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Multi asset quarterly update

July 2023

How can investors withstand the inflation pressures that are currently affecting markets?

In this webinar, Investment Director, Nersen Pillay, discusses:

  • The benefits to building a resilient portfolio.
  • The current economic backdrop and the challenges investors face.
  • An outlook on markets and what he believes may be ahead.

Hello, and welcome to this Royal London and Asset management webinar, thanks so much for taking the time to listen to us today it’s really appreciated.

So, firstly, myself. My name is Russell Evans I’m the Business Development Manager and I'm joined by Investment Director, Nerson Pillay who many of you will have heard from before.

We're going to give you an update on our flagship, GMAP’s, Governed Portfolios and GRIP’s range and we'll also be discussing the global macro environment, political risks, inflation, interest rates, give you a strategic asset allocation, and we'll look at current tactical positioning.

So, we are live today, so please ask questions in a normal way, and I'll be back for questions at the end. But for now, over to Nersen and we’ll make a start.

Great, thank you, Russ. Hello, everybody. I'm now simply an investment act in multi asset. So I'm going to talk about the inflationary era that we are now in and how that is impacting how we invest. Firstly, a few words about Royal London. As you know, we are a mutual established in 1861 with significant assets and that gives us stability, but also, we don’t have shareholders, so that enables us to be very in line with consumer duty, et cetera. The scale it gives us the expertise we need, and mutuality keeps responsibility at the core of our aims.

The multi asset team, you can see on slide two, headed by Trevor Greetham, a team of 14, which is running the multi asset funds, on a daily basis, under the oversight of The Independent Advisory Committee, And the governance at Royal London.

So, Market Outlook and agenda on Slide three. Many of you will be familiar with our Investment Clock model, which is on the right. Last year it was in Stagflation, which was a challenging period for many funds, Stagflation, being the bottom right quadrant of the investment clock. Where growth is weak, you're in the bottom half of the clock, and inflation is too high, you’re to the right of the investing clock. In that environment, tech fell very significantly with the Nasdaq down around 30% last year, and that hurt funds with very significant tech exposures.

We with our very disciplined, underlying strategic asset allocation diversification discipline, were somewhat protected from that, and resilient in that environment of tech, crashing last year. But, last year with Stagflation, interest rates were also rising sharply, and in the UK, rates have gone from below 1%, now to 5% already, and bond yields have risen very sharply. So bond prices have fallen. But once again being highly diversified in a disciplined way, protected people in the governed range in grips and in GMAP’s, as bond prices fell. So we were able to show the value last year of deep diversification and creating underlying strategic asset allocations for UK investors.

When you look at our Investment Clock model, the good news is that we are moving to the top left which is: recovery, which sounds much better than Stagflation, doesn't it? So you're in the top half of the investment clock, there is global growth improvement ahead and you are moving to the left, inflation is coming under control. Now, as always, in global macro and global markets, there's no smooth, easy transition. So if you read our blog, you'll see comments on there from Melanie Bakker, our Senior Economist talking about the lags with which monetary policy work and how interest rates have been slowing down inflation. But maybe not as quickly as some people hoped and maybe interest rates have gone up more quickly and to higher levels than many hoped.

So, we could see further interest rates, and interest rate increases and those increases could tip us and the U.S. into technical sessions, Germany is already in recession. So while inflation picture is better than last year, there is still the prospect of interest rate increases, so we don't want to be complacent about inflation and we'll talk about further sources of inflation risk.

Now, growth improving is a good thing in prospect, but once again, it's not necessarily a smooth and easy path to that nicer environment. The consumer is still under pressure, interest rates are still going up, mortgage payments, and therefore rents are still going up and the consumer under pressure various other ways.

So, while we see a brighter outlook, we are not complacent about the macro environment and how the consumer's feeling and therefore, we wouldn't be surprised by some volatility in markets, if there's any sort of disappointing news on growth, inflation or geopolitics.

So our Investment Clock Model is saying that we're moving from Stagflation to Spikeflation, we're moving from negative growth and high inflation to a period of better growth with inflation coming under control but there are sources of inflation that could cause us further concerns in markets.

