Charity Multi-Asset Fund update - May 2023

Transcript

Naomi Morris:

Hello, good afternoon and welcome to our first half-yearly update for the Charity Multi-Asset fund.

I’m Naomi Morris, product executive of the charity authorised investment funds, and I'm lucky to be joined today by Chris Lewis, our Head of Investment Strategy and Harry Hitchcock, Assistant Fund Manager of the Charity Multi-Asset fund and Portfolio Manager on desk.

So to set out the agenda for today, firstly I'll provide a fund overview and provide an investment philosophy before passing over to Harry, who will look at the Fund's performance and how it's performed against the benchmark. Then passing over to Chris Lewis, who will then look at the economic outlook and investment strategy, and then finally, I'll finish off with client service and questions. I do want to note for those online, please send your questions through. We can see them here, and those in the room simply raise your hand at that segment.

Starting off with investment philosophy and as a reminder for most of you, I'm sure. So the fund has a long-term rolling 10-year inflation plus 4% target, and we aim to achieve around 70% of global equity volatility. So by looking at the chart on the right, you can see that we aim to have a smoother pattern of returns over time and we believe we can achieve this with 3 objectives.

So first we look at the long-term asset allocation of the fund, where the fund will be split into various ethic classes. Secondly, we take a medium-term approach looking at the tactical asset allocation, considering the economic market, valuations and sentiments. But Chris will go into that a little bit later. And then finally, we'll look at investment selection and this is how we populate the fund portfolio. So just a reminder on the Charity Multi-Asset Fund - it is a charity authorised investment fund, and it's regulated by both the FCA and Charity Commission. In addition to this, the fund has an extra added layer of governance, because it is monitored by an independent advisory committee.

So, as I mentioned earlier, the fund's long-term objective of inflation, plus 4% is achieved with the chart here on the right. So as you can see, 70% of the portfolio sits in the global equity space, and 10% sits in a property. And this is where we believe that the majority of returns will derive from, here in this real asset space, and then the fund is diversified between bonds, diversifiers and cash. So the fund offers both distribution and accumulation units, targeting at 4% per annum and 1% a quarter.

So the fund is daily dealing and highly, actively managed and I’m pleased to say that the fund has over 360 charity investors with 634.2 million as the current AUM, and I’ll pass over to Harry to go over fund performance.

Harry Hitchcock:

Thanks very much, Naomi. Afternoon everyone. I am taking Tom Montagu-Pollock’s spot today so hopefully, I can fill those big shoes that he's left. As Naomi said I'm an assistant, the assistant fund manager on the Charity Multi-Asset fund to help Tom with the day-to-day running of the fund and I’m a portfolio manager in the charity team for those who don't know me or recognise me. So just quickly, I’ll take a little step back and look at how the fund has performed over the longer term and the past year, and then hand to Chris to talk about what we're thinking going forward.

Slide 5 for those online just shows the long-term returns of the fund since inception in September 2008. And you can see here that we do expect, and we have seen oscillations around that inflation plus 4% target over the long term. Given the trickier markets and the really strong inflation that no one will have missed over the past 18 months, the fund has now dropped below that long-term target since inception though we do believe that over the long term, this is still an achievable and suitable target. And I think just pointing to a couple of things on this chart on the right-hand side of the screen, you'll see in September 2008, in the financial crisis in 08, the debt crisis in 2011, and then the Covid impact in 2020 are all periods where we saw the long-term performance of the fund drop below that inflation target, though actually those periods marked quite a good opportunity to start reinvesting where we saw reasonable valuations and actually we saw strong rebounds following that. So not all doom and gloom. In terms of peer group performance, the fund is ahead of the ARC PCI Steady Growth index, which we measure performance against over 1, 3, 5 and 10 years. So, although behind the inflation benchmark, ahead of the Peer Group comparator. And I think the other pleasing thing to point out on this slide is that we have been able to deliver those returns whilst delivering less volatility when compared to the global equity market. So as Naomi said, the fund does invest in diversifiers to try and smooth the return profile of the fund. And what it does, what it shows here is that we have taken a reasonable return with two-thirds of equity market volatility over the long term.

