Page 17 – Dynamic Planner

What is driving growth today in sustainable investing? How can advice firms demonstrate value to their clients here? And what is making some advisers wary of talking about sustainable investing or ESG? Naomi English, Head of ESG Product Strategy at global giant MSCI, delivered a timely keynote at the 2021 Dynamic Planner Conference, answering those questions, among others. Below, are highlights of what she discussed alongside a video recording of her March talk in full. You can catch up on the full recording here.

What has driven growth in sustainable investing?

Over the past decade, we have seen tremendous growth in ESG investing globally, with an even greater acceleration last year in 2020. Growth was particularly pronounced in Europe and there are many reasons behind that. I would like to focus on two.

First, there is a better understanding today of the relationship between ESG and financial performance. We have seen that companies with high ESG ratings have been more profitable and paid higher dividends to shareholders, and that portfolios which have integrated ESG considerations have demonstrated more resilience than portfolios which have not.

On top of that, hundreds of different academic and practitioner studies have looked at the relationship between ESG and financial performance, allowing us to confidently say that the myth that incorporating ESG into your investments will hurt performance is simply that, a myth.

Second, investors are more aware of events today and less tolerant of corporate ESG incidents. More than 30 years ago, the share price of Exxon barely moved in the wake of the 1989 Exxon Valdez oil disaster. Today, there are example after example of companies, which have faced serious financial repercussions following corporate ESG incidents. Companies cannot get away with it today. There is a financial price to pay.

How can advisers demonstrate value to their clients?

It’s not only institutional investors who are changing, but individual investors too. According to studies, 84% of millennial investors are interested in sustainable investing, alongside 71% of overall individual investors today.

Naturally, those investors are looking to financial advisers to see how they can help them invest in alignment with their values. ESG investing insight is insight clients want and by providing it, advisers can demonstrate their value. They can further do this by strengthening clients’ portfolios by incorporating ESG; they can align portfolios to their clients’ values; and they can enhance their annual client review process, by providing meaningful insight here.

Some advisers may say, ‘Oh, only a small number of my clients ask about ESG’, but equally in that regard advisers are not waiting for their clients to ask them about increasing exposure to China in their portfolio, for example. Ultimately, investors look to their advisers to advise them and help them navigate global trends and risk.

Why are some advisers wary of discussing ESG?

First, they may be uncomfortable talking about it because they feel they lack the expertise. Second, there is existing confusion about ESG investing and whether it can really reflect a client’s values or an investment strategy.

ESG does mean very different things to different people. There is no one size fits all. For example, let’s say 50% of a company’s power use is generated by nuclear power. That could be a positive or a negative for a client, so it is very important for an adviser to understand their clients’ individual objectives, in respect of aligning personal political and ethical values with their portfolio and to understand their investment objectives.

A client may wish to align their portfolio with ESG preferences somewhat irrespective of performance. They may wish to see measurable environmental and social returns – sustainable investment impact – alongside financial returns. Those are individual objectives. When we turn to look at investment objectives, we are looking at the integration of ESG into portfolios to enhance long-term returns.

The methodology behind MSCI’s ESG research

The MSCI ESG research ratings go from a AAA, a leader, to CCC, a laggard. And not all issues are relevant for all industries. At MSCI, we use quantitative metrics to determine which are most relevant for an industry.

MSCI was the first ESG provider to assess companies based on the idea of ‘industry financial materiality’, which is really core to our approach. We have identified 35 potential ESG issues across all industry, but for each industry we only select between four to seven of them and we dive deep on those issues and give each an appropriate weight before reaching an overall rating.

Inside the MSCI ESG ratings: How companies are scored

Our analysis does not only look at the past but is forward-looking as well. It does not rely purely upon company disclosure, thus allowing our ratings to measure possible risks not captured by traditional financial analysis.

In Dynamic Planner, you can view and download PDF reports of analysis of funds, containing lots of information and allowing you to dive in and evaluate funds in respect of values alignment, sustainable impact and risk exposure.

What makes MSCI’s ESG ratings unique?

MSCI is a pioneer here with the deepest ESG history.
The MSCI ratings have been used by more studies than any other.
The ratings have recently been found to best predict ESG news on material ESG issues and future stock returns.
The ratings were the first to adopt a forward-looking financial materiality approach and have continued to innovate and refine their approach over the last decade.
They don’t rely purely upon company disclosure, with 45% of data used being alternative data.
Ratings use a common language to assess ESG performance and are transparent, helping set industry standards.

Learn more about MSCI sustainable investing research in Dynamic Planner.

By intelliflo

You may have noticed a change in our intelliflo brand. This new identity is more than just a logo change. It marks the start of an exciting new era for our customers as we bring five companies together across all the countries we serve.

On March 1 we announced that we are establishing ourselves as a new global leader in financial advice technologies. By bringing together intellifo, i4c, RedBlack, Jemstep and Portfolio Pathway, we are creating the most advanced open architecture solutions to widen access to financial advice.

Widening access to financial advice

Financial advice, literacy and support is often a privilege of the wealthy. The effects of the pandemic made it clearer than ever that we need to widen access to advice to improve people’s financial wellbeing. At intelliflo, we want to support you in your mission to help more people achieve their personal and professional goals through better long-term financial decisions. We want to create a seamless advisory experience, so that you can focus on what really matters: advising your clients.

Supporting choice

We have long championed the importance of choice for our adviser community. While we work toward a more holistic offer for our customers, we also recognise the power of connecting intelliflo’s open architecture solutions with third party software. Last week’s announcement does not change that.

