EXECUTIVE SUMMARY

• Fears pertaining to the economic impact of the coronavirus pandemic gripped financial markets in the first quarter of2020, leading to a profound sell-off in global stocks

• A series of unprecedented market movements and the fastest correction on record were just some of the quarter’sfinancial headlines, before a concerted fiscal and monetary response by authorities restored some semblance of calm

• Government bonds rose in value as investors flocked to safe-haven assets, while corporate bonds underperformed as therisk premium demanded by investors spiked

• The Prosser Knowles MPS strategies posted negative returns over the period, with those strategies primarily allocated toequity funds experiencing the largest drawdowns

INVESTMENT INSIGHTS

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TACTICAL POSITIONING OVERVIEW – 31 MARCH 2020

The first quarter of the new decade was defined by unprecedented volatility, dramatic stock price movements and the fastest US ‘bear market’ on record. Investor sentiment fluctuated wildly, while the unprecedented package of support by governments and central banks, exceeding that even of 2008, poured oil on troubled waters without resolving a situation that, ultimately, remains largely dependent upon the evolution of this pandemic. A global recession is now inevitable, with markets trying to understand the depth and length of the downturn.

The period was also notable for the number of meetings and, latterly, conference calls that we had with external fund managers, with over 100 held in March alone. While

THE PROSSER KNOWLES MANAGED PORTFOLIO SERVICE (MPS)

UPDATE - Q1 2020

20.04.2020

investment teams have spent recent weeks working remotely, the level of engagement with managers and companies has continued uninterrupted, with our investment fund and equity research teams working diligently to ensure we have the necessary information to help inform our decisions.

At the headline level, we expect markets to remain volatile over the next few months though do expect recovery in due course. Nonetheless, at this juncture we believe it is too early to say that markets have fully priced in the true implications of this crisis and, as a consequence, remain cautious on adding to equities.

PROSSER KNOWLES MPS STRATEGIES – Q1 2020 MODEL STRATEGY ATTRIBUTION ANALYSIS

All index and fund returns are quoted on a total return basis in sterling terms. Please note that not all strategies may hold the investments detailed below. Further information relating to a particular strategy and its current allocations can be obtained from Quilter Cheviot.

Fixed Interest: Bond markets were far from immune to the volatility that marred the quarter, with even government bond yields experiencing dramatic movements over the period. The ‘risk-on’ sentiment exhibited in the final months of 2019 – amidst a wave of positive political and economic news flow – was swiftly reversed as the severity of the coronavirus pandemic became apparent. Gilt yields initially fell to near-zero levels as investors flocked to buy safe-haven assets, before experiencing a sharp upward spike mid-March as holdings were sold to raise cash. However, the unprecedented package of support by governments and central banks, exceeding that even of 2008, helped to soothe nerves and ensured yields finished the quarter lower (meaning that the value of gilts rose).

Investor sentiment fluctuated even more dramatically in the corporate bond market. Credit spreads (the difference in yield between corporate and government bonds) widened significantly and, as expected, companies with weaker balance sheets and poorer credit ratings saw their debt prices fall by more than that of investment-grade rated companies. While the Federal Reserve’s historic announcement that it would purchase corporate debt did curb some of the more extreme positioning that was emerging in March, corporate bonds significantly underperformed sovereign debt during the period.

As would be expected in these conditions, the lower-risk strategies’ conventional and index-linked gilt exposure enjoyed a positive quarter of performance, with the credit allocation experiencing a more challenging period, though performing better than the higher-risk segments of the market. Across the government bond allocation the Allianz Gilt Yield fund outperformed the broader gilt market. In contrast, the Royal London Sterling Credit and Vanguard UK Investment Grade Bond Index funds both posted a negative return.

Elsewhere, the strategies’ exposure to the M&G Optimal Income fund struggled, a function of the manager Richard Woolnough’s positioning for a more positive economic

backdrop at the start of the year. As a reminder the holding was reduced at the end of 2019, leaving it as a relatively modest weighting within the allocation and thereby limiting the impact. Lastly, the PIMCO Global Investment Grade Credit fund also posted a disappointing return, the result of an ‘overweight’ allocation to subordinated bank debt and an ‘underweight’ position in (better-performing) utilities going into the crisis. We note that the team has tended to recover quickly from previous bouts of underperformance, and share their view that there are attractive opportunities emerging within their universe for investors with the appropriate time horizon and risk level.