But we are, at the moment, still modestly overweight, equities, and high yield, and climbing the wall of worry, which has been the correct thing to do. Having a disciplined process trying to eliminate emotion and behavioural issues from how we invest means that we have been exposed to risk assets as they have ground higher this year despite issues in the world like the US debt ceiling or geopolitical issues surrounding Russia or China. But we have a daily process, if things become more negative for markets, we are able to become more defensive very quickly. Similarly, if the macro picture begins to get brighter more quickly, we are able to get more positive in the portfolios. So the outlook is promising over the medium term, but don't be surprised by some summer volatility.

So, there's no such thing as passive in multi asset. Everybody's making choices about that underlying asset allocations, whether that 60/40 and passive, which are choices, or whether benchmark design is aiming to create appropriate global multi asset portfolio for UK Saver's, as we tried to do.

So, the governed range and the GMAP are ranges of funds, which aim to deliver consistent risk adjusted returns over the medium and long term for UK savers, and that's important they’re designed specifically for UK savers and that has implications for our figures for example, regional equity weight. We tend to have more UK weighting, because of the client base being UK weighted, now I'll explain why. But the government range and GMAP are a range of funds, which are related closely, and the GMAP on platforms you can see the four in the middle, GMAP, Defensive balanced, growth, and adventurous correspond to govern portfolio's 3,6,1,5,4 and 8.

The grips are our D cumulation range specifically designed for people who are taking it income who care more about capital presentation and are therefore more risk averse. So Governed Portfolios and GMAP’s are accumulation ranges and the grips are our decumulation range. I won't go too much into performance, suffice it, to say, we have delivered over 3, 5, and 10 years in the government range. Last year, we were very resilient, relative, both to 640 funds, and two funds with high exposure to tech.

This year, in the first six months of this year, tech has had a bounce and UK commercial properties down, which is more challenging for our underlying benchmark portfolios. But we are aiming to invest over the medium to long-term. So actually, property being down this year makes it more attractive to us. It's not actually a problem we’re tactically underweight, it's not a surprise because rates have gone up, it's an opportunity for us to look to add, potentially.

Tech going up very quickly and some stocks like Nvidia and Apple, looking fairly fully valued or expensive now, again, doesn't make us want to necessarily add to tech exposure. So six months performance we may look slow relative to competitors we may look like the tortoise, not the hare, But that doesn't worry us, we've got the portfolio's that we want to deliver over the medium and long run.

So, back to the theme from Stagflation to Spikeflation. Slide 11, Cash is not King, we think of the seventies as an inflationary era. Since Lehman’s crashed, cash has actually lost more of its value than in the seventies. So we've had significant inflation, obviously, a lot of that has been in the recent past, but we have had inflation and the general public may not understand how inflation impacts them negatively. Sometimes people say, why invest when I can get 4.75% in a building society? Well, inflation is higher than that, so 4.75% is a guaranteed negative real return.

People buy premium bonds, but 50,000 in premium bonds today only has the purchasing power of 45,000 last year. So cash is not king, we believe that properly designed multi asset funds can protect savers' against the ravages of inflation and deliver growth over the medium to long run. And that is why just sticking the money in the bank is unlikely to outperform a properly designed multi asset fund over the medium to long run.

So, why think about inflation hard? Well, the markets have been quite complacent for a long time because inflation has been very benign for a long time, and interest rates stayed near zero and wages were not rising particularly until the pandemic, which led to lockdowns, led to huge covert stimulus. The UK alone printed and spent so the government borrowed from the Bank of England and spent 4500 billion and our national debt has gone to over 100%.

So we face higher interest rates, and that gives us higher mortgage payments, higher rent payments, et cetera. So inflation is back in the system, because we locked down, we poured a lot of money into supply constrained economies, then we opened up, and inflation has been stronger than many people expected in 2021. Inflation was described by some central banks as transitory, but it's proved to be much stronger than that and part of the issue is clearly that we have a lot of debt, that we kept monetary policy easy for quite a long time and that is something that central banks in the US, the UK and Europe all did and also because of geopolitical risk. So geopolitical risk added to inflation last year, but that was an extra pressure on top of already above target inflation. So before Russia invaded Ukraine, we already had inflation post pandemic post opening up around 5%, and the invasion of Ukraine took us to about 10%.

