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Decarbonisation, demographics and deglobalisation: Sustainable Multi-Asset Fund Strategy Evolution

The 3D Reset

28/03/2024
CMAF/ SMAF 3D Reset Article

The Sustainable Multi-Asset Fund (SMAF) aims to achieve a return of UK CPI inflation plus 4% over a rolling ten-year period. For investors who select distribution units, the aim is to maintain the real capital value over the long term while producing a stable and sustainable total return distribution of 4% per annum. This approach is designed to balance the needs of both current and future beneficiaries.

The Fund was launched in 2018 and, since then, the investment strategy has continued to evolve, adjusting to shifts in the economic and market environment. We recognise that the global economy is now in a phase of considerable transformation. This was initially precipitated by the pandemic closely followed by the war in Ukraine, but in reality, these tragic events served to crystallise changes that have been building for some time.

As we navigate through these significant shifts, we have identified three key trends - deglobalisation, decarbonisation, and demographics, collectively referred to as the "3D Reset". These trends are shaping the global economy and influencing our investment strategy. In the following sections, we explore what the 3D Reset entails, its investment implications, and how we are evolving our strategy to ensure the Fund continues to deliver on its objectives.

What is the 3D Reset

The “3D Reset” refers to the three “Ds” of deglobalisation, decarbonisation and demographics. We believe these ongoing trends have had and will continue to have significant long-term implications for investors.

Understanding the 3Ds—how they affect the global economy and what that means for markets might be the key to deciphering what comes next and where the opportunities are.

What are the 3Ds?

Demographics: Changing demographics – specifically a predicted slowing of global population growth – will have a huge impact as employers face pressure to compete for a tighter talent pool and maximise the efficiency of its existing workforce. Companies will also look to invest in productivity-boosting technology to protect profit margins, like hastening the more widespread adoption of robotics and artificial intelligence.

Deglobalisation: The Covid-19 pandemic and rising geopolitical tensions have heralded a new era where greater supply chain resilience and security is a priority. These winds have and will encourage greater nearshoring of key sectors, such as manufacturing, which in turn will have implications across a wide range of sectors and asset classes.

Decarbonisation: Recent geopolitical tensions have accelerated the need for countries to reduce their dependence on traditional energy sources such as fossil fuels; in turn, this has strengthened appetites for action on the energy transition. An estimated $100 trillion will need to be spent across the energy industry by 2050 to reduce carbon emissions to the levels that would achieve the net zero goal.

What are the implications?

Inflation

In the near term, central banks have probably already done enough to lower inflation from the peaks in late 2022, when UK inflation hit a 40-year high. But even once the immediate problem is addressed, inflation pressures are set to persist in the new economic regime.

First, on the demographic front, ongoing worker shortages could push labour costs higher. Since the pandemic began, the labour force participation rate has fallen both in the United Kingdom and in other economies, such as the United States. In December 2022, there were 11 million unfilled job vacancies in the U.S., with only 5.7 million unemployed people. Basic economics dictates that where demand exceeds supply, prices, or in this case wages, must rise.

Next, deglobalisation is adding to long-term inflationary pressures. The pandemic further intensified the already strained relationship between the West and China as widespread blockages in the Chinese supply chain exacerbated inflation and highlighted the over-reliance on imports. The Russia-Ukraine conflict exposed similar dependencies, particularly regarding energy and agriculture in Europe.

In response to the disruption, we are seeing a new world order develop. Companies are diversifying their production and relocating it nearer to home in a process known as “reshoring.”

This means one of the great deflationary forces of recent decades, the growth of low-cost production in China, may have run its course. Globalisation can still play a role in lowering costs as production moves to new countries, but the easy gains—the globalisation dividend—could be over as firms place increasing importance on security of supply.

The third D of decarbonisation is also likely to have a significant inflationary impact. Although the cost of producing renewable energy is falling sharply, the cost of replacing carbon-based energy along with more aggressive carbon taxation policies, which will be needed if governments are to mitigate carbon emissions to meet policy commitments, will raise energy inflation for many years to come.

Together, it is therefore likely that these “3Ds” will result in higher and more volatile inflation.

Consequently, we have revised our assumption for long-term UK inflation upwards, from 2% to 2.4%.

We still expect to generate returns ahead of inflation over the long term. However, as we move into this new economic regime, we are evolving the strategic asset allocation of the fund to ensure we can continue to target Inflation +4% within the same risk profile whilst taking advantage of the trends.

To counterbalance the effects of higher inflation, we are modestly increasing the neutral equity allocation to 75% from the 1st April 2024. The funding for this adjustment would be sourced from alternatives and commercial property.

CMAF 3D Reset Table

Source: Cazenove Capital, 2024

This evolution underscores our commitment to delivering the best possible outcomes for our clients by continually adapting our strategies to the evolving investment landscape.

