role in a range of industries, AI could stimulate economic growth. Research from Goldman Sachs finds that generative artificial intelligence, a form of AI which generates content from simple prompts, could drive a 7% (or almost $7 trillion) increase in global GDP over the next decade. It could also lift productivity growth by 1.5% over the same time frame, presenting a compelling solution to the weak productivity growth that has held back mature economies (3.) in recent years.

Nevertheless, there is a downside. The Goldman Sachs report highlights the potential negative impacts of AI on our livelihoods across the world. It estimates that shifts in workflows triggered by these advances could expose 300 million full-time jobs to automation – equating to almost 10% of the global labour force. Certain jobs – long-distance lorry drivers, claims processors, translators – could become obsolete. Economists from Goldman Sachs estimate that roughly two-thirds of US occupations are exposed to some degree of automation by AI (3.).

AI investment opportunities

As investors, we need to accommodate these positive and negative elements. We need to assess opportunities among the growing list of companies that will participate in the growth of AI, but also avoid those companies likely to be disrupted by it. We also need to be careful on valuation. Emerging areas often attract speculative investors and quickly become expensive, leading to poor risk-adjusted returns. Just because a phenomenon is global and has a transformative impact doesn’t necessarily make it a good investment.

Instead of trying to pick winners from the increasing number of unprofitable AI start-ups, we are investing in the more established technology names. Few companies have the scale of data management and processing required to handle the growing volumes of data that are crucial to the successful deployment of AI. These incumbent mega caps are, therefore, likely to maintain their dominant positions for the foreseeable future. They also have the cash to hoover up the winners in the start-up space, as well as the resources to invest in AI research and development. Our analysts are focusing on companies that have a proven track record of innovation and delivering shareholder value.

We find it can often be more rewarding to invest in the ‘picks and shovels’ rather than the gold rush. Here, that would be areas such as semiconductors or the hardware that is necessary for AI development. These companies are unlikely to see the same boom-bust dynamics as the companies at the coal face of AI.

Artificial Intelligence is changing the world and will continue to do so. It will play a crucial role in the technological revolution we expect to see over the next decade. We want to participate in the growth of companies with proven experience in deploying new technologies, while avoiding those that face an existential threat.

For further information please contact Mark Coles Mark.Coles@evelyn.com

This article is solely for professional advisers and does not constitute investment advice – not for use by or for distribution to retail investors. The value of investments can go down as well as up and investors may not get back the amount invested.  Issued by Evelyn Partners Investment Management Services Limited, authorised and regulated by the Financial Conduct Authority

Sources:

RSMR has introduced its Passive Plus MPS range to the wider market, using an investment approach that has been successfully applied to individual bespoke portfolios for six years, on both an advisory and discretionary MPS basis.

The Passive Plus portfolios comprise chiefly RSMR-rated passive funds, plus targeted exposure to RSMR-rated active funds, to add diversification and/or dampen down volatility. The range is aimed at advisers and their clients who prefer the simplicity and lower charges of passive funds, but who are concerned about the relative risk of 100% passive exposure, or fear missing out on the opportunities that active funds can access.

The portfolios will be risk profiled by Dynamic Planner on a quarterly basis. Platform availability is via abrdn Elevate, abrdn Wrap, Aviva, Fidelity Adviser Solutions, Nucleus, Quilter and Transact.

Ken Rayner, RSMR CEO, said: “We’re very pleased to introduce our Passive Plus range to the wider market. Since launching RSMR 20 years ago, researching funds for advice businesses has been the bedrock of our business.”

Stewart Smith, Head of Managed Portfolio Services at RSMR, said: “The passive plus strategy has worked really well for advisers and their clients in a variety of markets. For our passive exposure, we select RSMR-rated funds from a range of fund groups such as Fidelity, HSBC, iShares, Legal & General and Vanguard. The exposure to RSMR-rated active funds, sitting alongside the larger exposure to passive funds, is targeted where it can add value.”

www.rsmr.co.uk

by Leila Thomas, CEO and Founder, Urban Synergy

Happy International Women’s Day? I’m never quite sure if this is a day to celebrate or commiserate.