Equities – UK: The UK was one of the worst performing equity markets over the period, as the index’s high weighting to economically cyclical sectors had a detrimental effect. Chief amongst these detractors were BP and Royal Dutch Shell, with the oil price hit by a perfect storm of higher supply – arising from a breakdown in the OPEC+ agreement – and weaker demand, as governments imposed quarantines and global air travel was sharply curtailed. This led to a fall in the price of oil (Brent Crude) to $24 per barrel, down from more than $60 per barrel at the start of the year. Mid and smaller-cap stocks were also hit hard, despite offering relatively compelling valuations when compared to other markets.

The performance of the strategies’ UK equity allocation was marginally behind that of the broader market over the period. The main positive contributor to relative returns was the holding in the Investec UK Alpha fund, benefiting from manager Simon Brazier’s gradual move towards large, cash-generative ‘quality’ businesses in recent times. The allocation to the Legal & General UK 100 Index Trust also proved beneficial, as larger companies outperformed their smaller counterparts. Elsewhere, Artemis Income, the joint-largest holding in the fund, finished broadly in line with the index, as the robust performance of key holdings such as Tesco, RELX and Direct Line Insurance was offset by the impact of the fund’s exposure to names including Informa (the global exhibitions, publishing and information services giant), ITV and Barclays. In contrast, the key detractor across the allocation was one of last year’s relative outperformers in Merian UK Alpha, which was stung predominantly by its exposure to consumer discretionary names.

Equities – North America: Across the North American market cyclical sectors such as Energy, Industrials and Financials suffered the steepest falls. Large companies outperformed smaller names, as indeed did those deemed to possess ‘quality’ and / or ‘growth’ characteristics (with strong recent performers – and perceived structural ‘winners’ – such as Amazon and Microsoft delivering a positive return over such a tumultuous period). In contrast, high-yielding, volatile stocks trading at lowly valuations were substantive underperformers.

A rush to acquire US dollars, a common characteristic during times of market turbulence, led to sharp moves in cable (the GBP/USD rate), with the value of the pound hitting a low of $1.14 at one point, before rallying to $1.23. This helped offset some of the falls in international

investments for UK-based investors. From a fund selection perspective, the strategies’ North American equity allocation marginally underperformed over the quarter. Key to this was the exposure to the Schroder US Mid Cap fund which, having enjoyed a pleasing 2019, was caught by the aggressive sell-off experienced across mid and small-cap stocks.

Equities – Europe ex UK: In Europe wide divergence in performance was seen across underlying countries. Italy and Spain, both severely impacted by the spread of COVID-19, posted losses of over 24%, with German and French bourses also experiencing meaningful falls. The Swiss market fared far better, with the country’s market comprising a large weighting to Nestlé (which outperformed due to its global footprint and dominance of several core at home food categories) and pharmaceutical giants Roche and Novartis.

The strategies’ exposure experienced mixed fortunes over the period. The Janus Henderson European Selected Opportunities fund outperformed as a result of its zero weighting to banks and tilt towards cash-generative businesses with strong balance sheets. However, the JOHCM Continental European fund trailed the broader index, as a modest overweight exposure to Financials (since trimmed) and the aerospace and defence company Airbus (heavily impacted by airlines not wishing to take delivery of aircraft) detracted from performance.

Equities – Japan: While the postponement of the Olympic Games to 2021 garnered headlines, Japanese equities generally outperformed other markets during the quarter. A 7% decline in the yen/sterling exchange rate also helped returns from a sterling investor’s perspective. Smaller companies trailed their larger counterparts, while ‘value’ stocks followed the global trend by underperforming ‘growth’ names over the period. The strategies’ exposure also trailed the index, with the Baillie Gifford Japanese Income Growth fund enduring a rare reversal of fortunes. The fund’s slight tilt down the market cap, ‘overweight’ exposure to Financials and selective weakness in Automation and Cosmetics names were the causes of this underperformance over the short term. There is no change to our positive outlook for the fund and the management team, with lead manager Matthew Brett adopting a relatively cautious approach to implementing change.