If you have any questions please get in touch with your Cazenove contact.

Disclaimers, risk warnings, company particulars and regulatory status

Disclaimers

We comply with our obligations under the Financial Services and Markets Act 2000. The disclaimers set out in this section do not exclude or restrict liability for any duty to clients under this Act or any other applicable regulatory authority. Nothing in this document should be deemed to constitute the provision of financial, investment or other professional advice in any way. The material in this document is for information purposes only and the services, securities, investments and funds described may not be available to or suitable for you. Not all strategies are appropriate at all times.

We have taken all reasonable care to ensure that the information contained within this document is accurate, up to date, and complies with all prevailing UK legislation. However, no liability can be accepted for any errors or omissions, or for any loss resulting from its use. Any data and material provided ahead of an investment decision are for information purposes only. Unit and share prices are for information purposes only, they are not intended for trading purposes. We shall not be liable for any errors or delays in these prices or in the provision of this information, or for any actions taken in reliance thereon. We reserve the right to amend, alter, or withdraw any of the information contained in this document at any time and without notice. No liability is accepted for such changes.

This document may include forward-looking statements that are based upon our current opinions, expectations and projections. We undertake no obligation to update or revise any forward-looking statements. Any such information is not a guarantee of any future performance. There is no assurance that any forecast or projection will be realised.

All data contained within this document is sourced from Cazenove Capital unless otherwise stated. Where FTSE International Limited (“FTSE”) © FTSE (2023) data is used, “FTSE®” is a trademark of London Stock Exchange Plc and The Financial Times Limited and is used by FTSE International Limited under licence. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

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Risk warnings

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Impact investing risk: The objective of impact investing aims to select investments that make a positive impact on the planet and people with the majority of portfolio investments aiming to solve the key challenges represented by the UN Sustainable Development Goals (for example, gender equality; affordable and clean energy; no poverty).  Such investment strategies may limit exposure to some companies, industries or sectors as a result portfolios may forego certain investment opportunities, or dispose of certain holdings, that do not align with the firm’s impact criteria. Impact investments may also potentially be higher risk, less liquid and provide lower returns than the investments selected for broader portfolios with similar risk profiles. As investors may differ in their views of what constitutes impact investing, the portfolio may also invest in companies that do not reflect the beliefs and values of any particular investor.

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Sustainability including environmental, social and governance (ESG)

SustainEx™ provides an estimate of the net “impact” that an issuer may create in terms of social and environmental “costs” or “benefits”. It does this by using certain metrics with respect to that issuer, and quantifying them positively (for example by paying ‘fair wages’) and negatively (for example the carbon an issuer emits) to produce an aggregate notional measure of the relevant underlying issuer’s social and environmental “costs”, “externalities” or “impacts”. SustainEx™ utilises and is reliant on third party data (including third party estimates) as well as Schroders’ own modelling assumptions, and the outcome may differ from other sustainability tools and measures. Where SustainEx™ relies on data and estimates produced by third parties, Schroders seeks to ensure that such data and estimates are accurate, but Schroders cannot and does not warrant the accuracy, completeness and adequacy of such third party data and estimates. Like any model, SustainEx™ will evolve and develop over time as Schroders continues to assess, refine and add to the metrics and their relative contributions. Generating SustainEx™ scores involves an element of judgment and subjectivity across the different metrics chosen by Schroders, and accordingly Schroders does not accept any liability arising from any inaccuracy or omission in, or the use of or reliance on, SustainEx™ scores. As the model evolves, changes made to how metrics are applied may result in changes to the SustainEx™ score of any issuer and ultimately the overall fund/portfolio score. At the same time, of course, the issuer’s SustainEx™ performance might improve or deteriorate. Schroders’ proprietary sustainability tools including SustainEx™ may not cover all of a fund/portfolio’s holdings from time to time, in which case Schroders may use a range of alternative methods to assess the relevant holding. In addition, certain types of assets (such as cash and certain equivalent securities) are treated as neutral and are therefore not considered by our proprietary tools. Other types of assets such as equity indices and index derivatives may not be considered by our proprietary tools and in such case would be excluded from a product’s sustainability score.

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This article is issued by Cazenove Capital which is part of the Schroders Group and a trading name of Schroder & Co. Limited, 1 London Wall Place, London EC2Y 5AU. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. 

Nothing in this document should be deemed to constitute the provision of financial, investment or other professional advice in any way. Past performance is not a guide to future performance. The value of an investment and the income from it may go down as well as up and investors may not get back the amount originally invested.

This document may include forward-looking statements that are based upon our current opinions, expectations and projections. We undertake no obligation to update or revise any forward-looking statements. Actual results could differ materially from those anticipated in the forward-looking statements.

All data contained within this document is sourced from Cazenove Capital unless otherwise stated.

The value of your investments and the income received from them can fall as well as rise. You may not get back the amount you invested.