Model Portfolio Service - Cazenove Capital...Secretary Larry Summers put it, is that “economic...

Model Portfolio Service Sustainable Models

Q2 2020 Review

For financial advisers and their clients

Sustainable Models

Contents2Market update from our Chief Investment Officer, Caspar Rock

3Q2 Portfolio Positioning from Portfolio Director, Steven Rooke

4Strategic and Tactical Asset Allocation

5Performance

6Underlying Portfolio Holdings

7Costs

8Sustainability dashboard

Cazenove CapitalModel Portfolio Service, Q2 2020

Sustainable Portfolios 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.

MPS Quarter 1 2019 Review1

MPS Q2 2020 Review 1

Sustainable Models

Platform availability

Ratings and awards

Performance monitoring

Risk profilers

1MPS Quarter 1 2019 Review

MPS Q2 2020 Review2

Sustainable Models

Caspar RockChief Investment Officer

Cazenove Capital

What has happened in markets?“Stock markets have shrugged off the worst economic data on record as investors look ahead to a strong recovery. The coming months will reveal whether their optimism is justified”

As global stocks recover from the coronavirus shock, are investors too optimistic?Global equities have staged an impressive recovery from their descent into a bear market earlier this year. In the case of the US, they even managed to erase the year’s losses, before wobbling again last month. Markets have been quick to latch on to good news – and very willing to overlook the bad. In most developed markets, coronavirus cases have been on a clear downward path. On the economic front, the US economy added 2.5 million jobs in May, even though economists had been expecting a larger number of job losses. That still leaves net job losses at close to 20 million. However, the change in the direction of travel is significant and suggests that the US economy may be on the road to recovery. Investors are increasingly looking at coronavirus as a one-off shock with little long-term impact. Indeed, earnings for companies in the MSCI World Index are expected to regain 2019’s level by the end of next year, according to data from Goldman Sachs. Investors are effectively “looking through” this year’s reduced profits in the expectation of a quick return to normality. A strong show of support from the Federal Reserve, with its open-ended commitment to the banking system and credit markets, has helped.However, as the global economy emerges from lockdown, there are challenges ahead which suggest that the recovery may not be as fast or strong as many investors hope. One indication of this is the uneven nature of the equity rally. Stocks in sectors that depend on economic recovery, such as financials, continue to trade well below where they started the year. Those sectors that are less dependent on robust economic growth, chiefly technology, have led the rally.

The long shadow of the pandemicSadly, the threat of coronavirus is not simply going to disappear – at least until a vaccine becomes widely available. Cases are still rising in emerging markets, particularly Brazil. There are also worrying signs that the spread of the virus may not be under control in parts in the US. In early June, for instance, Texas reported a record number of patients in hospital with coronavirus, just over a month after ending its lockdown. Fear of contagion will be with us for many months and this will impact businesses. While some may experience a rush of pent-up demand on reopening, others will see months of lower activity as people avoid contact. This has been the experience of China – where supply has largely returned to normal, but demand remains subdued. The combination does not bode well for profitability. Demand could also take a hit as a result of reduced confidence. Consumers and businesses may be understandably reluctant to make large purchases and investments while they face the risk of a second wave of infections – and potentially further lockdowns.

This more cautious view of reopening has prompted Schroders’ economics unit to lower its global growth forecast for this year and next. Next year’s rebound in GDP of 5.3% is now not quite enough to offset this year’s contraction, the worst since the 1930s.