We take pride in providing open architecture solutions and remain committed to supporting and expanding our integrations to better serve our customers. This is achieved through our rich and open API framework, developer hub and Store that enables third parties to integrate into our solutions.

At the same time, we know that for a growing proportion of advice firms, the option of a technology stack that provides everything in one place is increasingly compelling. End-to-end solutions can solve a broad set of adviser and home office needs, helping you enhance the efficiency of your work and deliver your services to more people, unlocking previously inaccessible growth and revenues while you focus on expanding and improving your client relationships.

We will be working with our customers throughout 2021 to make sure you can take full advantage of the new intelliflo solutions. In the meantime, you won’t experience any changes to our services and your customer services team will remain the same, so you’ll continue to have access to the same great local, in market support.

The new brand reflects that we are now a truly global player operating across a range of nations with holistic functionality built on solid foundations. All supported by a breadth of customer-focused technologies, people, talent and capabilities that is genuinely unmatched in the industry.

We are excited by the opportunity and responsibility we have in helping your business thrive and grow. Welcome to intelliflo.

The early part of a year gives investors an opportunity to take stock. Sunil Krishnan – Head of Multi-asset Funds, Aviva Investors – reflects on how the current environment is shaping our views for multi-asset portfolios

Despite some clear economic challenges, we are constructive on the outlook for the economy and risk assets. Strict lockdowns have been imposed in Europe once again, and at least parts of the US have followed suit. However, the distribution of vaccines to bring the global pandemic under control should have a positive impact on economic activity in the medium term.

Two other themes inform our current views. The first is that there are signs of froth in equity markets, particularly in US small caps and some tech companies. Retail investor participation, especially from US households, is high in these names and there is evidence of speculation in short-dated options, again likely from retail investors. Signs of excess bullish sentiment are increasing across a range of markets.

Although we do not yet see them as being material enough to pose a systemic risk to the global equity market, we are watching closely for indications of contamination. Following Tesla’s entry into the S&P 500, it would be a concern if gains in a single stock became a major force in the overall index performance. Similarly, if GameStop-style speculative behaviour began to emerge further afield, in European or Asian markets for instance, we would see it as a further warning sign.

The second theme informing our views is the change of administration in the US. Following the Democrat Senate wins in Georgia, investors have been debating whether the prospect of greater stimulus would be balanced out by more investor-unfriendly measures like tax rises or tightening of regulation.¹

Stimulus and regulation

On balance, we see the election result as constructive. While there may be appetite to consider changes in the tax regime, it is unlikely to be high on the US administration’s priority list in the middle of a pandemic, whereas President Biden has already put forward a $1.9 trillion rescue plan and is talking of an ambitious recovery plan to follow.² This proposal may be watered down in the legislative process, but even a programme of half the size would have been unthinkable before the Georgia Senate election results given the recent passage of a smaller programme. We expect to see increases in near-term fiscal stimulus.

With regards to regulation, the environment is a stated priority for the new administration. President Trump passed a raft of executive orders to roll back environmental regulation over the last four years, and the Biden administration has already begun to restore some of it.³ However, this is a return of the inevitable rather than a major surprise, especially in light of the global trend towards decarbonisation.

The second area of debate concerns the tech sector and whether regulation there could pose an existential threat to the largest companies. There is growing interest in trust-busting measures in China, Europe and the US, but without international coordination regulators will struggle to force major changes in tech companies’ business models.^4,5,6 For example, large US tech firms may be tempted to address European Union rules by simply creating a standalone European entity.

Regulators are also looking at whether companies’ past acquisitions were made for anti-competitive purposes. It would be difficult to unwind those decisions, but it signals greater scrutiny of such deals in future. The real question is to understand which companies’ business models are most dependent on being able to acquire assets defensively and which benefit from organic growth and innovation. We may see more differentiation between the two in the medium term. But we do not see the current regulatory pressure as a major challenge for tech earnings as a whole in 2021.⁷

The final element of pressure on tech relates to content moderation due to public and political criticism over the seeming inability of platforms to address hate content. Regulators aim to put social media platforms in the position of content editors. It is to some extent inevitable, and we expect the distinction between platforms and content publishers to diminish over time, but this is more likely to require platforms to refine rather than upend their business models. They may need to invest in moderation or editorship, but it is not quite the same as having to shut down large parts of their business.⁸

If the threats to big tech were more existential, they would lead us to challenge the US market as an investment. At the moment, they do not look quite so severe but could still be a headwind for those companies. That is one of the reasons we prefer to remain diversified in terms of geographies, despite the relative US outperformance over the last year and decade.

Diversified exposure in equities

We otherwise remain constructive on equities, particularly since investor expectations do not yet fully reflect the positive medium-term impact of vaccine rollouts in some sectors (despite signs of froth elsewhere). For instance, in industries suffering most from the pandemic, such as airlines, or areas that are highly dependent on global economic demand like energy, prices remain well below pre-pandemic levels.

Despite the uneven price recovery between sectors, we prefer to keep our equity positions broad-based across developed and emerging markets. This is partly because of the potential regulatory headwinds for US tech stocks and general signs of froth, and partly because focusing solely on sectors where stock prices are lagging can become bound up in style and factor risks.

