Charity Investment Seminar Round Up
The 2014 Charities Investment Seminar was held on 26 February in the familiar surroundings of the Royal Geographical Society. It was the first client event following the acquisition of Cazenove Capital Management by Schroders and representatives from both companies were there to welcome their 240 guests.
Markets have had an astonishing run in 2013 and value is undoubtedly harder to find at the start of 2014. This year’s Cazenove Charities Investment Seminar focused on finding the strongest investment opportunities at a time when economic growth is well set, but also well reflected in stock market prices.
Andrew Ross, the chief executive of the new combined entity, made the opening remarks, stating that the decision to develop the charities business under the Cazenove Capital Management (CCM) name “clearly illustrates our independence within the Schroder group”.
His words were echoed by Michael Dobson, the chief executive of Schroders plc, who described the charity sector as being “incredibly important” to the group, and that acquisitions for the firm were highly unusual. Schroders and Cazenove Capital are culturally similar in taking long term views and in both businesses clients genuinely come first. CCM clients will now benefit from a group that has scale, additional resources and increased investment talent. He, and others, were acutely aware that this scale and combined position created the largest manager of charity assets with a responsibility to the sector.
After these opening words, the seminar was divided into two sessions. During the first, the focus was economist Richard Jeffrey’s view of both the world and asset classes. Peter Harvey then discussed the debt markets and was followed by David Docherty and Matt Hudson and their views on equities.
The emerging ‘new normal’
Richard Jeffrey began by discussing growth. While economic activity will continue in 2014, growth will not resume its pre-crisis average of 3.4% per annum. He expected the ‘new normal’ sustainable growth rate to be close to 2.0% per annum although 2014 could well turn out to be stronger (although remains very sceptical of the Bank of England’s latest forecast of 3.75%).
Whilst the UK has been showing encouraging signs of recovery, there are concerns that faster productivity growth is required. So far the momentum had been largely consumer led with employment only rising slowly and real wage growth still negative.
Looking outside the UK, Richard also questioned the robustness of current data reported in the US, citing issues related to the adverse weather. He also noted that figures suggested, tapering Quantitative Easing was already leading to a rise in mortgage rates and a fall in both mortgage applications and residential investment. With regard to the equity markets, he feels that the speed of the recovery does not warrant the current strength of the indices.
The ‘shadow banking’ business in China was highlighted as a cause for concern. This unregulated lending has created huge credit growth, which will be difficult to rein in without having a negative impact on the economy and potentially leading to much lower property prices. Emerging markets have been feeding off developed market trade deficits, but as the latter have faced slower growth and become more efficient, there is less demand for EM products and services. In Japan, Richard remains to be persuaded about the success or otherwise of Abenomics. He also feels that it will take until late 2014 or 2015 before there is clear evidence. Richard admitted that Europe was behind both the UK and US in the recovery cycle. He is concerned that even economies as strong as Germany are relying on demand from Asia. He described countries such as Italy and Spain as still “structurally challenged”.
The “Holy Grail” for 2014 will be to create a virtuous circle whereby stronger business investment leads to improved productivity and an expansion in profit margins. These margins will enable household income to rise in real terms and bring sustained growth in demand, which in turn leads back to stronger business investment.
Peter Harvey, manager of the Cazenove Strategic Debt Fund, (a fund with structurally low exposure to interest rates), explained that he looked for performance through identifying high yielding credit opportunities, rather than taking advantage of a rising yield curve and investing for longer periods. In summary, he was encouraged by signs of recovery in Europe, although clearly there remain concerns about the southern peripheral countries. As such Mr Draghi and the ECB are likely to remain accommodative with yields remaining low for the time being. As such the environment remains challenging but opportunities for credit remain.
David Docherty and Matt Hudson, UK Equity managers reviewed a strong year for the Growth Trust for Charities and the Equity Income Trust for Charities. Having discussed portfolio compositions, they concluded by saying that the global economy was improving and so there would be renewed focus on the normalisation of market conditions. Whilst there clearly remain risks, equity valuations are supportive and they believe there was good scope for continuing strong performance and dividend growth.
After the break, there were three presentations. In the first, Marcus Brookes, head of the multi-manager team provided a multi-asset view of themes prevalent in markets and an insight into third party fund selection. Kate Rogers from the Schroders Charities team then focused her comments on issues facing charities themselves and introduced the Charity Multi-Asset Fund, placing it in the context of sustainable levels of expenditure.
Marcus Brookes, Head of the Multi-Manager team described the process used by CCM for fund selection and highlighted the extra opportunity and resource that he now had since relocating to join the Schroders’ multi-asset team in Gresham Street. He began by saying that whilst you cannot predict a fund manager’s future performance, there were factors that should be taken into account when deciding upon or reviewing an investment. These include present and past performance and an analysis of whether the process that achieved these returns is intelligible, robust and repeatable.
He then provided an outlook and, following the trend of the day, agreed that equities were currently the most attractive asset class. He had a preference for cash over bonds, which he considered too expensive. He also considered the US to be costly, preferring Europe and Japan. With emerging market prices falling, Marcus thought that this was an area to consider soon, but not just yet.
Kate Rogers, Co-manager of the Charity Multi-Asset Fund continued the Multi-Asset theme, but, given her audience, discussed it in the context of charities and the implications for them. She stressed the importance of diversity and showed compelling evidence that the equity returns achieved in the eighties and nineties were the exception, rather than the rule. As such, trustees should consider investments that spread the risk, dampen volatility of returns and provide a regular income stream. She introduced the Charity Multi-Asset Fund, a Common Investment Fund that looks to exploit these characteristics.
She then explored the trustees’ current dilemma of shrinking income at a time of increasing need and, developing this issue further, whether additional grants should be made now, even if this is at the cost of diluting capital, which may have implications for future beneficiaries.
Trends and technology in the future
In the final keynote speech, David Rowan gave us a fascinating insight into ‘Trends and technology in the future’. With film clips showing past predictions of what the future held and using phrases like “The future is not unknown” and “The future is here”, we had a fascinating presentation from David Rowan, Editor of ‘Wired’ magazine. We were given a glimpse of how almost everything in our lives could eventually be controlled by a mobile device, “the physical world and the digital world are merging”. Whilst on the subject of the mobile telephone, it was comforting to hear that consultants can occasionally get it wrong. In 1983 McKinsey was asked to write a report on the likely demand for mobile telephones by 2000. After much consideration, they thought that there would be 900,000 in use in the United States. There were in fact 109 million! He did also have one investment tip for our portfolios – catch an asteroid! Apparently one asteroid potentially contains more platinum than has ever been mined on earth.
Giles Neville, the Head of Charities, concluded proceedings, saying how much he looked forward to working with new colleagues and clients. He promised that our objective was to be the premier investment manager of charitable funds, be they large or small. We will look to maintain, expand and improve, not only in terms of performance, reporting and service, but in all other aspects ranging from research papers, to events and trustee training.
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