Equities – Asia Pacific ex Japan: The spread of the pandemic took a heavy toll on economic activity within the region. The strategies’ holdings delivered pleasing outperformance, with both funds – the BlackRock Asian Growth Leaders and Veritas Asian funds – helping to protect capital during the sell-off. The Veritas holding performed particularly well, benefiting from an overweight position in domestically-orientated Chinese consumer stocks and an underweight position in Energy, while a relatively heavy cash weighting – partially reduced as portfolio manager Ezra Sun added to emerging opportunities during the quarter – also helped to cushion against the sell-off.

Equities – Emerging Markets: The spread of the virus coupled with a strengthening dollar proved a challenging backdrop for emerging nations. Investors continue to assess the economic vulnerability of individual countries given the demand shock arising from the global lockdown, while the ability of individual nations to prevent their healthcare service from being overwhelmed remains in doubt. China outperformed during the period, albeit still posted a negative return, but is perceived to be ahead of the curve in terms of its progression through the health crisis and its return to some degree of ‘normal’ economic activity.

Turning to the strategies’ holdings, and the JPM Emerging Markets fund outperformed, assisted by a significant ‘underweight’ to Energy names and a corresponding ‘overweight’ exposure to high quality companies. The Lazard Emerging Markets fund endured a more difficult period for relative performance, as exposure to poorly performing Brazilian stocks and an underweight to the Chinese tech juggernauts impacted.

Commercial Property: March’s volatility also presented challenges to the commercial property sector, a relatively modest allocation across the strategies with a typical weighting of approximately 3.3%. The strategies’ holding in the BMO Property Growth & Income fund was suspended from trading in March, in keeping with action taken across other commercial property funds. The decision to suspend was taken to protect the interests of investors in the fund, and allows the independent valuer to better understand the impact the disruption arising from the pandemic is having on direct property market valuations. In this respect, it is a very different situation to the one faced by the sector in 2016, where too many investors sought to sell their holdings in the wake of the EU referendum result, prompting a liquidity ‘crunch’ in property funds as redemption requests were unable to be satisfied. In this instance, the action taken is consistent with the new requirements issued last year by the Financial Conduct Authority (FCA), whereby a fund must suspend dealing where the standing independent valuer expresses material uncertainty regarding the value of more than 20% of the fund’s immovable assets.

As a reminder, the BMO holding is a very different proposition to most other property funds, with only approximately 31% invested in physical ‘bricks and mortar’ property investments, with the remainder of the fund invested in shares of property companies. As these shares are traded on the stock exchange, they do not have the same questions around valuation. And while they may trade at a discount to their net asset value (NAV) – potentially reflecting uncertainty around the net asset value of the company – there is always a clear price for investors wanting to buy or sell. This source of capital has prevented the fund from suspending in the past, although the exceptional nature of current events and the revised rules have required action to be taken. We are engaging with the BMO management team on a regular basis, and will provide further updates as the situation develops. In the meantime, we have taken the fund out of the model strategies for new investments, and temporarily allocated the weighting to cash.

ECONOMIC OUTLOOK

Data from China – the first country to be impacted by COVID-19 and the first to show signs of economic recovery – emerged over the month showing an unprecedentedcollapse in the services part of the economy. Thedependence of developed economies on services sectors(roughly three-quarters of production, employment andGDP), means that consumer-led economies such as Europeand the US will be hit hard. Developed economies areprojected to contract roughly 3-4% year-on-year, with theeurozone in particular standing out with four quarters ofcontraction expected. Forecasts for emerging marketsshow positive but weak growth of just 1% year-on-year.

The data on the spread and subsequent recovery in COVID-19 cases from China and South Korea has been used as a template for other countries, suggesting the period of virus related containment is about three months. Europe became the epicentre of the outbreak in early March. Based on the trend in active cases the virus is set to peak in Italy in the first week of April with the UK and France two to three weeks behind. The US, however, remains in the acceleration phase, with a particular focus on New York where the death toll is rising faster than any other major city at this stage of the outbreak.

Unlike previous recessions, the sudden halt to economic activity from the necessary social distancing measures will mean that unemployment rises rapidly, rather than acting as a second-order effect as is ‘typical’ in an economic downturn. Short-term data points are illustrative; in the last week of March alone three million people in the US signed up for jobless benefits. That record was broken a week later, with more than six million signing up. The challenges facing governments and policymakers are altogether different, and as a result their response has been equally unprecedented.