So excessive covert stimulus high levels of debt, geopolitics all gave us high inflation. Public spending remains high, UK government spending per household according to the OBR is around £38,000 a year. So we are borrowing every year to maintain that kind of level of spending.

We also, in the world, have chronic commodity under investment. So huge profits in commodity producing countries in the last year or two and those countries are not investing as much as they might, because we have committed to net zero, we have announced two big producers, that we're going to be smaller customers from 2030. So if you are a big oil producer, for example it is entirely rational for you to invest less, and seek higher prices. So we've got chronic commodity underinvestment and structurally higher energy prices given commitment to net zero.

Now that is Inflationary, deglobalization 4 and 5 and structural changes to labor markets are also inflationary so in the pandemic, the whole world was scrambling for PPE, everybody was paying more for it, nobody had stockpiled pandemic levels of stocks.

Now that meant that everybody pays more. Now if we decide for security of supply reasons we want to make PPE in the west rather than in China, we can do that but it will be more expensive. So on shoring is inflationary, outsourcing was all about getting lower prices and just in time supply, etcetera. So deglobalization is inflationary, structural changes, labor markets are also inflationary. So, the UK has quite strong wage growth at the moment, stronger than Germany, which has high unemployment and is in recession.

The UK has issued around 700,000 skilled worker Visa's last year, so doctors, nurses, IT workers, post grads. But the labor market has changed in that it is harder to increase labor supply for unskilled workers since we left the EU. So skilled visas being issued, but unskilled visas are harder to come by. That means wages at the bottom end of the labor market at the bottom quintile are rising quite quickly. Is that a good or bad thing? Well, it's good if you're in that quintile but it is inflationary obviously. So inflation is here to stay and it has many drivers.

Now, some people say last year was unusual because bonds and stocks don't go down together very often. We think it's important to think in real terms, not nominal terms, return minus inflation, because inflation is very obviously non-zero so it is real returns that matter.

And on the right of slide 13, you can see that there are many years in which stocks and bonds fall together when inflation spikes. So we're moving out of a period in which inflation is benign and into a more normal world in which inflation has got many drivers, and is going to be showing signs of life and then need reining in by interest rates. So there'll be more cyclicality. So we're in a more normal world where stocks and bonds can both fall together. It's not as rare as some people think. So be properly diversified.

We expect Page 14 on the left are more cyclical world. Zero, around zero interest rates for a long time led to a very long US expansion, as you can see on the right. But now we're going to if central banks are successful, get back towards target inflation and then see monetary policy, reacting to inflation as it ebbs and flows in a normal way, the only way we go back to 1% mortgage rates is if we have a major global economic depression so, you know, we might not really want that. But having inflation back at target levels and fluctuating in a more normal way from next year would be fine for markets, as long as the markets have confidence that inflation is under control and interest rates are going to be relatively stable. So, a more normal world requiring proper diversification, and giving opportunities for active tactical asset allocation.

The first thing to get right is your underlying strategic asset allocation, and we review our underlying strategic asset allocation which you can think of as a benchmark regularly, every three years. We don't have a benchmark, which we dogmatically stick to, just in the same way as Volkswagen every few years, gives us a new golf GTI. It's still a GTI, but it's improved. And so, we believe that as the world changes as there’s new data, It's important to review underlying portfolios and we've just had our three year yearly review, which has led to some changes.

We always have the right attitude when it comes to investing, which is to be tortoise, not the hare. We're not trying to be top of the table, because that means taking quite a lot of risk, and years like last year show you that chasing whatever is hot in one year can lead to significant harm. So, being diversified and aiming to deliver consistently over the medium to long-term has enabled us to deliver consistent risk adjusted returns over the medium and long term, the right attitude.

We also designed the portfolios, the underlying strategic asset allocation or SAA’s to be global portfolios for UK saver's. So, we look different from many competitors, deliberately by design.

On the left of page 17, you can see a 60/40 passive fund. The teal colour, or blue colour is the equity regional weighting. So, if you're just market cap weighted, you're going to have a lot of US equities, around 40%, and only around 3% in the UK, and around 3% in emerging markets. If you look at the equity weighting, in our funds, you'll see that we have a significant weight into the US, but it's not 40%, It's a base weight of around 24.9-25%.