The exception we make is in European oil and gas, as a cyclical play which has not recovered very strongly. Even allocations to energy can be influenced by environmental, social and governance (ESG) considerations. Our ESG team’s analysis shows European firms are much more advanced than their US counterparts in responding to engagement and adapting their business models to a net-zero future.⁹

In terms of valuations, one of the key drivers for energy companies is oil prices. The pandemic continues to limit the potential for increases for now, but the medium-term outlook for demand is more positive in light of vaccine rollouts. In addition, at a meeting in early January 2021, OPEC surprised the market by deciding against a widely expected rise in production levels, to which Saudi Arabia added a unilaterally expressed willingness to take on more of the burden in terms of output reduction to protect prices.¹⁰ Suppressed production and a more favourable demand outlook in the medium term could combine to support oil prices.

Credit is more sensitive to US Treasuries

Credit has been a preferred allocation for us over recent quarters as the economy recovered and central banks pledged support, helping underpin corporate bond markets.

However, alongside high yield and hard-currency emerging-market debt, investment-grade credit has seen significant spread compression since the wide levels reached in March 2020 when the pandemic first hit. As spreads have tightened and total yields converge on equivalent government bonds, these markets have become more sensitive to interest rate moves and the US Treasury market. In this regard, they have become less compelling.

In contrast, local-currency emerging-market debt is not as sensitive to US Treasuries and could benefit if emerging-market currencies rally against the US dollar.

This did not happen strongly in 2020 despite dollar weakness versus developed peers; perhaps reflecting investor caution towards emerging economies given the progress of the pandemic. However, that could change in 2021 if economic activity rebounded in emerging markets at the same time as in the US – especially as a more dovish Federal Reserve will not tighten policy in a hurry, creating less supportive conditions for a strong dollar.¹¹

‘Risk-neutral’ Japanese yen

In terms of currencies, we continue to like being long Japanese yen versus the US dollar, although it may be less of a risk-reducer than it once was. Indeed, as more investors short the US dollar, the currency’s correlation with risky assets could become more negative. In other words, episodes of weakness in risky assets could see the dollar rally as investors unwind their levered positions.

In the current context, being long Japanese yen and short US dollars is not a risk-off position but, with the Japanese yen being a traditional safe-haven currency, it could be somewhat sheltered from risk-on/ risk-off movements.

The currency is also supported by domestic investors bringing more investments back into Japan. There is some evidence reshoring began towards the end of last year, especially in equities, and we expect it to gather pace in 2021.

References

By Sam Liddle, Sales Director, Church House Investment Management

As Covid-19 swept the globe in 2020, its effects were clearly devastating on the lives of individuals and businesses. The ripple effect will likely continue for some years to come, not least on economies and markets.

What we see today is a rather volatile market. This shouldn’t be too much of a problem if investors are in the early or even mid-phase of their investment journey, but to those in the decumulation phase, many are facing not just a capital loss but (by proxy) a reduced level of income in retirement.

The issue with volatility is often not knowing when it will occur or when it might stabilise. As Donald Rumsfeld once famously put it, there are known knowns, known unknowns and unknown unknowns.

This is particularly pertinent in financial markets and even some of the most accomplished investors can and have come unstuck when certain ‘unknown unknowns’ rear up. Coronavirus is one such example and both markets and investors have felt the full effects of the ensuing volatility.

As multi-asset investors (in the case of Church House’s Tenax Absolute Return Strategies Fund), we know all too well the importance of risk management and of managing volatility; it is very much part of our DNA.

Decumulation conundrum

To our minds, in the decumulation phase of life, a successful strategy must provide low volatility returns in order to avoid stripping out capita, which, in turn, reduces income.

The process is known as ‘pound cost ravaging’, where retirees are forced to sell larger and larger portions of their pension pot to maintain their preferred level of consistent income when the underlying value of that pot falls. As such, the best funds will be mindful of the risks to capital to avoid the worst extremes of market volatility associated with those risks.

The big question is, in this environment, how can investors navigate markets to avoid high volatility and even the permanent loss of capital in retirement?

The answer is simply to focus on low volatility returns through steady investment instruments. By way of example, throughout 2019 and into early 2020, the managers of the Church House Tenax Absolute Return Strategies Fund (Tenax) watched credit spreads tighten to levels last seen in mid-2007. We didn’t anticipate the pandemic but did anticipate an ‘event’ that would see spreads gap out again, causing a spike in volatility across all asset classes (and a consequent buying opportunity).

By the end of January 2020, Tenax had 69% of its portfolio invested in money market instruments, having sold most positions in risk assets as 2019 progressed. Then, we waited eagerly and when the eventual spike in volatility came, most obviously on 23 March 2020, creating plentiful miss-pricing opportunities, we were like ‘kids in a candy store’, able to deploy the cash for the benefit of the fund and its investors.

Managing up the allocation to money market instruments had protected the value of investments, while the subsequent buying opportunities allowed the fund to make sufficient gains to sustain withdrawals without affecting the capital value. In fact, growth stood at 4% in 2020.

Where next?

Even as this was playing out, the fund managers had to remain mindful that there are always risks to capital and that the shifting sands of global economies, poised as they are for strong recovery on the back of continued profligacy by central banks and governments, have now brought the spectre of resurgent inflation to the surface, with consequent disquiet in government bond markets – principally the US and UK.

Government bond yields in those two countries have spiked recently, raising concerns that interest rates, for so many years on a downward track, might finally be about to turn upward, and maybe even quite sharply. Gilts and longer duration corporate bonds have sold off in January and February 2021 and many fear it is only the beginning.