As we inch towards a more equitable society, ONS figures show that women still earn 7.7% less than men, and according to research by the Runnymede Trust* for Black Caribbean women that figure rises to 18% .

The Runnymede Trust also reports that “75% of women of colour have experienced racism at work, and 61% report changing themselves to ‘fit in’.

This year’s International Women’s Day theme is ‘inspiring inclusion’, and as ever, the charity I founded in 2007 – a Dynamic Planner partner – will be celebrating the female role models and mentors who make us a beacon of progress, optimism and, on so many occasions, joy.

Help us create the “C-Suite” excellence of tomorrow

For those who don’t know Urban Synergy, we’ve worked tirelessly with some 27,000 young people aged 9-24 to help them access education, degree apprenticeships, and work.

Active across London and the UK, we connect those young people to inspirational role models (such as Parris Small, a Software Engineering Analyst at Goldman Sachs, shown) in the form of mentors who they can relate to, who help the young individuals gain access to education, internships and work experience.

Then when they’re ‘work ready’ we connect them to companies that want to nurture and employ the next generation, particularly in the communities in which they operate.

In other words, we help young people write their own futures. We couldn’t have done it without the support of people like Ben Goss, CEO of Dynamic Planner, who was one of our founding role models, mentors, and corporate board members as part of his passionate support for inclusive business.

Today his company has the pick of Urban Synergy’s raw talent, young people who are bright, unique and hungry to succeed.

As Ben argued in the FT in February, Diversity and Inclusion is a supply and demand issue, and on the supply side, the continued challenge is that too few people from diverse backgrounds see financial services as a career path for them.

In his own right, Ben can today celebrate that his highly successful team is made up of 45 per cent women and non-binary colleagues.

This team speaks 27 different languages, and 43 per cent are non-white, while 10 per cent are LGBTQ+ and 21 per cent identify as neurodivergent.

A trailblazer role model

If you follow Urban Synergy on LinkedIn and Instagram, you will see our many female role models, mentors and their mentees. Like us they are inspired by trailblazers such as Ben who make their workplaces more inclusive and accessible.

You’ll also see the mentors who helped young women like Perrine Beckley shown in this image make it to Oxford University with confidence.

That’s when the joy kicks in. So often we learn that an Urban Synergy mentor is being invited to a young person’s graduation, or that the individual they’ve supported has been offered an apprenticeship or a job where they can build a career.

We’re lucky enough to be celebrating the 30th birthdays of four young men who began their journey with Urban Synergy in 2009. Their teachers at Deptford Green School feared they were at risk of exclusion and would fail to reach their true potential.

You can see their stories in this short video. Today they hold these roles:

Gavin Kamara – SEO Manager at CMC Markets
Kofi Siaw – Vice President at HSBC Innovation Banking
Chad Orororo – Sound Fx Editor/Sound Designer (Freelance)
TJ M.Jaiyeola – Relationship Manager at Transaction Network Services

So yes, turn on the news, and you can see that the three evils of war, racism and poverty are ever present in this world. However, on International Women’s Day, we certainly have something we can all celebrate.

If you would like to experience the joy of becoming a mentor, or want to partner with Urban Synergy to make your business more sustainable and attract young people to financial services, contact us.. You can also donate here.

By Dorian Raimond, Head of Fixed Income Strategy and Trading, Hilbert Investment Solutions

As we have entered a new regime of higher inflation and higher yields, decades-old templates of portfolio construction might be worth reconsidering. Bonds yields have become more attractive again, while the product seems to have lost some of its diversification appeal. Could structured solutions well come out as the welcomed saviour?

Typical pension allocation follows portfolio theories like Markowitz’s (backed by a few decades of historical evidence), with the aim to balance volatility (‘risk’) and returns by attributing a risk-weighted exposure between equities (higher and more volatile returns), and bonds (less volatile and yielding less, with a defined capped upside).

The lower rates / lower inflation regime experienced since the ‘80s has proven to be a great soil for risk parity and 60/40 portfolio constructions. As many professionals of the sector have reported, the negative correlation of rates and equities during that time was a function of several factors – from the introduction of inflation targeting by central banks which had gained their independence, to deflationary pressure from globalisation, to quantitative easing by central banks after the 2008 financial crisis, and a self-fulfilling market mechanism.