In the short term, the monetary response from central banks has seen record sums deployed to help alleviate stresses in both financial markets and the ‘real’ economy. The Federal Reserve cut rates twice in the first quarter from 1.75% to 0.25% and increased its bond-buying programme. The Bank of England cut base rates to 0.1%. Governments have also announced huge fiscal policy initiatives: the UK and German governments have committed to cover the majority of workers’ wages during the shutdown to prevent companies from laying off staff. In addition, government-backed loans are trying to avoid the otherwise inevitable swathe of cash-flow led bankruptcies. The scale of the response is necessary, and welcome for business to survive a substantial cut-off in revenue and give the economy the best chance of a rapid recovery. While the response from central banks is also necessary to keep borrowing costs low, the issue of government debt sustainability will likely resurface in the aftermath of this crisis.

OUTLOOK & MODEL STRATEGY POSITIONING

We believe that markets will ultimately recover, but given the significant uncertainties surrounding the magnitude and duration of the downturn we remain relatively cautious in the short-term. While markets have re-priced to factor in a global recession in the first half of this year, we believe investors will require confidence that the spread of the virus has been halted before being prepared to look through to recovery in the second half of 2020.

The shape of the recovery will depend on limiting the cascade of business bankruptcies, layoffs, and consumer scarring which would deepen the recession and lengthen the time it takes to return to growth. Given that the US and some areas of Europe are yet to see the plateau in COVID-19 cases there remains a lack of clarity around the time until containment measures are phased out.

Final year results for company earnings have clearly been overshadowed by the pandemic. Earnings per share typically fall by around a third in a recession, though the Global Financial Crisis saw earnings per share fall by 50%. We estimate that equities are now discounting a roughly 30% decline in company earnings this year.

What makes this downturn unusual is that dividends could be postponed or cut in line with profits. This is potentially a bigger problem in the UK, where companies have historically been generous with their pay-outs but have also largely maintained them in a downturn. Bank balance sheets may be much stronger this time around, but political expediency demands they share the pain by forcing them to suspend their dividends. For some companies the total lack of incoming revenue will give them no choice, but shareholders will be watching management carefully.

We expect markets to remain volatile over the next few months. However, we do expect recovery in due course and for longer-term investors recommend maintaining a marginal bias to equities over bonds. Nevertheless, at this juncture we believe it is too early to say that markets have fully priced in the true implications of this crisis and, as a consequence, have remained cautious thus far on adding to equities across client portfolios.

Source: Quilter Cheviot, Financial Express, April 2020

Please note any reference to holdings is in relation to the Prosser Knowles (Series 2) model strategies, and may not be held within Series 1 portfolios due to differences in fund availability.

Investors should remember that the value of investments, and the income from them, can go down as well as up and that past performance is no guarantee of future returns. You may not recover what you invest.

This has been prepared for information purposes only and is not a solicitation or an offer to buy or sell any security. It does not purport to be a complete description of our investment policy, markets or any securities referred to in the material. The information on which the document is based is deemed to be reliable, but we have not independently verified such information and we do not guarantee its accuracy or completeness.

Investors should remember that the value of investments, and the income from them, can go down as well as up and that past performance is no guarantee of future returns. You may not recover what you invest.Quilter Cheviot is the trading name of Quilter Cheviot Limited, a private limited company registered in England with number 01923571, registered office at One Kingsway, London WC2B 6AN, is a member of the London Stock Exchange, is authorised and regulated by the UK Financial Conduct Authority, is regulated under the Financial Services (Jersey) Law 1998 by the Jersey Financial Services Commission for the conduct of investment business and funds services business in Jersey and by the Guernsey Financial Services Commission under the Protection of Investors (Bailiwick of Guernsey) Law, 1987 to carry on investment business in the Bailiwick of Guernsey; has established a branch in the Dubai International Financial Centre with number 2084 which is regulated by the Dubai Financial Services Authority. Quilter Cheviot Limited has established a wholly owned subsidiary in Ireland, Quilter Cheviot Europe Limited, which is regulated by the Central Bank of Ireland. Registered in Ireland: No. 643307. Registered Office: Hambleden House, 19-26 Lower Pembroke Street, Dublin D02 WV96.

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(04/2020)