But the key thing is, we're active with that, so when we're negative on the US, we might go down to around 15%, when we're positive on the US, we might be up at around 35%. But we're not just market cap weighting, we're choosing a weight, which we think is appropriate for a UK client, and then, depending on market conditions we're going underweight and overweight.

Similarly, with emerging markets, we don't have 3% because that's the market cap weight. We have 8 in our SAA and tactically, we can take that to zero if we're negative on emerging markets or if we're very positive, we could take that over 15%

Now, the UK stands out because if you're just market cap weighted, you'd have under 3. We've got in our base case, in our SAA around 16%. Now, that is a lot more and sometimes people say, is it home bias? No, it's not. It comes from doing the work and creating global exposures for UK clients, and UK equities have particular benefits for UK clients giving us inflation resilience, given the SEC to make up giving us UK dividends, which gives you protection against currency movements, giving you a lot of foreign earnings in the FTSE 100, three quatres of its earnings from abroad. So, again that mitigates currency weakness earnings are boosted by Sterling weakness and long term, good returns.

So we want to have more in the UK for that inflation resilience, and currency resilience, and UK dividend income. But again we're active, so when we want to be underweighting the UK, we might just have 6% in the UK rather than 16. And when we want to be overweight, as in 2022, we could be up at around 25%.

Now, in equities we are distinctive as I mentioned. But maybe we're even more distinctive in bonds when compared to a 60/40, because the 60/40 has a lot of bond exposure, whereas if you look at our bond exposure we're diversified.

So as fixed income suffered losses last year given interest rates were rising, given inflation was high. We were able to deliver resilience for clients by being diversified in fixed income, we weren't as exposed to fixed income. Secondly, we would tactically underweight bonds as yields were rising as bond prices were falling, Thirdly, we had asset classes which were going up in an inflationary environment, which were causing inflation that led to bond losses. So commodity gains were offsetting bond losses.

We also had property in the benchmark. Now, property long-term can give you inflation resilience, because values can rise and because rents can rise. Now, in the short run, inflation can lead to interest rates going up, which can lead to property having downside but that can be a buying opportunity for the long run.

We are tactically underweighting property, it is down this year but that just means it's become more attractive as a long-term investment.

Now the governed portfolios have evolved over time. So through the years, we review them and we improve them because the world changes, because new data is available, and you can see from 2009 there are various occasions when we have, for example, added to emerging markets, or high yield, or changed our regional equity splits. And we have, in this major review this year, also evolved our underlying as SAA's in the governed range, and the GMAP’s

Underlying the portfolio's is very, very significant diversification. The funds that we are allocating between have hundreds of holdings that means governed portfolios and GMAPS’s have thousands of holdings underlying.

So, the funds are not really about stock specific risk, there about, active tactical asset allocation, and delivering consistently over the medium to long term, with very significant underlying diversification. And diversification means that if you look at the composition of a fund, here’s GMAP defensive on page 20, as an example. You've got commodities giving you inflation resilience in a year like 2022, or in the Gulf War Commodities gave you inflation resilience. In crises, like the Lehman Failure, having fixed income assets gave us protection.

So, we don't get involved with what we call exotic or expensive investments, like leasing jumbo jets, or peer to peer lending, or expensive hedge funds. We have the tools we need to deliver we believe the risk adjusted returns that we need to over the medium and long term by using UK and overseas stocks, UK, commercial property, direct purchases by our own property team, commodities through the index and fixed income using Royal London active bond funds.

Now, how have we evolved the benchmark? Well, we've increased our allocation to bonds from cash. Bonds have become very much more attractive, given that yields have had such a big move between 2020 and 2022.

So, central banks moving from QE-QT, no longer printing money bond yields have gone up. The market has had to adjust to levels which become attractive to private investors. And that means it makes sense for our benchmarks, our SAA’s, to have the great allocation to bonds, because they become more reasonable investment. So if central banks are going to successfully get inflation back towards 2% then you know UK government bonds, giving a greater than 4% yield today can look attractive.