Looking at returns over the past year, it's been a challenging year for markets as central banks have continued to raise interest rates in an attempt to bring down that stubbornly high inflation that I was talking about a moment ago. And more recently over the past 3 months, we've seen stresses in the banking sector with the collapse of Silicon Valley Bank, followed shortly by the further disruption in Europe with Credit Suisse. That caused stocks to dip sharply during March, but we did see a slight recovery to finish the first quarter of this year higher. We have seen a significant dispersion of returns within the equity market this year, with big kind of mega-cap technology stocks, with clear leaders, helped by earnings generally outperforming expectations. Within fixed income markets, the higher yield environment that we've seen over the past 18 months or so, has caused bond prices to fall. And so against this backdrop over the year to the end of March, the fund was down 4.1%. The Arc Peer group which I noted a moment ago was down 4.6% over the period. Global equities were down 1.4% and UK Government bonds were down over 16%. So it really does show that there have been some tricky periods in financial markets.

The chart on the left-hand side of the screen here just breaks down the fund, showing what's contributed and detracted from the overall performance. The dark blue bars show contributors. The magenta-coloured bars show detractors, and the light blue just shows the overall fund performance, which, as I noted a moment ago, was down just over 4%. So it's been a challenging 12 months for equity markets, and the fund equities on aggregate have detracted from performance, though there have been some brighter spots within that allocation. So UK equities is a good example of where we've seen some positive contribution to performance.

There's also been some relative positivity from the global equities and really what that is, is there are symptomatic funds that we have strong, long-term conviction in which have really helped performance. And to note a couple, there's a Global Insurance Fund which I’ll talk a bit about on the next slide and a Health Care Fund which performed well given the defensive characteristics of this sector over the past year.

Moving away from equities and onto fixed income in absolute terms, the fund's fixed income exposure detracted over the period, but on a relative basis it protected reasonably well, as I noted a moment ago, the UK Government Bond index was down over 16%, the fund’s bond exposure was down about half of that, so there was some relative outperformance there. Most of that is to do with the shorter duration nature of the fixed income exposure that we hold, and that really is less affected when we see rates rise. There was also some mixed exposure from our alternative assets. In a rising rate environment, we saw pressure on property, given the capital values of property kind of came under quite heavy pressure. But we did see some positives, notably from our gold exposure, which acts as an inflation hedge.

Lots of names on this slide and I won't go through it all given I've just given a fairly detailed rundown of what's happened, but this is just showing the top contributors and detractors of the fund over the first quarter of 2023, and the year to 2023. If we just look to the right-hand side first, it's the thematic equity names which is the most significant contributor over the period that Global Insurance Fund has really benefited from the higher rate environment that we've experienced. You'll see also that gold acting as an inflation hedge has been particularly helpful. And then, finally, one of the newer additions to our portfolios, although maybe a bit outdated now is the Fidelity Global Dividend Fund. What that fund does is invest in higher quality businesses around the world, which was added on the back of seeing this pick up in inflation in December 2021 and wanting to own higher quality businesses that are able to pass on that inflation to the underlying consumers. So that was played out relatively well for the portfolio.

On the negative side over the past 12 months, some of the alternatives have struggled. That Schroder Diversifies Alternative Assets Fund has seen some difficulty given the widening. We've seen between the listed price of some of these listed infrastructure and investment trusts and the actual net asset value. So a lot of them are now trading on discounts, but we are now beginning to see some good opportunities to add in that space. And then, as I mentioned, equity markets were relatively weak over the past 12 months and so some of our larger allocations to equity exposures have detracted. Flipping that, looking at 3 months, you'll see that actually equities in general, as shown by that S&P 500 tracker, some of the UK equity exposure have all been positive for performance given what I was just talking about. But actually, then some of those, some of those funds and exposures that were really positive over 2022 have begun to give back some of their performance, looking predominantly there at the health care exposure through Wellington Global Health Care as investors have a slightly higher risk, less defensive assets in the market.

With that, I will now hand over to Chris, who is going to give an update on what we're thinking going forward.

Christopher Lewis:

Thank you. I'm going to try my best not to touch this thing, because it's really squeaky, I don’t know if anyone noticed but I will spend the next 20 minutes or so going through our updated economic outlook and also what it means for our investment strategy as we move through this year.

So first I think it's worth noting that, you know we’ve been through the first 5 months this year, and compared to where we were at the start of this year, there's a lot more optimism around the economic outlook than we had in the back end of 2022. From a growth perspective, yes, we do still expect global growth to slow but there are signs of positivity around growth from both China, Europe, and increasingly from the US, and although a lot of the indicators still suggest that we should expect a US Recession, the scale of that is likely to be quite shallow and quite manageable from a global economic perspective. So it shouldn't I think, from a growth perspective, it's definitely brighter than we had expected coming into this year.