The ‘Everything Rally’ brought on by the years of quantitative easing (QE) began to challenge the theory; correlation between equities and bonds started to turn positive as each shock brought ever faster quantitative easing, leading to longer periods of positively corelated (positive) returns. But returns were positive, and we looked elsewhere. Then, in 2022, came the “Everything Sell-off”. While 2023 was good overall, intra-year sell-off’s saw once again bonds and equities go down in tandem.

What fuelled the success of these strategies is just not there anymore. Those portfolio constructs do not achieve their aim in a regime of higher inflation, since bonds and equities are likely to remain positively correlated.

But inflation is going down, so surely, it’ll go back to normal?

It’s hard to dismiss the case against it. Globalisation is not in vogue anymore and 40% of the world population voting this year is likely to confirm this trend. At the same time, between the exponential growth of public debt on the back of fiscal stimulus, and the quantitative tightening of central banks (reversing their monetary stimulus), bond yields might easily be floored.

Geopolitical tensions remain on the rise and will keep being the tailwind for inflation (and deglobalisation). As long as central banks keep their independence (a debate gaining traction in fact), we should not expect rates to go aggressively lower. Should inflation make a comeback, rates might in fact rise further.

While bonds might not work as a risk offset to equity exposure, the investment itself is still very much an attractive proposition. Especially if corporate earnings start to deteriorate and weigh on stock prices. Bonds just need to be considered for what it says on the tin; fixed income. The great reset in yield has made for more attractive nominal returns for bonds – but also for structured products.

Under a low-rate regime, structured products were mostly for yield enhancement as investors looked for ways to add leverage. But as rates rose, the issuance of structured products rose as well. The higher yield regime created new opportunities for structured products; total or high capital protection.

Structured products are now offering close to 10% return with high capital protection. An attractive proposition versus typical 60/40 portfolios, especially as you get closer to retirement age in a high inflation environment. Such coupons offer a higher chance of a positive real yield on your life-long investment, while the capital protection is key to protect against a 2022 redux.

This has always been the crux of the matter; participating in equity upside, clipping high fixed income coupons, while not risking life-long invested capital, and even more so as one gets closer to retirement age. As portfolio construction itself is not trusted to provide this protection anymore, pension solutions like Hilbert Protect 90 offer 90% capital protection. This capital is invested in equity and fixed income ETFs, and every quarter, returns making for a new high-water mark of investment values are also protected at 90%.

For more information about Hilbert Investment Solutions’ retirement products with capital protection, click here to visit our website.

The value of investments can fall. Investors may not get back the amount invested.
For Financial Advisors only. This is not investment advice.

By Newton Investment Management

Against a backdrop of volatility and macroeconomic uncertainty, investors might be wary about the future. Here, Newton multi-asset chief investment officer Mitesh Sheth and FutureLegacy portfolio manager Lale Akoner outline what they think makes a robust multi-asset portfolio in the current environment.

We have entered a market regime characterised by deglobalisation, decarbonisation and divergence, which requires an active, dynamic and sustainable approach to portfolio management, according to Newton multi-asset chief investment officer Mitesh Sheth and FutureLegacy portfolio manager Lale Akoner.

“We believe this next decade will be unlike anything we have lived through before,” says Sheth. “We cannot just rely on historical models and data, or experience alone to navigate this volatile regime.”

Sheth thinks volatility in markets has led investors to be nervous about saving for the future.

“People want their investments to keep pace with inflation, they want to remain resilient through this market volatility and leave a legacy, not just for their own kids but for all our futures on this planet,” he adds.

He argues in this environment it is important for investment management to draw heavily on multiple research inputs across asset classes. At Newton these include quantitative, fundamental, and sustainability research and even investigative journalism.

On a thematic level, Newton’s research considers the macro themes of big government, China’s influence, financialisation and the great power competition; and micro themes of the internet of things, smart everything, tectonic shifts, picture of health and natural capital.