We've increased our credit exposure again as we look forward towards economic recovery into next year. We've added to all maturity bonds, increasing flexibility in our bond make-ups. So we want to go more defensive or more aggressive in our fixed income portfolios, we have now got more flexibility in the portfolios.

We've added more global diversification, both in bonds and inequities. Last year the FTSE 100 outperformed the Nasdaq massively. So intuitively, it makes more sense that when you review your underlying portfolios, global equities relative to UK look more attractive now than they did before that significant move.

So we still have very significant UK exposure compared to some competitors, but we have increased global equity exposure. We've also increased exposure to global bonds to around 20% of our fixed income weights. We've trimmed higher commercial property benchmarks, we are tactically underweight anyway as I said, property, having taken a hit as interest rates have gone up sharply, it actually becomes more interesting to us now than before.

So we've made sure our portfolios are aligned with the risk targets and have taken into account all of the new data we have in the previous couple of years.

So, with inequities, we used to have a broad split of 35% UK, 55% Global, 10% emerging. That's our new strategic mix 25% UK, 65% global developed, 10% emerging. We still have more in the UK, than most competitors, but we've added to global. In three years’ time, if the data suggests adding to the UK, we would do that, we're not ideological about it. It's about designing the right underlying portfolios given the data available.

As mentioned, having a what we might consider a proper allocation to UK equities in a global portfolio designed for UK clients, makes sense. It gives you inflation, resilience, as you can see on page 23, it gives you good returns long-term, and in periods of falling inflation and interest rates, it still gives you a positive return, but can lag growth here indices. And in that situation, we would underweight our UK holdings and overweight, for example, tech or emerging markets.

So Page 24 on the left, commodities give you resilience to inflation hedges. We added significantly to our commodity holdings in 2020. Commodities had crashed people were working from home, not traveling, factories were closed, not buying metals, not using as much energy.

So commodities had crashed, we were criticized by some for having commodities at all. We added because part of our process is not to be driven by market moves, but to seek out what is looking more attractive in valuation terms and to sell what is looking, maybe too expensive valuation terms. So commodities became much more attractive having fallen sharply, we expected the world to open up, vaccines, et cetera were being developed. So we added to commodities and over the following 18 months, two years into 2022, very significant gains were made in commodities.

Now we took profits last year because valuation is not only something that we find attractive when it's low, it's something that we take into account when it's high. And we took profits in commodities in a disciplined way.

On the right you can see that UK commercial property benefits the risk return and volatility and income of the portfolios so it's worth having in the mix.

What do we own? Well, we have our own property team buying real bricks and mortar and they look to buy sustainable buildings or make all buildings we own sustainable.

So if you think of hotels, we are attracted to modern budget hotels, which are always full, always able to pay the rent and which are being modern going to be more efficient, et cetera. We like prime offices, demand for offices, is not weak. We, ourselves, have just moved Office HSBC moving from the Canary Wharf Tower because in a hybrid working world, actually people need offices which meet different needs. So, we find office’s is still attractive and the offices that are vacated get redeveloped. We like warehouses because the nation loves ordering things from warehouses, and then going to the post office and returning things to warehouses. So that's another strong area.

Clearly, the high street suffers from the growth in online shopping so that wouldn't be an area that we'd be exposed to, but property long-term is an attractive asset class, the fact that it’s down as interest rates have gone up, sharply, is no surprise, we have been tactically underweight. So from our point of view, on the right side of that, the interesting question to us is, when do we begin to act?

In fixed income our SAA review for the governed portfolios, GRIPS, GMAPS we have added to global bonds, because global bond yields have become much more attractive. But we still have mostly UK fixed income because we care about currency risk. The client base is UK, so we're creating global portfolios for UK clients. So we don't want to add too much currency risk to people, we want UK income, but we have added 20% global bonds, and we've added all maturity, government bonds, giving ourselves greater flexibility.

So page 26 shows you the governed portfolio underlying strategic asset allocation weights and of course, we are active around these weights with significant latitude.

You can see at the bottom, for GMAP’s, I mentioned. So Governed Portfolio 3,4,5,6 map to GMAP Defensive, Adventurous, Growth and Balanced on platforms for blending or Investment Accounts.