On the other side of that is the inflation picture, I'll touch on that more later. We know in the US, the core, and the headline, or the headlines in particular are dropping quite quickly. Core is proving to be a bit more resilient given the service sector, and how robust the labour market and consumer spending is proving to be.

The UK is a slightly different story. We know it's still quite a more significant challenge for the UK than other areas of the world. However, I would still expect, as you move through the next couple of months, you will see those headline figures start to perform more meaningfully, simply from a mathematical perspective. We see the year-on-year base effects start to come through. So if we look at where we are today, over 10%, the economic forecast for this month's print is around about, it is starting at 8%. So quite a significant fall and that is just a mathematical perspective. I still think that the UK faces probably greater inflationary challenges than the US, in particular, and it will still continue to be a problem for monetary policy decision-makers.

As we've seen this brighter economic outlook, sentiment has improved. I think sentiment has been the key driver of markets for much of this year. Investors have started to venture back into risk assets more meaningfully, particularly the large cap tech stocks as it's been noted, and that remains quite buoyant. There are still risks to this clearly, but the key difference where we are today is that there are both upside and downside risks, so it's quite, we are more balanced in our view on where we go from here than we were at the start of the year. We still think there could be a US recession, although we are less concerned about the overall impact of that.

So just looking at our, this is the current economic forecast from the Schroders’ economics team. You can see in 2023, a clear slowing in global growth. However, once they revise these, which they are in the current process of doing, I would expect that 1.9 figure to move higher. So, as I said, it is, the alloc is improving. What you can see from this chart, is that China makes up a vast majority of that growth this year, and to a lesser degree next year. So that is where there is an element of positivity. We know China is the second largest economy, we know it's been in a period of lockdown for the last couple of years and the hope of the expectation is that once we see that, those restrictions lifting, which they began to at the start this year, there's a lot of saving both domestically about 2.6 trillion was saved last year alone which could be spent on the domestic market. They're also a big player, as we know, in the international market, both from a tourism perspective and also imports of particularly heavy machinery and materials. So and largely, I would say, from an economic perspective that has played out quite well this year. We have seen the economic growth numbers, the economic activity numbers from China pick up and perform quite strongly. This hasn't yet been reflected in equity markets, or particularly in financial markets, more broadly and largely, I think there's still some reticence particularly from the domestic market to either guard and spend, and also to start investing money. You have to remember that they have been in lockdown for 2 years. It's going to take a long time for people to resume normal patterns of behaviour and for risk appetite to return to domestic investors. So I think once that starts to come through, which you may start to see in the second half of the year, we're hopeful that you could see better performance from the equity markets, reflecting what is a much brighter economic picture but it hasn't happened yet.

Outside of China, Europe, the outlook for Europe, as we know, has improved thanks largely to a warmer than expected winter. And these charts here, focus purely on that. So, firstly, on your left-hand side, we see that the German gas inventories, the dark shaded areas, the historic range and the dark blue line at the top is where we were, around the end of the first quarter, but very much towards the top end of that range. A warmer winter means they've had to draw less on their inventories. They remain more fully stocked and therefore gas prices have been allowed to fall as a result, and that is a huge benefit to the European economy. It's allowed them to effectively avoid recession whilst corporate earnings have been allowed to continue to grow, given their margins have been more defended. So again, a more positive and expected outlook for Europe, where they have a very good chance of avoiding recession altogether, and it is an area where actually equity markets have started to reflect that positivity.

Now, the US is more of a mixed picture. If you look at any of the economic indicators, hard or soft, and those economic indicators which historically have a very high or a very good track record of predicting a recession. They all suggest that a US Recession should definitely be on the cards. I've included the leading economic indicator, the Conference Board's collection of these, and as you can see historically when we've been at these levels that we currently are, you have always had, or certainly over the past 30 years, you've had a recession. And yet, where we are today, there's still uncertainty as to whether the Fed will be able to engineer a soft landing, whether it be able to contain inflation whilst avoiding a recession or not. And it makes it quite difficult, from our perspective, from an investment perspective, we need to understand where we are in the economic cycle in the US. I think the largest support for the US economy continues to come from both the fact that the labour market is very resilient, we haven't yet seen a high number of redundancies or growing unemployment, and as a result, household income remains quite robust and quite supported, whilst leverage, as you can see there remains very well contained. And that is largely because, it's really since 2010 during the period of QE, and also very much so as a result of the pandemic and the fiscal handouts. We've seen massive wealth creation for all of the US households allowing their leverage level so that the ratio of debt to liabilities to wealth to come down quite significantly. So where we are today, yes, obviously costs have gone up as the cost of living crisis has come through but not to the point where actually we need to worry too much around the ability of households to be able to pay off some of that or to meet their liabilities, particularly when you consider that most of them now have very long 30 year fixed mortgages at a very attractive rate. So that is not really a concern. So the support from the household, the continued spending of the consumer and the very robust labour market have allowed the US to avoid recession for the time being.