Sheth says bringing this all together enables the investment process to be ‘joined up, agile and able to spot opportunities others miss – now and in the future’.

Dynamic and active

Other important factors in the current environment, Sheth adds, include being directly invested and actively managed.

“At a time of great divergence, we believe passive strategies may struggle to deliver positive real returns,” he says.

Akoner concurs that as capital becomes limited, talented active managers have a higher chance of outperforming benchmarks. She notes 2022 was the first year since 2009 that most active asset managers of equity mutual funds were able to outperform the S&P 500 index .

“This is because liquidity is getting scarce and the dispersion between stocks and sectors is increasing, leading to a boarder opportunity set for active managers,” she adds.

Tactical overlay

In terms of portfolio construction, Akoner argues tactical asset allocation, using a derivative overlay, is fundamental to navigating the current market volatility.

“We look at things like liquidity indicators, positioning and flow indicators as well as spreads data to see if there is any froth in the market,” she says. “We can use futures, forwards, and physical securities to navigate the environment tactically.”

In terms of long-term positioning, Akoner says the portfolios are overweight in healthcare and utilities while underweight in consumer discretionary and energy. When it comes to fixed income, portfolios are underweight duration relative to the benchmark.

“We think market is incorrect in pricing quick Fed cuts,” she adds. “We think especially the ample amount of Treasury issuance could contribute to the peak rate environment in the short term. When those rates start to come down, we could go neutral and move long equity futures.”

Sustainability

With decarbonisation also being a key facet of the new market regime, Akoner says it is important for an investment process to support the transition to a low carbon economy. This, she adds, means adopting an investment process that incorporates red lines for excluding certain companies. The FutureLegacy team then look for three buckets of investment opportunities:

  1. Solution providers – companies solving problems on sustainability through products and solutions. For example, heating, ventilation and air conditioning (HVAC) businesses
  2. Balanced stakeholders – companies with sustainable internal processes. For example, companies best in class for governance or high standards on human capital management
  3. Transition – companies at the start of their sustainability journey but showing a credible commitment to a transition business model

Akoner notes sustainable strategies in the wider industry have tended to have a growth bias, because they consist to a large degree of technology companies which can have lower carbon emissions. However, she argues quality is the primary factor the team look for which could then result in a stock being either value or growth.

Please feel free to contact us if you would like more information on the FutureLegacy range.

The value of investments can fall. Investors may not get back the amount invested.

For Professional Clients only. This is a financial promotion.

Any views and opinions are those of the investment manager, unless otherwise noted. This is not investment research or a research recommendation for regulatory purposes.

For further information visit the BNY Mellon Investment Management website: http://www.bnymellonim.com.

By Minerva Fund Management Solutions

For a number of years, financial advisory firms have operated in an environment that is ever changing and bringing increased challenges to their business model. One challenge is managing a range of client portfolios across a range of clients and asset classes.

As a financial advisory firm, it is an expectation that the suite of products offered will be broad, flexible and potentially encompass a range of investment options that meets a varied set of client needs, particularly for firms holding themselves out as independent.

PROD has resulted in financial advisory firms offering their clients solutions based on client lifecycles (the ‘target market’), that can contain a variety of investment solutions including active, passive, blended options, bespoke investment management and the ability to meet a client’s ESG preferences.

Needless to say, Consumer Duty is a piece of FCA regulation that brings another challenge, which requires a financial advisory firm to scrutinise their business and formally document how they meet the four client outcomes, taking into consideration a number of requirements such as client needs and the associated costs aligned to a level of service or tariff that represents fair value.

This has led financial advisory firms to explore opportunities to simplify their processes, and one opportunity that is generating more interest is unitising existing client investment solutions within their Centralised Investment Proposition (CIP).

The rationale for this is due to a variety of reasons, so there is no ‘one size fits all’ approach but to give you an example; under the Consumer Duty, good client outcomes for all clients is one of the core principles, if a financial advisory firm is managing a CIP across multiple platforms and each platform trades with a different modus operandi, then investment outcomes will inevitably be varied across their client base. Firms will need to think through the implications of this under their Consumer Duty procedures.