Slide 27 shows you the GMAP benchmarks consistent with the governed portfolio's mentioned. So that is the end of what I'm going to say about our Strategic Asset Allocation Reviews. The next section is on Active Tactical Asset Allocation and a sort of late cycle window for equity strength that we are in for now.

How do we choose where we are underweight and overweight? Well, in just the same way as we're disciplined and quantitative, in designing our strategic asset allocations, we are displayed and quantitative in designing our active tactical asset allocation positions. I've shown you the investment clock briefly at the beginning, that is just one of our models. We got a suite of models which help us to choose where we want to be overweight and underweight.

The multi asset team, in the middle, we have developed our own models, but we don't want the process to be a Blackbox process. We use our models, hopefully in an intelligent way to create the positions and the portfolios that we want.

But we also pay for external research. So, we want to be challenged by smart people, particularly people who we find useful, who disagree with us, and help us improve our process.

We also in Royal London, have over 150 investment people so every Monday, we sit down with our own equity bond property expert CIO, and get all of the internal expertise we can. So, the process is quantitative, disciplined, model based, but it's not a black box process. We have expert internal and an expert external opinion to help us.

The Investment Clock model is based on linking how global growth, inflation, and interest rate movements are impacting asset class performances.

Now, the clock has been useful to us in the last decade and before. But if we are moving into an environment in which we've argued that inflation is not going to be dead, it's going to be moving maybe within a range and monetary policy is having to respond to that. Even when inflation is under control, then there'll be more cyclicality then the investment clock model might be more useful in the next decade, and it has been in the last decade.

When we meet as a multi asset team every day, we look at all of the portfolios, the Cross Asset, Regional Equity, Currency, Sector, Credit Positions. Page 31, you can see the first column. We look at fundamentals using the investment clock, growth, inflation, interest rates. We look at earnings revisions. Which regions have positive revisions, which have negative?

We look at carry interest rate differentials. In addition to fundamentals, we look at valuations, we take profits when things are expensive. So in 2021, there was a point where Apple was worth more than FTSE 100, looked pretty expensive and the market was extremely keen on tech and funds with lots of tech. We were actually taking profits, because we care about valuation, and we were buying the UK, which looked incredibly cheap relative to tech.

In 2022, the UK outperformed, as growth stocks were derated, given interest rates going up, so evaluation discipline in 2021, helped us to sell expensive asset classes and by much more attractively valued ones. I mentioned already, 2020, we bought commodities when they were unfashionable and attractive, and we took profits in 2022 so evaluation matters.

In addition to evaluation, we look at technicals. Cross asset, equity, market currency sector momentum. So, if you look at our portfolios, we are genuinely active. Sometimes, because we are a mutual and because we aim to be highly competitive in terms of fees, sometimes people assume that our funds are simple in terms of SAA, and tactical asset allocation. But hopefully, I've shown you that our SAA design is sophisticated and disciplined. 

And on Slide 32, you can see that we are genuinely active with our funds and able to change them today if we need to. If there were some good news in the market, if there was for example, some resolution which reduced the risk that the Russian Ukraine situation is causing in the world, then markets may rally. We could add to risk today.

If there were some bad news, we could protect the portfolios by de risking today. So we are genuinely active in the portfolios, if you look across Asset Strategy, Currency, Regional Strategy sectors.

So our models are adding value consistently over the medium to long term. They don't deliver every quarter, every half. They're not trying to; they're trying to deliver consistently over the medium to long-term. Looking at the Cross Asset choice, Credit, Regions currency sectors and we are looking at the portfolios and the models every day.

So current view's, climbing the wall of worry (for now). There's a piece on our blog from Hiroki Hashimoto about climbing the wall of worry, why are we still overweight given we are concerned about the consumer, we think there could be more interest rate increases. We think there could be technical recession in the UK and US, and Germany's already in recession. So why are we still overweight Equity's climbing the wall of worry?

Well, the investment clock and now other models are designed to give us that cold hard discipline that a model has and to avoid the behavioural problems of human beings. So people can get scared and panic out where people can get greedy and panic in, fear of missing out.