Bond markets also face the looming threat of inflation and, in this environment, it is worth remembering that as interest rates have been falling since 1992, there are a great many money managers who have never seen a rate rise and who cannot contemplate higher inflation.

Fortunately, for investors, the managers of the Tenax Fund are able to draw on long memories and have already positioned the fund so that 33% is allocated to AAA Floating Rate Notes (FRNs) and a further 37% to sterling corporate bonds with an average duration of just 2.7 years.

The interest or coupon from FRNs, as the name implies, rises and falls with movements in interest rates, so as interest rates rise, so do they. This is quite unlike other bonds, the capital value of which will fall as interest rates rise. So, FRNs essentially provide a free hedge against rising rates. Similarly, longer duration bonds are most vulnerable to rising rates so maintaining short duration is a sensible strategy for an absolute return fund trying to protect capital and provide withdrawals for SIPPS in drawdown.

For growth, governments in many countries, notably the US, have outlined extensive infrastructure spending as a means by which to kick-start their economic recovery, so that seems another sensible area in which to invest and Tenax has 6% exposure to the asset class. Our 10% allocation to equities includes investments in mining stocks and financials that have historically benefited from rising inflation, while UK REITs offer recovery opportunities through the likes of Shaftesbury and Land Securities.

As is always the case with decumulation funds, it is the combination of exploiting mis-pricing opportunities to generate upside participation and defensive assets to limit downside participation that create the low volatility of returns essential to sustain withdrawals without stripping out capital.

How can Risk Managed Decumulation funds help my clients in retirement?

Speaking virtually to 1000 financial services professionals from across the UK at its 9th Annual Conference this morning, Dynamic Planner’s CEO Ben Goss praised the transformation of the financial planning profession over the last 12 months and claimed that advisers and clients who more fully embrace technology will better weather the challenges to come. He said:

“An extraordinary transformation has taken place over the past year. The pandemic set the industry and wider world on a rollercoaster ride. Financial planning can be tough at the best of times, but without the face to face contact that clients were used to, it was even tougher. And as the pandemic grew, the nation’s concerns over health became a priority.

“But it wasn’t just health concerns that we faced, there was a major challenge to people’s invested wealth as well as their income. You, the advice industry rapidly transformed working practices to be there for your clients with reassurance and support. As an example, last year in Dynamic Planner we saw four years’ of growth in clients completing risk profiling questionnaires remotely, and a number of advice firms have reported the ability to support up to three times as many clients per adviser by using facilities such as video calls and screen sharing. We are immensely proud that through a combination of your expertise and our technology, we have helped get many of your clients through this crisis.

“We see the need and opportunity to engage with clients around their financial planning being bigger than ever post the pandemic, and we strongly believe that those, whether adviser or client, who more fully embrace technology will better weather the challenges to come.

“We now live in a hybrid world – where advisers and clients increasingly undertake their planning together on the same system, at the same time. Our vision is all about empowering firms to meet client expectations in this new hybrid world, and deliver truly engaging financial planning through a model where advisers have all the benefits of remote when you need them, but will also have everything you need for face to face client meetings too.

“At the heart of Dynamic Planner’s vision of One System for all financial planning needs – where we have delivered significant enhancements to client risk profiling, portfolio review, cashflow planning and research and recommendations – is the concept of having an ‘always on’ plan, enabling advisers and clients to properly engage with their financial plan and deliver interactions and client experiences that really demonstrate the value of the ongoing advice relationship.

“Of course, in terms of client engagement, an increasingly important aspect of financial planning is reflecting your client’s sustainability preferences in their portfolio. Advisers face two challenges: how to have a really good conversation with clients who are unlikely to be experts in this field, and how to objectively assess the different manager approaches and solutions? We’ve worked with our partners MSCI to provide whole of market objective ESG analysis on UK funds, and in the coming weeks we will also be launching a psychometric sustainability questionnaire that gets to the root of how people feel about sustainability when investing.

“The events of the past year have been unexpected, but the changes it has paved the way for are profound. Over the next four years we will be doubling our investment in Dynamic Planner, delivering a powerful solution that enables advisers to deepen and extend your relationships with clients. Technology has been at the heart of keeping the financial world functioning these last 12 months, and as the country plots its way out of lockdown, we expect to be at the centre of that ongoing transformation.”

Want to see what Dynamic Planner can do for you? Request a demo

By Bordier UK

The COVID-19 pandemic and the global response to fight it has steered our lives, economies and financial markets over the past year.

Whilst the longer-term effects are still being unraveled, it has become clear that the coronavirus pandemic has given greater prominence to the environmental, social and governance (‘ESG’) agenda; key issues such as tackling climate change now seem much more achievable as government policy, finance, investment and changes in societal behaviour all unite for the common good of creating a more sustainable future.

Naturally, the prominence of ESG in the media and the numerous international ‘green’ policy initiatives that have been announced across the globe have sparked a growing interest from clients in ESG investing or what we would term, responsible investing. As a result of this interest, ESG or responsible investing has now become a key criterion for advice firms when building their own centralised investment proposition (‘CIP’).

So, what does this mean for advisers and their investment propositions, and what challenges are they facing?

What is most apparent is that clients care about the broad issues represented by ESG, however their level of knowledge when it comes to understanding just what ESG means and how it is applied to the investment universe is, in general, in need of adviser support and guidance. Add to that some confusing terminology and it is often difficult for clients to accurately describe what their ‘ethical’ or ESG criteria are.