A unitised fund solution can enable a financial advisory firm and its clients to access the same investment solution and have similar investment outcomes. In addition, there are a number of other factors that could lead a financial advisory firm to consider unitisation as an option for their business. It has the potential to provide:

In addition to the above, in our view, a unitised fund solution may help a financial advisory firm satisfy two of the four outcomes under Consumer Duty, namely Products and Services and Price and Value. This is because under the Consumer Duty, products that already comply with the Product Governance Rules in PROD and the Collective Investment Scheme Assessment of Value Rules in COLL, can satisfy these two Consumer Duty Outcomes. As a result, the use of FCA regulated unitised funds could achieve these two outcomes.

So, there are a number of fundamentals as to why a financial advisory firm could consider this option to augment their CIP. However, before a financial advisory firm reaches a conclusion that a unitised offering is a good move for their business, there are other factors that need to be considered before they can press the start button.

As a starting point, a financial advisory firm will need to compare a client’s current proposition with the potential unitised investment offering. Prior to undertaking this comparison, there is perhaps a perception that a fund offering may increase the ongoing charges figure (‘OCF’). However, this is not always the case and before making this assumption, it is always worth having an in-depth discussion with potential providers. Of course, one key factor in an overall OCF is fund size, and in our experience, making a unitised solution as part of a CIP viable requires AuM of at least £50m per fund.

Another aspect to consider is client reporting. A client using a Model Portfolio Service for example, can have the added benefit of a client viewing individual holdings in a quarterly valuation and take comfort their portfolio is diversified; compared to a unitised solution with just one or two fund holdings. Having said that, there are technology solutions that are available and will offer a ‘look through’ service.

In essence, there is no overriding rationale as to why a financial advisory firm should, or should not, offer a unitised investment solution to their clients. The most optimal outcome will, of course depend on their business model, client requirements and what is most suitable for their clients.

Find out more. Contact Mark Catmull, Sales and Marketing Director, Minerva Fund Management Solutions.

The aftermath of the Covid-19 pandemic and a tightening of global supply chains have unleashed an inflationary wave which looks set to drive greater corporate discipline, boost income stocks and increase the importance of dividends to investor returns, says Newton portfolio manager Jon Bell.

After years of low interest rates and low inflation, the economic tide is turning. Post the Covid-19 pandemic, Newton Investment Management’s Jon Bell says an injection of pent-up savings has introduced a fresh flood of liquidity to the market. This, in turn, has helped fuel a sharp spike in inflation across major markets – just as supply chains contract.

While the initial rise in inflation was at first considered a transient blip by some economists , Bell believes higher inflation levels are now here to stay, with major implications for global investors.

“Post-pandemic, we believe we are now seeing a regime change from a disinflationary world to one which is more inflationary,” he says.

“In recent months markets have seen growing evidence of deglobalisation and increased protectionism which will further support this. In our view, we will have to get used to the fact we are living in a more inflationary world than we were.”

All of this, says Bell, means change for both equity investors and the companies they invest in. In a post-global financial crisis (GFC) environment, where the corporate operating cashflows of some of the largest US technology companies and many others rose significantly, corporate excess and a general lack of focus on shareholder returns became more common. In some extreme cases, this led some companies to focus more on devising workplace gimmicks than delivering shareholder value.

Payback time

For Bell, changing market conditions mean it is now payback time for investors, with some investment managers now looking to subject the companies they invest in to much greater scrutiny, demanding more capital discipline and higher dividend pay outs.

“Although corporate margins have improved over time, many companies have given less back to shareholders in the form of dividends than they did historically. In our view, that needs to change. As we go into a different, more challenging economic environment, corporates need to offer more value to shareholders,” says Bell.

“The days when companies could spend as much as they like on whatever they want are behind us and we expect to see them begin to tighten their belts. The age of extravagance is over.”

Bell believes investment managers can play a key role in shifting corporate thinking, influencing management teams and encouraging them to change behaviours in order to generate greater shareholder value.