But the one concern I do have about this and the longest that I have about the US economy is the fact that we know that it takes between 12 and 18 months for the impact of rising interest rates to be felt in the real economy. We've been through a period of one of the fastest, the most significant interest rate rise cycle and I don't think that has yet fully been reflected in the economy, so we could yet see the labour market start to crack under that pressure which would feed more into the inflationary, or sorry more into the recessionary narrative. I still think there are very much risks to the US economy, and certainly in the short term it has proved to be quite resilient. Now it has been mentioned but I thought to spend a bit of time on it, but the main economic risk to the US, I still think, comes from what's happening in the US regional banking system. We can talk about the debt ceiling, I view that as less of an economic risk and more of a market risk but we can speak about that later. But from an economic perspective, what we have seen with the failure of First Republic, Silicon Valley Bank, is some of the largest regional bank failures in history, that is certainly going to put pressure on the US economy. Now I would say, I don't think this raises the risk of a systemic banking crisis, I think that has been very much, that has been pretty well contained. Firstly, by the higher, tighter regulation and the better capital position of the larger banks but also importantly by the response of the Federal Reserve to the disruption we saw. And the chart to the right shows the total assets on their balance sheet and the sharp line upwards in March 2023, was the response to the failure of Silicon Valley Bank. There was a very quick and quite decisive step into the market through emergency liquidity measures to ensure that the collapse of a single bank didn't prove to be a systemic risk event and that is important. I think compared to 2008, they now have the ability and the willingness to more meaningfully step in to contain these risks and as a result, we aren't too concerned that it could lead to a broader financial crisis.

What is likely to happen, and why there could be implications for the US economic growth is that we're likely to see tighter regulations, and we are likely to see the credit conditions may tighten further, lending standards are going to be much tighter. Now, why is this important? Well US regional banks, they make up, they represent 50% of all loans in the US and 80% of all commercial real estate loans. So they are incredibly important for the credit flow in the US economy and how the US economy functions. In an environment where regulation is tight, where credit lending standards are much tighter, you are likely to see the flow of credits slow through the economy and historically, that has led to tight slowing and economic activity. We've already seen economic activity indicators slow, quite meaningfully this year, but we could expect a bit more downward pressure on those indicators. So certainly I do think the banks and the impact of the banks hasn't yet fully been felt, and that could start to play out in the second half of the year.

Now, it could also have an implication for what happens in US interest rates, which as we know, has been a central preoccupation with Marcus for much of the last 18 months. So the Fed have been very much data focused on how they have communicated the path, the future path of interest rates over this period. They've been focused on 2 things: firstly inflation clearly and secondly, the labour markets. Now as I’ve mentioned with both of these inflation is coming down. It is still above long-term targets for the central bank but is far more manageable than it was 8 to 12 months ago. However, the labour market is, as I said, incredibly tight and suggests that they can continue to raise rates to control inflation without breaking the economy. So both of these key indicators aren't yet suggesting that they should imminently pause or cut rates. However, they are also very aware of the importance of financial stability for the economy and they are very aware of the importance of the regional banks for that. So there will be some thought as to whether they should be at least pausing interest rates to help support financial stability and growth in the US and I think that additional factor as a result of the disruption could play into, a sooner than expected, well previously expected pause in US rates.

And that's what we're seeing here. So this is the current market expectation for interest rates within the US, Europe and the UK. You can see in the US, we are effectively at the peak and the market is now pricing in about 2 to 3 or 3 to 4 rate cuts by the end of the year. Our view is that we don't, we think, yes, they could pause, but we're not expecting interest rate cuts this year, particularly if the economic outlook has improved. If it has improved, if they do avoid recession, there's less incentive for the Federal Reserve to cut rates. And that, I think from a market perspective, what that means is, you've seen certain sectors rally hard on the expectation that rates will come down, there will be further liquidity support. If we see a bit of reality coming into that, and rates started to be repriced higher, you could see a little bit more volatility in certain more growthy sectors.