But models look at the data and so the investment clocks be very helpful to us because it's been saying to us, yes, you know, there are concerns about the debt ceiling, or China or Taiwan, or Russia, Ukraine, but the global economy is improving in the absence of any further inflation or great shock, we are heading into a better era.

Hiroki’s actually just put on the blog that we may dip from recovery into reflation. There is some coming into labor markets in the UK and US, although wage growth is still quite robust and you know that wouldn't be a surprise because central banks are trying to get inflation down, they're trying to slow down the economies. So we might not have a smooth journey, but the outlook is relatively constructive.

So that's one reason we have correctly climbed the wall of worry, stayed overweight risk assets, despite lots of worries in the markets because we've got that discipline from various models helping us to keep involved. But similarly, if we need to protect, we can move quickly to make the portfolios much more defensive.

The mini budget crisis last year were pretty short lived, but it gave us an opportunity to add to risk. One model we have looks at market sentiment and when people are panicking, it tells us to buy and so it's very useful.

So, the mini budget panic last year was a short-term thing we took advantage of. We've added to risk, and we've stayed overweight since then which has been the right thing to do, despite the market worrying about various things on the way, it is going up. The reason for that is the global economy is improving, earnings revisions have been more robust, the UK and US are not in recession, even if we think they may dip into technical recession and all of that has been a more positive outcome than many people expected.

So, corporate earnings are proving resilient and improving in line with our great scorecard. So at this time last year, some learned predictions from the Bank of England, and IMF, et cetera, were pretty gloomy about the UK and predicting pretty bad recession. We're not in recession, which is good news, and the US has neither, and revisions have been relatively positive, consumer so far, has been reasonably robust.

Now, obviously as Melanie Baker's written, monetary policy operates with a lack, so interest rates going up doesn't affect everybody immediately and people these days have more fixed rate mortgages, they don't immediately feel the pain. So consumers have been more resilient than some expected.

So corporate earnings are proving relatively resilient. And if global growth is improving, and if interest rates could be falling next year, then that could be quite a positive, medium term scenario, even if we have to go through some volatility first.

But one thing that worries us is narrow equity market leadership, so the fangs are up over 70% from the bottom. Tech has bounced sharply, and again Apple is worth more than the FTSE 100.

Now, the last time that happened, tech had a significant fall. Nvidia is on 40 times earnings with a lot of excitement over AI in the price, so expensive evaluation. So, any kind of bad news related growth or inflation could lead to some correction. So narrow market leadership markets driven up by a few stocks or one sector, you know, isn't a house built on the rock, but more on the sand and subject to volatility and there could be volatility because central banks are still tightening the screws.

Consensus expects UK rates to peak under 6% now, but that means that there is still some tightening that can continue, the Federal Reserve is pretty clear that getting inflation down is their target. Central banks are not clairvoyant, they tend to be a bit late to tighten monetary policy and they tend to be a bit late to start easing it, because they're not clairvoyant. But they are getting closer to the peak, but we wouldn't be surprised if there is some more rate rise pressure to come, and that could challenge areas which have gone up a lot.

Credit spreads should be wide in recession, and they have widened, and we have also seen banking sector stress so again, that is something to note in that banks are tightening lending conditions.

So when do we get into a better environment? Well, a bear market is a big downtrend in which you can get very big rallies and then selloffs because the market's worrying about growth, interest rates, inflation, the consumer. A bull market is a better environment in which you have earnings growth, in which you have a happier consumer. And for that, you need unemployment to peak so the consumers not so worried about their employment and interest rates to be peaking, or consumers to expect interest rates, even to fall. And then people will take a 5% mortgage if they believe their job secure, and they believe their rates not going to go up and begin to spend, and then companies will begin to see better earnings growth.

So a bear market tends to end when unemployment peaks, and the consumer gets happier. And when the consumer isn't worried about interest rates rising anymore, they begin to borrow and spend, and we begin to get earnings growth, and we're getting closer to that kind of positive environment.

So finally, slide 43, we are climbing the wall of worry overweight stocks kept there by our models being displayed, but we can defend quite quickly if we see some summertime volatility brewing in markets.