He says, “Ideally, we want to see more corporate discipline and the return of a healthier blend of corporate reinvestment and dividend pay-outs to shareholders. In fact, companies have not been doing a very good job of giving cash back to shareholders in recent years and, in many cases, we have actually seen pay-out ratios fall.”

Not all sectors are alike. While some US technology giants have a poor track record of rewarding their shareholders in recent years, some pharmaceutical and utilities companies have been far more responsive, with business models that do more to reward investors.

Against this mixed backdrop, Bell stresses the historic and ongoing importance of dividends in a world where slower economic growth can limit returns. The compounding of dividends from income stocks, can fuel a steady accumulation of income within portfolios. This strength of income stocks, he believes, was often overlooked during a long period of low inflation and heavy central bank intervention in markets, post the GFC.

Exciting investments

“The 2020s started with a record low return from dividends, and an environment of zero interest rates and excess fuelled by quantitative easing. Yet when financial bubbles burst dividends, can become a very important factor in building returns,” Bell says.

“It may be that in 2030 we look back on a decade where dividends have been critical to investor returns. The last time inflation was a major problem, in the 1970s and 1980s, strong returns came from dividends and income stocks do tend to outperform during similar periods.

“In inflationary markets, we continue to believe dividends are key and that the compounding of dividends makes select income stocks some of the most exciting investments in the current market.”

For more information on equity investing at BNY Mellon Investment Management, please visit our dedicated Adviser site.

The value of investments can fall. Investors may not get back the amount invested.

For Professional Clients only. This is a financial promotion. Any views and opinions are those of the interviewee, unless otherwise noted. This is not investment research or a research recommendation for regulatory purposes.

For further information visit the BNY Mellon Investment Management website: http://www.bnymellonim.com

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By Casterbridge Wealth

Investing is often made to appear more complicated than it needs to be, and sometimes conventional wisdom isn’t really wisdom at all.

Nothing proves this more than the damage wrought by bonds during 2022. The so-called ‘risk-free’ asset proved anything but, and bond market falls in the region of 30% would have made for some difficult conversations with unsuspecting investors who thought their bond allocation gave them some protection.

The battering bond markets took last year is a great example of ‘group think’ within investing – where warning signs are ignored and it feels safer to travel with the herd. Unfortunately though, when it comes to Managed Portfolio Service (MPS) offerings, independent thinking is not part of the proposition. Instead, most choose to ‘play it safe’ and hug their benchmarks.

That’s all well and good if you believe in safety in numbers. But advisers may want to ask whether MPS portfolios are being managed to a benchmark for the sake of the client, or the sake of the provider. Because the simple truth is that clients don’t care about the benchmark; they just don’t like losing money.

We recognise the feeling, which is why one of the defining principles at Casterbridge is that we manage client money as if it were our own. In fact, when you don’t believe in benchmarks determining your asset allocation, it gives you the freedom to play to your strengths and act on your own insights.

So, when in 2021 central banks and the big investment banks were describing post-pandemic inflation as merely ‘transitory’, we were more sceptical. Our research, our experience of managing investment portfolios across numerous market cycles, and our belief in challenging conventional thinking told us that pent-up consumer demand and broken supply chains would lead to surging – and far stickier – inflation. Being benchmark-agnostic meant we could act on this view.

We therefore changed our portfolios to a maximum underweight in bonds, while holding shorter duration bonds capable of proving more resilient in a rising rate environment. As a result of this inflation hedging and bond underweight, the Hardy MPS range outperformed most of its peers by between 5% and 8% over 2022, meaning those advisers who recommend our Hardy range could have much more positive conversations with their clients.

Our agnostic approach also applies to choosing between active and passive investments for our portfolios. We don’t believe in restricting our investment universe, and think passive funds should be used as a building block of active asset allocation, not as the driver. We doubt that passive investments have the capability to outperform in the current environment, so we apply a blended approach that stays conscious of costs, while still giving portfolios the potential to outperform based on value judgements.

We’re always ready to share our thoughts on portfolio positioning or the future direction of markets. So, to have a frank and fearless discussion with us, get in touch on 0800 644 4848.

For more information about the Hardy Managed Portfolios, visit https://casterbridgewealth.co.uk/hardy-advisor/