active/passive models - cazenove capital · active/passive models how are the portfolios invested?...

Model Portfolio Service Active/Passive Models

Q3 2020 Review

For financial advisers and their clients

Active/Passive Models

Cazenove CapitalModel Portfolio Service, Q3 2020

Active/Passive Portfolio reviewThis review covers the Cazenove Capital Model Portfolio Service including asset allocation, performance and latest views from the investment team on markets and strategy.

If you have any questions about this report or your investment generally, please contact your local business development manager.

Contents

2Market update from Chief Investment Officer, Caspar Rock

3Portfolio Positioning from Portfolio Director, Steven Rooke

4Strategic and Tactical Asset Allocation

5Performance

6Underlying Portfolio Holdings

7Costs

MPS Q3 2020 Review 1


Platform availability

Performance monitoring

Risk profilers

Ratings and awards

MPS Q3 2020 Review2


Caspar RockChief Investment Officer

Cazenove Capital

What has happened in markets?

“Global equities continued to rally in the third quarter, with the US – and in particular the technology sector – leading the way. But performance has become increasingly dependent on a relatively small number of stocks – and an election looms”

Note: Forecast is not a reliable indicator of future performance.

Equities rise as the global economy starts to healCoronavirus took a heavy toll on the global economy, but the worst-case outcomes envisaged by economists and officials have thankfully been avoided. While this year’s contraction is the worst in decades, a strong rebound over the summer means that output is unlikely to have fallen by as much as initially feared. Schroders’ economists recently upgraded their forecast for 2020 to a fall in global GDP of 4.6%, compared with a fall of 5.3% previously. On this basis, the output will exceed its 2019 level by the end of 2021. Corporate earnings are expected to follow a similar trajectory.Investors were encouraged by these signs of economic recovery – as well as hopes that the worst of the pandemic is behind us. Global shares enjoyed their strongest August performance in over 30 years, rising more than 6% in the month. Despite a rough patch in September, the S&P 500 is still above its pre-Covid peak.This leaves shares looking expensive based on near-term earnings. The MSCI World Index trades at 24 times forecast profits over the next year, well above the long-term average of 15 times. This is not necessarily a cause for concern. Despite frequent criticism of markets’ short-termism, they can be quite efficient at “looking through” temporary disruption. Today’s high valuation suggests that investors are looking beyond the slump in earnings caused by the pandemic and focusing on companies’ longer-term earnings potential.

Technology continues to shine Beneath the surface, however, the after-effects of the pandemic are still apparent. For one thing, the stock market’s gains have been very unevenly distributed. Investors in the UK, Spanish or Italian stock markets, for instance, are still nursing significant losses year-to-date. To a striking degree, performance has been led by US technology firms, which have benefited from recent changes to the way we live and work. The biggest US tech companies are now worth more than entire European stock markets. The performance may be justifiable, at least to some extent. These companies were in strong shape before the pandemic hit – and are now benefiting from an unexpected acceleration in digital adoption that could lead to years of profit and cash flow growth. The strong performance of the tech sector is also a reflection of the long-running “style bias” that has characterised markets in recent years. In an uncertain economic environment, investors seek out those businesses that can offer some certainty of growth. There are signs this has been taken to extremes this year. Some companies have seen share prices rise far more than perhaps could be justified by the witnessed change in the fundamentals of their business.

The recovery remains vulnerable The key question mark is the course of the pandemic. As the spread has slowed in the US, Europe now looks to be embarking on a second wave. And while progress towards a vaccine continues apace, it is at best months away. In the meantime, consumers and businesses face the increasing likelihood of a resurgence of Covid-19 over the colder winter months and potentially further lockdowns. Understandably, people are in a cautious mood and there are signs that, after an initial burst of pent-up spending, activity may now be more subdued.There is also uncertainty around fiscal support measures to follow on from those introduced earlier this year. At the time of writing, the US Congress has yet to agree on a further stimulus package. If it fails to do so, consumer income – and spending – may not be sustained at current levels. In the UK, the furlough scheme is due to end this month. A new job support plan will help cushion the blow – but it is less generous than the furlough scheme and unlikely to prevent a rise in unemployment. The rising odds of a “no deal” Brexit also increase the vulnerability of the UK economy.