As an experienced CIP provider, we’ve found that it is important for an adviser firm to have access to the right resources to help inform their clients on what is meant by ESG or responsible investing. Only then will a client be able to understand how their sustainability beliefs fit in with their investment objectives.

We strongly believe that client friendly literature, such as the Bordier UK’s Approach to Responsible Investment guide, can help clients understand responsible investment and how its roots lie in strong corporate governance, which extend beyond the more prominent socially responsible or ethical investment concepts that are frequently in the public eye.

Importantly, responsible investment is more far-reaching and can be incorporated into any investment strategy: it should be seen as a holistic approach that aims to include any information that could be material to investment performance. Responsible investment does not necessarily require ruling out investment in any market, sector or company. Rather, it informs the investment decision-making process to ensure that all relevant factors, both financial and non-financial, are accounted for when assessing risk and prospects for return.

So now that an adviser’s clients understand what responsible investing is, how can adviser firms integrate ESG within their centralised investment propositions?

As with every proposition, there will be clients whose individual sustainability beliefs (i.e. ‘dark green’ clients) result in advisers having to move back to the more product-centric recommendations. However, from our experience and for the majority of clients, a proposition that has responsible investment/ESG factors embedded within its investment process is key and can cater for most client needs. This enables advisers to recommend strategies that not only alleviate client concerns over ESG factors but that also have the ability to achieve long-term investment returns.

Thorough due diligence is required, along with a flexible approach to investing in both actively managed external funds, where fund managers are taking active decisions regarding share ownership (as opposed to investing in line with a specific benchmark) and lower cost passive funds. Active managers, by their very nature, tend to have very close relationships and engagement with investee companies, in contrast to the managers of passively managed funds (such as trackers or exchange-traded funds) where there is little or no corporate engagement.

Through both our initial and ongoing due diligence process in relation to the funds we select for our clients’ investment portfolios, we are satisfied that the external fund managers to whom we allocate capital are incorporating strong disciplines within their own investment and decision-making processes in relation to ESG matters.

Indeed, the majority of the funds being utilised by us to construct our range of investment strategies are being managed by firms that are signatories to the United Nations-backed Principles for Responsible Investment (‘PRI’) initiative. The Principles are a voluntary and aspirational set of investment principles that offer a menu of possible actions for incorporating ESG issues into investment practice, and we would strongly recommend that advisers examine the UN PRI [https://www.unpri.org/] as a basis for satisfying most clients’ sustainability or ESG requirements.

Of course, as the topic of responsible investment is so broad, evolving and often quite open to interpretation, there should be no hard lines in terms of how it is implemented and addressed in any investment process. However, it is interesting to note that responsible investment is already strongly embedded within the institutional world and in particular, within the funds we select for clients’ portfolios.

When looking to create a responsible CIP, advisers should look for an experienced investment partner who can incorporate ESG factors within their investment process to help future-proof their proposition.

For the past 175 years, the Bordier Group has helped preserve clients’ wealth, growing and safeguarding it for future generations. Investing responsibly is integral to the philosophy and values on which our services are based and so we believe that, along with our experience of designing, building and implementing CIPs, we can help advisers provide their clients with a proposition that not only delivers long-term investment returns but that also has a meaningful impact on protecting and enhancing our world for the benefit of those who follow in our footsteps.

If you would like to learn more on how we could help you incorporate ESG factors within your proposition or wish to receive a copy of Bordier UK’s Approach to Responsible Investment, please contact a member of our team on 020 7667 6600 or email sales@bordieruk.com.

Important information
Bordier & Cie (UK) PLC (‘Bordier UK’) is authorised and regulated by the Financial Conduct Authority (‘FCA’) Registered Number: 114324. Incorporated in England No.1583393.
Bordier UK is a specialist investment manager dedicated to providing portfolio management services. Bordier UK offer Restricted advice as defined by the FCA, which means that if Bordier UK make a personal recommendation of an investment solution to you, it will be from Bordier UK’s range of investment propositions and will reflect your needs and your approach to risk.

This post is not intended as an offer to acquire or dispose of any security or interest in any security. Potential investors should take their own independent advice to assess the suitability of investments. Whilst every effort has been made to ensure that the information contained in this post is correct, the directors of Bordier & Cie (UK) PLC can take no responsibility for any action taken (or not taken) as a result of the matters discussed within it.

Progress towards easing COVID-19 restrictions is good news for the economy and society. But it has different implications for different asset prices, writes John Roe, Head of Multi-Asset Funds, LGIM

Policymakers must strike a difficult balance on the question of when lockdown measures can safely be removed. Vaccination rates in some parts of the world suggest a return to normality could occur as soon as next month, but new strains of the virus and further potential mutations weigh on the side of greater caution.

Governments in different countries will come to different conclusions, so let’s focus on three of the most important for us as investors.

The US

Our most debated topic is the reopening of the US. The Democrats’ stimulus plan is expected to be worth at least $1.3 trillion and is likely to come in March, at the same time as the remaining restrictions in large parts of the US begin to be lifted.

We think such a package could be excessive given that it is double the Congressional Budget Office’s estimate of the US output gap. By March, US household excess savings should be over 10% of GDP and could provide a war chest for both spending and further investment in the stock market by retail traders. This would occur just as uncertainty fades.

This combination of factors would represent an upside risk to growth, employment, and so ultimately longer-term inflation. The upside growth potential helps support our positive medium-term view on equities.

On inflation, though, we think it’s more complex. There have long been underlying deflationary forces at work in the US, such as technology and globalisation. America struggled to generate wage inflation even when unemployment was at a 50-year low of just 3.5% in 2019.