We are still underweight property in commodities but wondering when we add for a better 2024 macro outlook. In currencies we are not taking much risk at the moment. Into a recovery, the dollar could be weaker, it's already been a little bit soft so you could see us go underweight the US Dollar into recovery.

Regionally we are underweight in the UK, we were overweight last year, we have taken profits in that position. We were underweight in the US, we've added towards neutral emerging markets, we are less underweight than we were but we’re still underweight.

What we require there to see China more positively going for growth and it has been. Japan has had a decent outperformance yet to date we have been overweight, Japan, and overweight Europe, which is also had to bounce. In sectors we have been more positively positioned overweight, discretionary. We were underweight last year but still overweight staples showing a little bit of defensiveness. We've added to financials which clearly as interest rates rise, can become more profitable but we've remained overweight health care.

We are around neutral in tech, slightly underweight because valuation does concern us and the narrowness of market leadership does also concern us. So, that is how we are currently position.

Any questions?

Great, thank you, yeah you covered a heck of a lot there so a few of the questions have been covered. We've got a lot, just thinking in terms of time we'll go through a couple. There’s one here, that's just noticed the performance is lagged a little bit year to date, so please can you let us know what was being an attractive performance, and have you made any changes to the GMAP’s and GP’s as a result.

OK, yep, thanks, Russ.

So, when I talked about the benchmark, the SAA Design, Strategic Asset Allocation Design, we designed portfolios to be global portfolios for UK clients, and we want to deliver consistently over the medium and long run.

So that means we have more UK equity, exposure, and less tech exposure than some competitors. So this year, tech has had a sharp bounce, we have benefited, we have, we're around neutral. But other people have more tech, so that will have benefited them over six months.

We don't really worry about the short-term, because, as I mentioned, tech looks expensive, so actually having a lot of tech just at the moment may not be a wonderful thing over the next three months, or six months. But one thing that has led to us, you know, looking like the tortoise not the hare this year, is that we choose to have less tech exposure than some competitors.

The other thing is we choose to have real bricks and mortar commercial property. We're tactically underweight so we've been on the right side of property underperforming this year, we expected property to underperform as interest rates have gone up sharply. But having property means that we've been exposed to that downside even if we've been tactically underweight.

Now we don't ever intend to try and go to zero property and then buy back in property, you know, it doesn't work like that. You may well be trying to buy back in higher prices because everybody would try to do that when property begins to look good. What we're more interested in doing actually is buying while property has been, you know, revalued with higher interest rates. So those are the two key things that have made us look like the tortoise not the hare, year to date, but if you just look back to last year, the opposite was true. Tech crashed, and we were extremely resilient because of the diversification that we're committed to, and over 3, 5, 10 years plus that attitude and approach has delivered in our funds.

Just one last question to finish then I think, and I mean, given that the market still pricing in about another 150 basis points worth the rate hikes.

I mean we've seen good value there now, we've been adding to duration within the bottom part of the portfolios within GMAP’S and Governed Portfolios.

Yeah, thanks Russ. So in our SAA review, we have added to duration in our SAA’s. As I said, in our bond portfolios, we've added 20% global and had it all maturity Governed bonds increase the flexibility. The outlook for bonds next year could be quite positive. So, in the absence of any further growth or inflation shocks, the outlook is that is for interest rates to begin to come down at some point next year, as inflation heads towards target. Then we would be keen to have more longer duration exposure in that scenario, so we will be looking at the portfolios and increasing duration as we get closer to the period, when we think interest rate cuts will be adding.

But if you look at the GMAP’s for example, obviously dynamic as an equity fund, so duration of zero. But GMAP balance duration of around 2 and GMAP conservative duration of around 7.

Perfect. OK, I think we best wrap up there now. I mean, we have got a lot of questions that we haven't answered, so we will be coming back to you, if you have asked one of those so look out for that.

It just leaves me to say a big thank you to everybody who's on the call today. If you do hold our GRIPS, Portfolios, or our GMAP’s, or Governed Portfolios, and indeed any of our funds. It's really appreciated, thank you very much, you can see here, your contacts which are available to you. So, if you do have any questions, please give us a call, but otherwise, we'll look forward to hearing from next time, OK? All the best. Have a great rest of your day.

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