Fed signals a new approach on inflation More encouragingly for investors, central banks have signalled that they will remain in support mode for a while yet. At the annual Jackson Hole economic symposium (held virtually this year), Federal Reserve chairman Jerome Powell announced changes to the Fed’s monetary policy framework. Under the new approach, the Fed will target an average inflation rate of 2% – giving them the room to allow the inflation rate to overshoot the target to make up for previous shortfalls. Given inflation has been slightly below target for several years, this suggests that interest rate rises could be off the cards for a considerable period of time. The change sounds very abstract, but recent history underlines its potential market implications. If the Fed had been following this new framework between 2015 and 2018, it may have raised rates far less than it did – if at all. This might have helped to avoid the economic slowdown and sharp market correction in late 2018.

US election a potential trigger for volatilityPolls continue to suggest a Biden win is the most likely outcome, but Trump’s prospects have been ticking higher in recent weeks. Markets may be relatively sanguine about a clear result for either candidate, with the Democrats and Republicans each controlling one chamber of Congress. This would likely ensure a relatively high degree of continuity in the tax and regulatory environment. A Democrat win in both the Senate and presidential races would likely open the door to more significant change. One key point to bear in mind is that trade and technology tensions between the US and China would not disappear with a new president. While Biden would probably pursue a more diplomatic course in international relations, a tough line on China has broad cross-party appeal. A more concerning possibility is the risk of a long delay until the result is finally known and potentially a contested election. Uncertainty over the outcome would be unwelcome to markets.



How are the portfolios positioned?

Steven RookePortfolio Director,

Manager of Cazenove Capital Model Portfolio Service

“Our global approach helped during the quarter, as UK equities continued to struggle”

US equities led the way, with a strong performance from the tech sector

During the quarter we added to our healthcare positions

Good contribution from asset allocation

Global stock markets continued to make progress following the rebound seen in the second quarter. Once again it was the US leading the way with the technology sector up strongly despite a wobble in September caused by a pickup in Covid cases, whilst a weaker US Dollar helped Asian and Emerging Markets. The ‘growth‘ style continued to outperform the ‘value’ style, with weakness from the energy and financial sectors. This provided another headwind for the UK market, with heavy weightings in both sectors coupled with the looming Brexit deadline weighing on sentiment.

The market backdrop this year has provided ample opportunities for active managers to deliver alpha particularly within equities, where there has been a clear divide between market winners and those in challenged industries or with poor balance sheets. Whilst the Active/Passive models take index exposure within equities, our asset allocation has been very good with significant exposure to the US market. The big 5 technology stocks: Apple, Microsoft, Amazon, Facebook and Alphabet (Google) make up 19.4% of the S&P500 index, with strong contributions this quarter from Apple (+22.0%), Amazon (+9.4%) and Facebook (+10.6%). Elsewhere our emerging market equities

have benefitted from its China exposure. China may have stumbled early in its handling of the coronavirus, but the country responded quickly and decisively, allowing the economy to recover well ahead of the rest of the world.

During this risk on the quarter, returns from bonds and alternatives were less pronounced. Higher risk areas of the bond market delivered the best returns, with our positions in the Schroder Sterling Corporate Bond and Strategic Credit funds both up over 2%, whilst our UK government bonds fell. Our alternatives nudged higher, helped by returns from the Troy Trojan and Atlantic House Defined Returns funds.

We rebalanced the models in July, adding to our healthcare position. The shorter term we have seen political sentiment weigh on the sector, however, this remains one of our favoured long term themes with valuations undemanding and earnings growth improving. We funded this by reducing our UK equity exposure. Within alternatives, we sold our modest position in the Winton Absolute Return fund following a period of poor performance and thoughts that this trend following strategy could continue to struggle in more volatile markets. We reallocated the proceeds between the Janus Henderson UK Absolute Return fund and Troy Trojan fund.

Given the current backdrop, we are happy to maintain our equity exposure with the intention to look to add on market weakness. We remain underweight bonds, with the focus here on diversification and defensive qualities, whilst within alternatives, we continue to favour assets that can behave differently to more traditional asset classes such as equities and bonds.

MPS Q3 2020 Review4


How are the portfolios invested?The models adopt the Cazenove Capital multi-asset approach investing in a wide range of asset classes aiming to deliver strong risk-adjusted returns. The active/passive models invest in open-ended funds. The charts below illustrates the long term (strategic) and current (tactical) asset allocation of the core models.