Structurally, we therefore expect inflation to disappoint in the medium term, but in the short term we know realised inflation is likely to be high – potentially 3% in May. That, combined with rapid rehiring post-lockdown, could temporarily help fuel the inflationary narrative that this time it’s different and sustained wage inflation is coming.

The UK

The UK is a vaccination trailblazer, with over 25% of the adult population having had their first jab. Despite that, we think UK sentiment remains quite negative due to the repeated lockdowns and Brexit-related news stories.

For example, UK rate expectations are still more dovish than other developed markets and we think sterling remains heavily undervalued. So, with the UK likely to be able to reopen sometime in the spring, we want to position in UK rates for a strong rebound in growth ahead of unemployment’s probable peak around May.

The dynamics in UK equities are less clear, as a strong pound is a headwind given its impact on foreign earnings, so we remain tactically neutral.

Europe

Only about 5% of people in the EU have been vaccinated against COVID-19 so far, which we think means the bloc can’t reopen until at least May. Doing so earlier would be a mistake, in our view, particularly given the higher infection rates from new strains.

The chances of an economic boom in the EU are also lower, given smaller fiscal transfers and less inflationary risk, with five-year forward inflation pricing about half that in the US.

Against this backdrop, we’ve sold out of European cyclical equities and are also negative on euro investment-grade government bonds, where spreads are at their lowest since early 2018.

Equally, some ‘defensive’ European assets don’t look attractive either. 10-year bunds in particular have a yield similar to the ECB deposit rate and in our view offer limited return potential in risk-off scenarios, whereas in better scenarios they could sell off more materially.

By Canada Life Asset Management

The fourth quarter of 2020 brought a swathe of positive economic, political and medical news, sparking a wave of investor optimism.

Despite a resurgence in COVID-19 infection rates in the UK, Europe and the US, global equities and corporate bonds delivered positive returns. Central banks continued to expand their asset purchase programmes to keep bond yields at historically low levels, which in turn provided strong support for equity and bond markets.

Smaller companies, emerging market equities and Asia-Pacific ex-Japan equities produced exceptional returns on hopes for an economic recovery. Value stocks outperformed growth stocks as investors shifted their focus from technology, e-commerce, healthcare and consumer staples towards mining, consumer, leisure, transport, financials and energy stocks.

Corporate bond markets delivered strong returns. Safe-haven assets were less popular, with US treasuries giving a negative total return. UK gilts and German bunds were slightly positive.

Announcements from Pfizer/BioNTech, Oxford University/AstraZeneca and Moderna gave the first strong evidence that mass vaccination could be feasible in 2021. This triggered a swift revival of interest in companies that stand to benefit from social re-normalisation.

Equity and corporate bond markets also responded well to the election of Joe Biden in the US, which was soon followed by bipartisan agreement on the much-needed US pandemic relief plan. The high level of US debt and proposed further spending suggest a weakening of the US dollar, contributing to the notable rise in emerging market equities.

The announcement of a Brexit deal at the end of the quarter removed long-standing uncertainty over the UK’s future and a key deterrent for would-be investors in UK markets. UK equities and corporate bonds rose, and sterling strengthened against the US dollar.

UK property data releases in Q4 highlighted the profound impact of the pandemic on the UK property market. MSCI all property capital values for the UK are expected to have fallen by approximately 11.6% (source PMA), and most types of real estate saw reductions in rents and prices. However, some areas – including industrials, supermarkets and housing – were relatively insulated.

Portfolio review

The fourth quarter of 2020 saw a slight increase in exposure to equities relative to bonds and property across Portfolios III-VI as equity markets recovered, while Portfolio VII’s equity allocation remained broadly unchanged.

Following a strong run in US technology stocks during 2020, the Managers reduced exposure to the NASDAQ and increased exposure to the LF Canlife North American Fund, which is well-positioned to benefit from a broader recovery in the US economy.

The Managers are optimistic about the UK equity market’s prospects, as it appears increasingly likely that the UK’s domestic economy could enjoy a strong rebound in 2021, coupled with increasing global demand for the UK’s international mining, industrial and consumer goods companies. Also reflecting the prospects for global recovery, the Managers added two new European equity holdings, the iShares STOXX Europe 600 Automobiles & Parts and iShares STOXX Europe 600 Industrial Goods and Services ETFs.

Exposure to emerging markets, Japan and the Asia-Pacific region rose in higher risk/return profiled portfolios as these markets continued to recover.
Property exposure remains broadly unchanged, but the Managers have continued to diversify holdings through the iShares Developed Market Property Yield ETF, which gives liquid access to a wide range of yield-bearing property shares.

Outlook

An end to the pandemic appears to be in sight, but the path to recovery may be bumpy over the coming quarters, particularly if there is disruption to the production and distribution of vaccines.

In the absence of major disruption to vaccination programmes, the second half of 2021 is likely to see a consumer recovery, the reopening of the leisure and tourism industries and the refilling of supply chains. Economic activity could be surprisingly strong. Given pent-up demand for the goods and experiences that consumers have missed during lockdowns, we could see a temporary rise in inflation, bringing a modest rise in government bonds yields.

UK equities have dramatically underperformed other major markets and, with a Brexit deal now secured, appear extremely undervalued and a suitable target for M&A activity. There is a possibility that the UK will be the first major economy to implement its vaccination programme and return to social normality, which bodes well for the UK’s consumer-focused economy.