The political temperature rises and the US election loomsBy and large, Western governments enjoyed far greater public support than they might have expected in dealing with the pandemic. It was perhaps inevitable that as the acute phase of the health crisis passed, division and conflict would return to public life. In the UK, this was apparent in the widespread outrage at Dominic Cummings’ questionable travels across England. More worryingly, hundreds of thousands of Americans have taken to the streets to protest racial inequality and police brutality, following the killing of George Floyd. There have been protests in solidarity in many countries around the world. So far, stock markets have shrugged off the protests, as they have so much distressing news this year. However, this is an election year in the US and the impact of the unrest is far from clear. Taking a tough line on protesters may help President Trump establish himself as the “president of law and order”. By contrast, the protests and Trump’s response may galvanise support for Joe Biden. One outcome that would come as a shock to markets is a Democrat victory in both the presidential and Senate races. This would allow Biden to deliver on his campaign pledge to reverse Trump’s tax cuts, which provided a significant boost to company profits and household spending. Electoral calculations are likely also influencing the US response to China’s imposition of security legislation on Hong Kong, with the Trump administration initially taking a hard line. While its position has since softened, the risk of renewed trade tensions between the US and China is high. Needless to say, this would not help the global recovery from a pandemic.

Towards a new normal History suggests that pandemics can leave long-lasting scars on an economy. Growth suffers as consumers and businesses become more inclined to save than spend or invest. Interest rates remain at very low levels as central banks attempt to stimulate demand. In recent months, investors have shown an impressive ability to shrug off shockingly weak economic data relating to the period of lockdowns. We expect they will pay closer attention to indicators that shed light on how quickly confidence is recovering. They may be less forgiving if it becomes apparent that economic activity is not rebounding as quickly as they currently expect.

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



Sustainable Models

How are the portfolios positioned?

Steven RookePortfolio Director,

Manager of Cazenove Capital Model Portfolio Service

Equity markets have rebounded swiftly, helped in no small part by the huge liquidity supplied by central banks and governments”

The rally saw a wide disparity of returns between geographic regions and sectors

During the quarter we added two new impact funds

This offered a good opportunity for active managers to take advantage

Equity markets staged a remarkable recovery in the second quarter of the year, with the MSCI World Index up 20% in sterling terms recovering the losses made in the first quarter. There was however a wide disparity in returns between geographic regions and company sectors. The US once again has led the way helped in no small part by the dominant technology sector with the share prices of both Amazon and Apple up over 40%. Small and medium-sized companies also outperformed their large-cap peers, bouncing back from a bruising first quarter for these less liquid areas of the market. The UK once again struggled, with Brexit continuing to deter overseas investors, whilst it was no surprise to see the more defensive sectors such as utilities and consumer staples not keeping pace with the rally.

These conditions were ripe for active managers to take advantage and the models benefitted here, with the likes of ASI UK Ethical Equity, Brown Advisory US Sustainable Growth, Wheb Sustainability and Impax Environmental Markets posting good returns. The Brown Advisory US fund is playing the tech theme through the likes of Microsoft and Amazon. The managers continue to actively engage Amazon management over working conditions, particularly in the current environment, with the company announcing they are to spend $4bn on the likes of PPE, COVID testing, wage increases and social distancing measures. Impax returns were boosted from several renewable energy and energy efficiency names such as Xinyi Solar, Nibe industrier and Altair Engineering.

With equities stealing the limelight, returns from bonds and alternatives were muted in comparison. Government bonds were modestly positive, although

our index-linked gilt position was up 13% due to moves in longer-dated bonds, whilst more risky assets such as corporate bonds were also up strongly helping the Rathbone Ethical Bond fund. Within alternatives, Civitas Social Housing had a very good quarter following a good trading statement with the dividend now fully covered, whilst the Atlantic House Defined Returns fund rebounded well following a tough Q1.

We rebalanced the models twice during the quarter. In April we initiated a position in the Liontrust Sustainable Future UK Growth fund and consolidated our UK positions by selling the Kames UK Ethical and Schroder Responsible Value funds. We also broadened our overseas equities by adding the Liontrust Sustainable Future European Growth and Vontobel mtx Sustainable EM Leaders funds and selling the Stewart Worldwide Sustainability fund which had held up well during the market sell-off in Q1. Elsewhere, we improved the quality of our bonds by buying the Vanguard UK Government Bond Index and selling the Kames Ethical Corporate Bond and Schroder EMD Absolute Return funds. Conventional gilts tend to exhibit a more negative correlation to global stock markets and should better protect models in the event of further stock market weakness. In late June we further reduced our UK equity exposure as well as selling out of the Hermes Impact Opportunities Fund using the proceeds to re-invest into two global focused impact funds – M&G Positive Impact and Montanaro Better World. We have also made a change within our alternatives, selling the Atlantic House Defined Returns Fund and initiating a position in iShares Physical Gold.