Long-term strategic asset allocation

Tactical asset allocations

Volatility Higher

Return

Lower

UK equity Overseas equity Absolute return CashFixed income Other Alternative

Higher

Equity riskAggressive

GrowthCautious

2015

9

15

50

5 5 55

5

Balanced

33

1836

52

132

61

7.5

5

7 19

20

75

23.52

10

Volatility Higher

Return

Lower

Absolute return CashCommodities Other alternativesUK equity Overseas equity Fixed income

Higher

Equity riskAggressive

GrowthCautious

29

1510

44

4

8

11

9

7

39

Balanced

710

15

55

512

70

13

79

76

19

744

5

322

Source: Cazenove Capital, as at 30 September 2020. Asset Allocation is subject to change without notice.



Active/Passive portfolios 3 month 1 year 2 years 3 years 5 years Cumulative return since launch*

Cautious 0.6% -0.2% 4.6% 8.1% - 8.9%

Balanced 1.1% 0.7% 5.7% 11.8% - 13.0%

Growth 1.5% 1.1% 5.9% 14.1% - 15.7%

Aggressive 1.9% 0.7% 5.2% 14.7% - 16.5%

Equity risk 2.2% 1.3% 5.9% 16.7% - 18.8%

Active/Passive portfolios Q3 2019 - Q3 2020 Q3 2018 - Q3 2019 Q3 2017 - Q3 2018

Cautious -0.2% 4.8% 3.4%

Balanced 0.7% 4.9% 5.8%

Growth 1.1% 4.8% 7.7%

Aggressive 0.7% 4.4% 9.0%

Equity Risk 1.3% 4.4% 10.2%

Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested.Source: Cazenove Capital, as at 30 September 2020. Performance is shown on a total return basis, net of underlying fund charges but gross of Cazenove Capital fees and any fees applied by the platform and professional adviser, deduction of these will have an impact on overall performance. Inception date 30 June 2017. Performance is calculated by Cazenove Capital and provided for illustrative purposes only and should not be viewed as the performance of a specific client portfolio.

How are the portfolios performing?

MPS Q3 2020 Review6


The underlying portfolios in more detail

Asset class Security MPS Cautious MPS Balanced MPS Growth MPS Aggressive MPS Equity Risk

Equities

UK Vanguard FTSE All Share Index 3.6% 6.7% 9.9% 12.2% 12.9%

Total 3.6% 6.7% 9.9% 12.2% 12.9%

Europe ex UKVanguard FTSE Developed Europe ex UK Index

1.8% 3.7% 4.6% 5.4% 6.3%

Total 1.8% 3.7% 4.6% 5.4% 6.3%

US Vanguard US Equity Index 8.4% 15.5% 23.0% 29.5% 33.2%

Total 8.4% 15.5% 23.0% 29.5% 33.2%

Japan Vanguard Japan Stock Index 1.2% 1.5% 1.9% 2.7% 2.8%

Total 1.2% 1.5% 1.9% 2.7% 2.8%

Asia ex Japan HSBC Pacific Index 1.4% 3.4% 4.5% 5.3% 6.0%

Total 1.4% 3.4% 4.5% 5.3% 6.0%

Emerging MarketsVanguard Emerging Markets Stock Index

0.7% 3.6% 5.5% 7.7% 8.8%

Total 0.7% 3.6% 5.5% 7.7% 8.8%

Global

L&G Global Healthcare & Pharmaceuticals Index

1.1% 3.6% 4.6% 7.7% 7.7%

L&G Global Technology Index 0.0% 3.5% 4.1% 4.8% 4.8%

L&G Global Equity Index 3.3% 3.0% 4.9% 5.2% 7.8%

L&G Global Infrastructure Index 1.0% 0.9% 1.4% 1.4% 1.4%

Total 5.4% 11.0% 15.1% 19.1% 21.6%

Equities total 22.5% 45.4% 64.4% 82.0% 91.6%

Bonds

UK

Schroder Strategic Credit 3.9% 2.5% 0.0% 0.0% 0.0%

Vanguard UK Short-Term Inv Grade Bond Index

10.7% 6.8% 4.9% 1.0% 0.0%

Vanguard UK Inflation-Linked Gilt Index

8.9% 5.9% 4.3% 1.1% 0.0%

Schroder Sterling Corporate Bond Fund

5.0% 2.5% 0.0% 0.0% 0.0%

Vanguard UK Government Bond Index

8.5% 6.5% 4.2% 2.8% 0.0%

Total 36.9% 24.2% 13.3% 4.9% 0.0%

Global PIMCO Global LIBOR Plus 3.9% 2.4% 0.0% 0.0% 0.0%

Total 3.9% 2.4% 0.0% 0.0% 0.0%

Emerging marketsSchroder Emerging Market Absolute Return

2.8% 2.0% 2.0% 0.0% 0.0%

Total 2.8% 2.0% 2.0% 0.0% 0.0%

Bonds total 43.6% 28.6% 15.3% 4.9% 0.0%

All holdings Active/Passive models



Asset class Security MPS Cautious MPS Balanced MPS Growth MPS Aggressive MPS Equity Risk