Corporate bonds have risen significantly since March 2020, and we expect to see further rises as investors anticipate a recovery in sectors most badly affected by the pandemic. However, credit default rates among lower-rated bonds are forecast to rise to their highest levels since the Global Financial Crisis of 2007-08, making good stock selection essential.

UK property remains attractive in the current environment of ultra-low bond yields. 2021 is likely to be a year of change for UK property, with increased demand for flexible working, growth in online shopping, a rise in localism and convenience in suburban areas, and more people moving to rural areas. These trends offer great potential for property investors who are able to tap into these trends.

Past performance is not a guide to future performance. The value of investments may fall as well as rise and investors may not get back the amount invested. Income from investments may fluctuate. Currency fluctuations can also affect performance.

The information contained in this document is provided for use by investment professionals and is not for onward distribution to, or to be relied upon by, retail investors. No guarantee, warranty or representation (express or implied) is given as to the document’s accuracy or completeness. The views expressed in this document are those of the fund manager at the time of publication and should not be taken as advice, a forecast or a recommendation to buy or sell securities. These views are subject to change at any time without notice. This document is issued for information only by Canada Life Asset Management. This document does not constitute a direct offer to anyone, or a solicitation by anyone, to subscribe for shares or buy units in fund(s). Subscription for shares and buying units in the fund(s) must only be made on the basis of the latest Prospectus and the Key Investor Information Document (KIID) available at www.canadalifeassetmanagment.co.uk.

Canada Life Asset Management is the brand for investment management activities undertaken by Canada Life Asset Management Limited, Canada Life Limited and Canada Life European Real Estate Limited. Canada Life Asset Management Limited (no. 03846821), Canada Life Limited (no.00973271) and Canada Life European Real Estate Limited (no. 03846823) are all registered in England and the registered office for all three entities is Canada Life Place, Potters Bar, Hertfordshire EN6 5BA. Canada Life Asset Management is authorised and regulated by the Financial Conduct Authority. Canada Life Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority.

The fund may invest in property funds that may be illiquid and subject to wide price spreads, both of which can impact the value of the fund. The value of the property is based on the opinion of a valuer and is therefore subjective. CLI01827 Expiry 31/12/2021

JM Finn Fund Manager James Godrich explains what he has learnt from planes, jazz, Jonny Wilkinson, cricket and doctors that can be applied to investment management

A fund manager is often judged on his grey hairs, his experience of living market cycles and comparing moments in time to a bygone era, but some of the greatest advice I ever received has been to never stop learning and to be an unashamed copycat of good ideas. These two in conjunction have done much to shape my investment philosophy and the strategy employed in the Coleman Street Investment funds.

As an example, I recently listened to a lecture that was titled ‘tales from a jazz musician and management educator’ where the speaker drew parallels throughout between jazz and business. In it, he used examples of things like ‘you can’t work in competition if you’re in the same orchestra’ and discussed how important it was to know the roles and boundaries of yourself and others in the band. But what really stood out to me was this idea of being either a ‘reader’ or a ‘jazzer’.

A reader is someone that can play a score note perfect – they can take a script, however complex, and they can repeat and replay that script. A jazzer is someone that has a deep understanding of their topic but can improvise and be creative but with discipline based upon fundamental restrictions and knowledge.

It struck me that in fund management we need to be jazzers – it is vitally important that we have a deep understanding and that we exercise discipline, but it is also crucial that we allow ourselves enough freedom and creativity in order to take advantage of opportunities that others might not see.

This approach can be seen in the funds through our asset allocation – the benchmark allocation provides the foundation, but we have the ability and the freedom to take a solo when the time is right. We talk about this as tilting around the benchmark.

Rugby fans of an age will recognise Jonny Wilkinson – a hero of mine and I will forever remember the drop goal going over in 2003. In another instance of learning from the experience of others, I listened to a podcast with him recently and he has clearly become much more mindful as the years have gone on. Jonny was a complete perfectionist and says he sought invincibility in everything he did. That meant always scoring the point, winning the game or lifting the trophy. But he now understands that that wasn’t sustainable and he thinks this mentality added emotional pressure and is in part to blame for why his career wasn’t as long and celebrated as it could have been.

Jonny now defines true invincibility as the ability to celebrate your successes to the same extent that you are curious about your disappointments. The emphasis here is about process and evaluation – so that’s exactly what we do. We care about the process that we go through on a day-to-day basis and then an honest evaluation of our work and our decisions some time after – in doing this we strive for invincibility, not by the dictionary but by Jonny’s definition.

We do this in many ways in the funds, but one example is that one year on the analysts on the team will do a deep dive analysis of decisions made. The focus of this is on the process at decision time – whether the investment was a success or a disappointment, that review can provide insight in equal parts.

My third parallel gives me a chance to talk about cricket. I used to play a lot of cricket. I still do. I love to play it; I love to watch it; and I’m a bit of a purist. And when watching test cricket my favourite phrase to hear is ‘that’s a good leave’. To the untrained eye, the batsman has done nothing – they have literally not even attempted to hit the ball – but have made an active decision to do nothing and that has taken great discipline. And we try to do this in the funds.

We can spend hours, days and weeks of work analysing a business and it’s hard at that point to leave the business alone and to do nothing. But sometimes you have to and sometimes it’s a ‘good leave’.