Social Update - gold: As part of our diversified approach, we will at times hold asset classes that do not directly contribute toward our social objectives, such as gold. The investment case for holding gold has been clear as has been demonstrated during the turbulent recent market environment. The ethical case is less obvious and the commodity comes with social and environmental challenges. We have examined our position and are comforted that it remains appropriate for a sustainable mandate, as the underlying exposure is to the gold that has been mined post-2012, where new regulatory standards were put in place to ensure appropriate environmental and labour standards are met.


MPS Q2 2020 Review4

Sustainable Models

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 Sustainable models are unconstrained, investing in open-ended funds, ETFs and Investment Trusts. The below illustrates the strategic and tactical asset allocation of the Sustainable models.

Long-term strategic asset allocation

Tactical asset allocations

Volatility Higher

Return

Lower

UK equity Overseas equity Absolute return CashFixed income Other Alternatives

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

10

15

43

4

4

414

36

6

Balanced

812

18

50

5

5186

64

18

73

9

19 13

73

32

2

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



Sustainable Models

How are the portfolios performing?

Sustainable Portfolios 3 Month Return 12 Month Return 24 Month Return 3 Years 5 Years Cumulative Return since launch*

Cautious 8.3% 4.0% - - - 11.1%

Balanced 11.1% 4.0% - - - 13.6%

Growth 13.8% 3.8% - - - 15.1%

Aggressive 16.3% 2.7% - - - 16.2%

Equity Risk 17.5% 3.0% - - - 17.5%

Sustainable Portfolios Q2 2019 - Q2 2020 Q2 2018 - Q2 2019 Q2 2017 - Q2 2018

Cautious 4.0% - -

Balanced 4.0% - -

Growth 3.8% - -

Aggressive 2.7% - -

Equity Risk 3.0% - -

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 amount originally invested.Source: Cazenove Capital, as at 30 June 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 31 December 2018. 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.

*Sustainable portfolios launched 31 December 2018.


MPS Q2 2020 Review6

Sustainable Models

All holdings

The underlying portfolios in more detail

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

Equities

UK

SLI UK Ethical 0.8% 2.6% 3.7% 5.0% 5.7%

Liontrust SF UK Growth 0.8% 2.5% 3.7% 5.2% 5.7%

Trojan Ethical Income 2.2% 3.3% 4.7% 7.4% 7.1%

Total 3.8% 8.4% 12.2% 17.6% 18.5%

Europe ex. UK Liontrust SF European Growth 1.1% 2.2% 3.1% 3.7% 4.3%

Total 1.1% 2.2% 3.1% 3.7% 4.3%

US Brown Advisory Sustainable Growth 4.3% 8.7% 11.5% 13.0% 15.9%

Total 4.3% 8.7% 11.5% 13.0% 15.9%

Emerging Markets Vontobel MTX Sustainable Emerging Markets Leaders Fund 1.6% 2.5% 3.9% 5.1% 6.9%