Alternatives

Hedge FundsJanus Henderson UK Absolute Return

4.5% 3.8% 3.3% 2.6% 1.7%

Total 4.5% 3.8% 3.3% 2.6% 1.7%

Other Architas Diversified Real Assets 4.6% 3.8% 2.7% 1.4% 0.9%

Total 4.6% 3.8% 2.7% 1.4% 0.9%

Multi asset Trojan Fund 6.1% 5.3% 4.0% 2.3% 1.4%

Total 6.1% 5.3% 4.0% 2.3% 1.4%

Structured Products Atlantic House Defined Returns 3.8% 3.4% 3.0% 2.5% 2.0%

Total 3.8% 3.4% 3.0% 2.5% 2.0%

Alternatives total 18.9% 16.3% 13.1% 8.7% 6.0%

Cash – GBP 14.9% 9.7% 7.2% 4.5% 2.4%

Cash total 14.9% 9.7% 7.2% 4.5% 2.4%

Total 100.0% 100.0% 100.0% 100.0% 100.0%

Source: Cazenove Capital, as at 30 September 2020.

Active/Passive Active/Passive Cautious Active/Passive Balanced Active/Passive Growth Active/Passive Aggressive Active/Passive Equity Risk

Cazenove Capital 0.30% 0.30% 0.30% 0.30% 0.30%

Ongoing charges 0.33% 0.30% 0.28% 0.22% 0.21%

Total 0.63% 0.60% 0.58% 0.52% 0.51%

What are the costs?

Source: Cazenove Capital, as at 30 September 2020. Fees and charges are indicative, may differ by platform and does not include adviser fees..

MPS Q3 2020 Review8


Important informationIssued by Cazenove Capital, which is a trading name of Schroder & Co. Limited, 1 London Wall Place, London, EC2Y 5AU. Registered number 2280926 England.Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority.

The contents of this document are based upon sources of information believed to be reliable. However, save to the extent required by applicable law or regulations, no guarantee, warranty or representation (express or implied) is given as to its accuracy or completeness and Cazenove Capital, its directors, officers and employees do not accept any liability or responsibility in respect of the information or any recommendations expressed herein, which, moreover, are subject to change without notice. The material in this document is for information purposes only and should not be deemed to constitute the provision of financial, investment or other professional advice in any way. The services, securities, investments and funds described may not be available to or suitable for your clients.

Risk warnings There is no guarantee that the objectives will be met. Past performance is not a guide to future performance. The value of investments and the income from them can go down as well as up and an investor may not get back the amount originally invested and investments may be affected by fluctuations in exchange rates. The levels and basis of tax assumptions may change. You should obtain professional advice on taxation where appropriate before proceeding with any investment.

Prior to making an investment decision, please consider the following risks:

Interest rate risk: For models investing in fixed income, changes in interest rates are likely to affect the fund’s value. In general, as interest rates rise, the price of a fixed bond will fall and vice versa.

Credit risk: The value of the model may fall if the companies and governments who have issued the bonds deteriorate in quality, or in the worst case scenario become insolvent.

Liquidity risk: It may be difficult to sell some investments (or sell them without making a loss) due to an insufficient number of buyers in the market.

Currency risk: The model can hold some investments that are not denominated in UK Pound Sterling (£). These may be affected by changes in currency exchange rates.

Emerging market risk: The model invests in markets where economic, political and regulatory factors can be significant. This may affect the liquidity, settlement and asset values. Any such event can have a negative effect on the value of your investment. Investments in emerging markets can demonstrate significant declines in value over extended periods of time.

Counterparty risk: There is a risk that a counterparty may default or not comply with its contractual obligations resulting in financial loss.

Cazenove Capital 1 London Wall Place, London EC2Y 5AU T +44 (0)20 7658 1000

cazenovecapital.com/advisers 505283

active/passive models - cazenove capital · active/passive models how are the portfolios invested?...

Documents