As for eurozone and the UK, the market is still expecting interest rates to rise further, it is a very different profile in those regions. For the UK in particular, I feel that we could see a pause before 5% from where we are today. Again, it is largely to do with the construction of the housing market and the importance of the housing market to the economy. We know in the UK there's far more sensitivity around mortgage rates given the shorter fixed terms, and about 25% of the housing market has to refinance their mortgages this year. That is going to put a significant strain on household incomes. The Bank of England will be very aware of that, and probably look to support the housing market in particular, so that again will put a bit of pressure on them to potentially pause and look to all these cut rates to support growth in the back end of the year. So different profiles, informing certainly how we are approaching investment in different regions.

Now, what does this mean for our strategy? I will start with a statement, and what I note is that what we believe certainly is that an understanding of where we are in the economic cycle is very important to informing the type of assets that we want to own that have historically performed best in those economic environments. We still feel we are in an economic slowdown, potentially heading towards a recession. As a result, the assets we've been focused on the past year have been investment grade credit. We had a preference for investing grade credit relative to equity, where we felt there was a better risk return profile for holding that within a risk asset bucket. Our absolute return, again, did very well for us last year and was a key focus for us. More recently, we have been focused on building some of our more defensive assets in the portfolio and looking more at government bonds after the significant pricing we saw last year, whilst also maintaining some gold. As we move to the cycle, as we move into recession, our focus will shift, we will look far more at adding more risk to play the recovery. But certainly where we are today, we do remain quite cautious, and therefore the focus is still on ensuring that the portfolios have the right level of defensiveness.

The key question, I think we've seen in the first course in particular, equity markets have performed quite well, and the key question from a lot of clients, a lot of investors is when are we going to start adding more meaningfully to risk assets into equities? We have these 5 key indicators, which we look at to help take the emotion out of things and help focus on what are the fundamental drivers of equity, or what could the fundamental drivers be for equities. The first two I've covered, we do expect US interest rates to have peaked, and we could see a pause in that cycle which would be supportive. The arrows are how these indicators have moved year to date. The peak interest rates, it’s definitely improving and the economic backdrop has picked up, as I mentioned. Now the two key ones alongside that I say, are earnings and equity market valuations.

Now from an earnings perspective, you might expect that, if we assume that we're heading in a slowdown heading towards recession, we know the input costs for a lot of companies have gone up, margins could come under, and under more pressure, therefore you'd expect earnings to slow. We have seen a degree of that this year. Yes, we have seen earnings fall and that's shown by the change in this analyst forecast of the shaded bars. We have seen those analyst expectations for the year as a whole come down so far this year. They do still remain in positive territory. Analysts are still expecting earnings to grow for this year as a whole and that is still quite positive, given the economic backdrop of the concerns that we have. So whilst they have proved more robust, they have been more supportive. We do still have some concerns that we could see further weakness in earnings before the bottom of that cycle.

Valuations again, I wouldn't say valuations are hugely supportive. And that's largely, as I mentioned, the main driver of markets has been sentiment as people, as their sentiments improved, people have been willing to buy equities at a higher valuation. So we've seen broadly multiples move higher for this year, and that's shown by the blue diamonds, which is the current, the 12-month forward p. ratio of these different regions as at the end of April. You can see compared to where it was in December, the greens, we've moved generally higher across the board, particularly in the US, which is a long way above the 15-year average, which is represented by where the 2 bars meet, and actually looking quite expensive. So there isn't necessarily valuation support, particularly if we expect earnings to fall. So whilst there's positivity around economic growth and positivity around a peak in the Fed cycle, there are still reasons to be relatively cautious on equities.

And this means that where we've invested deities, we have had a very strong preference for owning higher quality companies, as Harry mentioned, with the ability to be able to better navigate these sorts of environments. Now Goldman Sachs very helpfully constructed these baskets of stocks, which is quite useful to monitor and 2 of the baskets they have are those companies, US companies, with strong balance sheets versus US companies with weak balance sheets. You can see that by the 2 lines relative to the market, which is the blue, the dark blue dotted line. And as both this year alone, there's been a very strong performance differential between these 2 different types of companies, and we've been very much focused on those higher quality companies which have relatively performed better. If we do move into recession as we move through the economic cycle, there is some historic precedent for focus on this. The quality companies have always, since the 1970s tended to perform better in periods of recession. So again, looking back through history and looking at the current environment, it lends itself to wanting to focus on higher quality, more defensive companies.