The funds I manage are mostly invested in directed equities; our investment approach is to consider ourselves 100% owners of any business that we invest in but to only pay what we believe the be a fair price for the shares. In 2019, we did a lot of work into a specific stock in the leisure sector– we liked what we saw in the business but felt that the risk reward in the shares was inappropriate and so left the shares alone. Six months later the global pandemic hit and we were able to buy what we felt was a structurally unaffected company at a more appealing valuation.

The shares price has nearly trebled since that initial investment and we are excited for the future of the business. Our decision back in 2019 was a good leave.

And whilst I used to play a lot of cricket, I’ve never flown a plane. But one of the things that I know you have to do is that when learning, you have to stall a plane in mid-air and you have to retrieve a plane from a spin. Pilots are taught that they will make mistakes and that bad things will happen – they are taught that it is how you react that is important and that you need to practice that reaction.

We think this mindset should be similar in fund management – we do not choose to make mistakes, but we know that we will. It is how we react to them, it is what we learn from them and how we prepare for the next one that matters.

My final example is something that has been a very important part of my investment process since reading a book many years ago written by Atul Gawande who was employed by the WHO to find out why the surgical error rate in modern western countries was so high. The bottom line is that he found out that people were making simple mistakes like chopping off the wrong leg or having the wrong blood type for the patient but that these errors could be dramatically reduced by the use of a simple and physical checklist.

If it’s good enough for surgery, it’s good enough for fund management and the use of checklists throughout our process is absolutely vital. It doesn’t help us to make exceptional decisions, but we hope that it does help us to avoid stupid ones.

An example of this is what I call my pre-flight checklist – before we take off on any investment, we ask ourselves some simple questions, we print them off and we tick a box. For example, within our direct equity exposure, we ask ourselves things like: can this business grow at greater than GDP? Does this business operate at high or stable margins? Does this business turn its profits into cash? Can I buy the shares at a reasonable price?

Over the coming years, I am sure there will be many more people and disciplines to learn from. We aspire to learn as much as we can and to be unashamed copycats of good ideas.

https://www.jmfinn.com/services/financial-advisers/advisers

By Steve Russell, Investment Director, Ruffer LLP

Source: Citi, Dealogic

We all know that 2020 was an incredible, and terrible, year. The pandemic caused the worst recession for centuries, along with an appalling death toll and suffering. Meanwhile, financial assets pushed ever upwards, surfing a wave of liquidity meant to counteract the impact of the pandemic.

This month’s chart shows that it was also a record year for share issuance, surpassing even the heady days of 1999-2000.

We could have anticipated share buy backs collapsing, as sales and profits vanished. Similarly, companies needed to raise record levels of equity to survive the lockdowns.

But who would have predicted IPOs reaching a record level too? Most surprising of all was that SPACs (Special Purpose Acquisition Companies) made up $75bn of that record total, eclipsing the previous record of such issuance in 1999 by over five times.

What, you might ask, is a SPAC? It is a new company, coming to the market and issuing shares to acquire other companies. But without the wearisome requirement of actually saying what marvellous opportunities it has identified.

This is reminiscent of the 1720s South Sea Bubble, when a speculative boom saw investors throw their money at all manner of unlikely projects. Most of them, Isaac Newton included, lost fortunes.

The poster child for the South Sea Bubble was a company promoted ‘For carrying on an undertaking of great advantage, but no one to know what it is’. Almost the perfect description of the modern-day SPAC. But today’s version has $75bn to play with. The 1720s original was more modest, and after receiving £2,000 from subscribers the promoter promptly emigrated.

What relevance does this all have for today? Confident that central banks will keep interest rates at or close to zero, investors assume that there is no risk to today’s sky-high tech valuations and are throwing money at profitless IPOs and secretive special purpose vehicles.

What could possibly go wrong? In a word: inflation

The danger is that markets are focusing on the wrong discount rate. The promise of untold future profits should not be discounted back by interest rates, but by inflation. That is the true measure of the purchasing power of future cashflows, assuming they ever actually materialise. It is inflation, and more precisely the fear of future inflation, that could see the current IPO and SPAC mania join the South Sea Bubble as one of the greatest financial follies of all time.

However, instead of explaining what protections we hold at Ruffer against this – our views on inflation are hardly a secret – I will end with a happier story appropriate to current troubled times.

Not everyone lost their money in the South Sea Bubble. It so happens that one investor, a bookseller named Thomas Guy, sold out at the peak in 1720, quintupling his money. He made so much money that he established a new hospital in 1721: Guy’s Hospital in Southwark – where today’s heroes are fighting the pandemic. May we all be as lucky – and as generous.

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If you would like to discuss the article in further detail with someone at Ruffer, please do not hesitate to contact Toby Barklem, Business Development Director.
tbarklem@ruffer.co.uk
+44 (0)20 7963 8127

Past performance is not a guide to future performance. The value of investments and the income derived therefrom can decrease as well as increase and you may not get back the full amount originally invested. Ruffer performance is shown after deduction of all fees and management charges, and on the basis of income being reinvested. The value of overseas investments will be influenced by the rate of exchange.

The views expressed in this article are not intended as an offer or solicitation for the purchase or sale of any investment or financial instrument, including interests in any of Ruffer’s funds. The information contained in the article is fact based and does not constitute investment research, investment advice or a personal recommendation, and should not be used as the basis for any investment decision. This document does not take account of any potential investor’s investment objectives, particular needs or financial situation. This document reflects Ruffer’s opinions at the date of publication only, the opinions are subject to change without notice and Ruffer shall bear no responsibility for the opinions offered. Read the full disclaimer.