Total 1.6% 2.5% 3.9% 5.1% 6.9%

Global

FP Wheb Sustainable 1.7% 4.1% 5.1% 6.9% 7.3%

Impax Environmental Markets 4.0% 7.7% 11.8% 15.2% 16.9%

Schroder QEP Global ESG 3.1% 4.6% 7.1% 10.1% 11.0%

M&G Positive Impact 1.8% 4.0% 5.2% 6.6% 7.2%

LF Montanaro Better World 0.9% 2.0% 2.7% 3.3% 4.0%

Total 11.5% 22.5% 32.0% 42.0% 46.3%

Equities total 22.4% 44.4% 62.6% 81.5% 91.8%

Bonds

UK

Vanguard UK Inflation-Linked Gilt Index 9.6% 5.8% 4.5% 1.6% 0.0%

Rathbone Ethical Bond 8.1% 5.7% 2.6% 1.5% 0.0%

Threadneedle UK Social Bond 8.3% 5.5% 2.6% 0.0% 0.0%

Vanguard UK Government Bond Index 7.9% 4.7% 3.5% 2.3% 0.0%

Total 33.9% 21.8% 13.2% 5.4% 0.0%

US Lyxor US TIPS ETF GBP hedged 9.0% 7.4% 5.1% 0.0% 0.0%

Total 9.0% 7.4% 5.1% 0.0% 0.0%

Bonds total 43.0% 29.2% 18.3% 5.4% 0.0%



Sustainable Models

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

Alternatives

Commodities iShares Physical Gold ETC 5.6% 3.6% 3.6% 2.6% 2.5%

Total 5.6% 3.6% 3.6% 2.6% 2.5%

Other

BBGI 2.4% 2.3% 1.9% 1.8% 2.2%

Greencoat UK Wind 2.6% 2.5% 2.0% 2.0% 0.0%

Foresight Solar 2.3% 2.2% 0.0% 0.0% 0.0%

Civitas Social Housing 2.3% 2.3% 2.2% 0.0% 0.0%

Trojan Ethical Fund 5.9% 4.1% 2.5% 2.1% 0.0%

Total 15.4% 13.4% 8.7% 5.8% 2.2%

Alternatives total 21.0% 17.0% 12.2% 8.3% 4.7%

Cash - GBP 13.6% 9.5% 6.8% 4.8% 3.5%

Cash total 13.6% 9.5% 6.8% 4.8% 3.5%

Total 100.0% 100.0% 100.0% 100.0% 100.0%

Source: Cazenove Capital as at 30 June 2020.

Sustainable Cautious Balanced Growth Aggressive Equity Risk

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

Ongoing charges 0.49% 0.64% 0.73% 0.87% 0.91%

Total 0.79% 0.94% 1.03% 1.17% 1.21%

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

What are the costs?


MPS Q2 2020 Review8

Sustainable Models

Sustainability dashboard MPS Sustainable Growth vs. MSCI AC World

Equity Sector Exposures (% total portfolio)

Tobacco 0.5% Alcohol 0.8%

Armaments 0.7% High Interest Loans 0.0%

Gambling 0.2% Fossil Fuels 1.2%

Sector exposure based on MSCI revenue data, as at 30 June 2020.

Planet People

Carbon intensity 88 vs. 145 Mt CO2

Women on Boards 24% vs. 23%

Emission Reduction Policy 76% vs. 83%

Human Rights Policy 60% vs. 65%

Water intensity 28 vs. 38m3 H2O

Volunteering Program 70% vs. 73%

Source: Refinitiv. Aligned to UN Sustainable Development Goals. Intensity is per $1m sales. % companies with volunteering programs, emission reduction and human rights policies shown.

Source: Carbon footprint is based on the average carbon intensity (tonnes CO2e/ $mn of revenues) of portfolio companies, weighted by their position size based on MSCI data. Social benefit is calculated using SustainEx, a proprietary impact measurement tool created by Schroders: MSCI AC World +0.9%, Portfolio +6.4%

Renewable energy

Green bonds

Energy transition

Sustainable farming

MPS Sustainability

GrowthPortfolio

Carbon footprint reduced by 60%

Our companies Global equities

Social Bonds

Social Housing

Healthcare

Education

Social benefit increased 6x

Our

co

mpa

nies

Glo

bal

equi

ties

Investing for people Investing for planet

Impact Less than half the carbon emissions, six times the social benefit



Sustainable Models

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

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