Outside of equities, we still like the best way bonds. We have reduced our allocation, we lack them less because evaluations are more expensive now, but the yields you're getting on investment grade corporate bonds are still attractive, particularly relative to the dividends and earnings yields you're getting on equity. So again, if you're expecting quite a volatile, uncertain market which may move sideways, having the carry, or having the income elements from bonds, does look relatively attractive from a total return perspective. So we do still think there is a place for investment grade credit in portfolios in this environment

Nominal government bonds within the fixed income space, again, is probably an area we are far more positive on than we have been for probably the last 10 years. Largely driven by the massive yield moves that we saw last year. So evaluations became far cheaper and we saw, as we know, the yields move higher, and as a result, obviously capital values fell quite significantly, which was quite painful last year. But being underweight, fixed income through that period was helpful and now adding back to fixed income and lengthening durations that we could potentially benefit from a change in the rate cycle seems to be quite a good strategy in that space. Now, one thing I’d also point out, the right-hand chart shows the correlation between equities and bonds. Historically, you would, and if you're looking at pure investment theory, you'd expect that defensive assets, like government bonds, should always or should tend to offer diversification benefits alongside risky assets. That works apart from in a period of incredibly high inflation, where interest rates, higher interest rates are affecting everything. As we've seen today, there's been a significant move back towards actually, you are getting better diversification benefits from owning government bonds. So cheaper valuations, more attractive incomes and better diversification characteristics are all reasons to want to own government bonds in multi-asset portfolios. And again, just a very similar chart I want to show for quality equity, and it's quite intuitive, but owning defensive assets like government bonds, like gold into a recession, has proved to be a better place to be than more risky assets historically.

So to summarize, where are we? We remain underweight equity. We are looking for opportunities to add, but we still have to come to some concerns - we're not rushing into doing so. We are overweight fixed income. We like credit. We also really like government bonds, and that's a big change compared to the last 10 years, and we still own some alternatives where we think there are interesting diversifiers, both from a risk management, but also a return-generating perspective. And I believe our long-term themes have probably been talked about a lot before, so I won't mention those. That's all from me so I will hand it back to you, Harry.

Harry:

Thanks very much, Chris. Yeah, so a couple more slides from me just to wrap things up, and I'll keep my hands off the lectern so it doesn't squeak. Thanks for pointing that out Chris. This slide just outlines kind of the actual implementation of the fund and hopefully, it ties quite nicely into what Chris has just been saying. So to take you through each column step by step, the column furthest on the furthest left, as you look at the screen, shows the equity allocation. As a reminder, the strategic allocation to equities for the Charity Multi-Asset Fund is 70%. So that's 65.8% as at the end of March is a slight underweight to the strategy, and that's for the reasons Chris was outlining here. You also know one of the bigger changes from this last update is that the allocation to UK equities has come down from about 9% to just under 4% now. What that has been is, we have taken the opportunity from the relatively strong UK equity performance that we saw over the past year and so far this year to reduce that allocation in line with the strategy of going 100% in global equities. Really, we see having the ability to invest globally in nature provides the best opportunities to get the best returns. In terms of other moves, you'll remember the way that I mentioned the Polar Global Insurance Fund, performing incredibly well in 2022, we took the opportunity to take profits there and recycle them into the Schroder Global Sustainable Fund.

In terms of alternatives allocation, which is there to smooth the returns of the fund and act as a diversifier, there hasn’t been too much change here, and we still believe that actually having a reasonable allocation to these alternatives is important in times such as the these when we're seeing a higher level of volatility. And I think the interesting one here is that allocation to fixed income and cash. As Chris has mentioned, we are probably the most kind of positive on fixed income as we've been in the past decade or so, which predates me so I take it under good authority from a couple of the gentlemen sitting at the back of the room there, that this is the highest allocation we've had in cash for a while. And as Chris mentioned, this is predominantly being driven by the better opportunities that we're seeing here with the pick up and yields that we've seen in this rising rate environment. And, as Chris said, we have added further here just last week we added to a UK guilt with the maturity of 2039. So we're really bringing out that duration exposure as well. And finally, you'll note that that cash allocation has come down. We still do hold a little bit of cash which is picking up a yield of around 4.5% now, which is positive.

In terms of what that breakdown looks like in the equity allocation of the portfolio, really, this is just for your detail. As Chris was saying, we do have preference for high quality areas in the market. The top 10 holdings there you'll see, Microsoft for instance, is a high quality name. The chart on the left-hand side just shows the under and overweights we are to individual sectors. Again, we have preference for those higher quality, more defensive areas of the index, and I think a good one to pull out here is health care where we have a material overweight.

And then finally from me, I know that, and I know you all know that the Charity Multi-Asset Fund doesn't have any restrictions on what we're able to invest in, unlike its sister fund, but we do still track and monitor the environmental, social, and governance statistics of what we're investing in. And what this slide does here hopefully, helpfully illustrates both the social and environmental impact of the fund. As you can see from the right-hand side, the fund has a lower carbon footprint than it would if you were just to invest in a basket of global equities and on the left-hand side it has a better social or an improved social benefit. And just briefly, the social benefit is calculated from using Schroders’ proprietary SustainEx tool, and that tool aims to quantify both positive and negative externalities through a common monetary lens at both company and fund level. The tool essentially examines over, well hundreds and hundreds of academic and industry studies of social and environmental impacts, and focusing on the largest of those impacts in the world today which are having benefits and costs to the individual underlying companies within the fund.

I will hand back to Naomi just to wrap up, and then to start taking questions.

Naomi:

Thanks, Harry. So just to quickly touch on client service. First of foremost, if you don't receive any of our updates, any of our newsletters or webinar invitations, please do let us know and we'll add you to our mailing list.

So our next update for the Charity Multi-Asset fund is on the 8th of November later on this year. We also have some Charity Trustee Investment training here at 1 London Wall Place, and it will also be available online. Part One will be on the 20th of June 2023, and part two will be on the 21^st of September, but I do encourage you to go on to our website for more information.

And just a final note as I mentioned earlier, our charity authorised investment funds do have an independent committee that represents the interest of unit holders and more information is available on our website. But if you are interested in becoming a committee member, please don't hesitate to come and talk to me. We'll be more than happy to talk to you about that.

So I think we can move over to questions now, if Chris and Harry, can I bring you up here please?

Yes, we do have quite a few actually. Yeah okay. So first question actually for you, Chris, is the inflation plus 4% target still achievable?

Chris:

I think there are two answers to this. In the short term, I think any manager would probably struggle to hit that inflation target when you have inflation prints at plus 10% and financial assets are struggling. But we would say that over the long term, over a longer term cycle we still expect to be able to achieve and beat that benchmark with the current asset allocation and approach that we have, so we still have confidence in our ability to do so over the longer term, and it is for us, a long term benchmark.

Naomi:

Brilliant. Thank you. Next question actually for you, Harry. Will you continue to maintain the distribution policy given the challenging current economic environment?

Harry:

Yeah, it's a good question and a question we've had quite a lot given the increasing need of a lot of our investors to be able to continue to pay out reasonable distributions for their grants and the like. In short, yes, we are still committed to paying a 4% distribution, 1% per quarter. We think this is achievable and actually, we've seen growth in the income element of that distribution over the past year or so. Going back to what we've been talking about the increasing allocation to fixed income, for example, where we're beginning to see a much better pickup in the natural yield has meant that actually the income portion of that total return distribution has increased, so absolutely we continue to be committed and think it's achievable to continue paying that 4% distribution.

Naomi:

Brilliant thanks, Harry. And then final question actually for you, Chris, and reads what is likely to be the next asset allocation move within your portfolios?

Chris:

I mean I’m hopeful that the next big asset allocation move will be adding back to equities, and adding that to risk as the economic outlook improves, and some of the concerns we have start to dissipate.

That is obviously very much caveated by the fact that we live in an ever-changing environment, and it could be the case that we are forced to move more defensively in the short term. But certainly, the way we tend to operate is looking at longer term business cycle shifts and where we are to date. That's where we think we're going to be in about 12 months. We feel we are certainly moving into a period of opportunity to add back risk. So that would be the likely move that we make.

Naomi:

Okay. Thanks, Harry and thanks Chris. Just to round up, thank you to all for coming in today. Thank you for those online again. If you've got any questions or need anything from any of us please don't hesitate to contact one of our team. And, please, I just want to say thank you for your continuous support. Thank you very much.