A New Locum for Clearwater!

Firstly, a very Happy New Year (if it’s not already too late to be saying that), I do hope you had a relaxing and enjoyable Christmas.

As an inevitable consequence of marching time, I am, rather regrettably, starting to look my age and this has prompted several clients to ask, ‘What would happen to our financial arrangements if anything happened to you?’ It is a very fair question, none of us know how long we have and why should I be immune from the illnesses and accidents that do sadly befall others.

So, I just want to reassure you, by sharing with you the plans we have in place should such a catastrophe occur.

In the first instance of course, Kim and Adam, are here to help; they know you and the plans we have built with and for you. They will, therefore, be able to respond to any immediate enquiries you may have. Together we have built your financial plans for the long term, and it is unlikely anything occurring to me in the short term, should affect them.

However, in the event of a longer-term absence, it is vital that you continue to have support from a similarly well-qualified financial planner. I have therefore sought to find another adviser who could step in to help if needed. My priority has been to find an adviser who works in the same way we do, has the same experience and qualifications as I do and is familiar with the same systems and solutions we use and recommend. They would need to be able to hit the ground running if it came to it and with minimum disruption to you.

After a fruitful search I have found such a firm, Financial Planning Partners Ltd, run by brothers David and Andy Hearne. They are both Chartered Financial Planners who have each been in the financial planning profession for over 20 years. Based nearby in Berkshire, their business provides a virtually identical service to ours and as a result, I am confident that David and Andy, would be able to provide an excellent continuation of service to all our clients.

From their side, David said the following: ‘I’ve known Graham for a number of years and as Certified and Chartered Financial Planners we are both dedicated to providing the best independent advice and financial planning service to all clients. Graham and I have found ourselves mixing in the same circles, using the same services, and recommending the same solutions and this feels like a very good fit. We hope we won’t ever be required, but we are ready and willing to help if needed.’

David was recently awarded the Certified Financial Planner of the Year 2022 at the CISI Financial Planning awards. Of course, I hope nothing untoward happens to me that requires his help, but I am confident that Financial Planning Partners, with the ongoing help of Adam and Kim, will be ready to step up in a worst-case scenario.

If you had any concerns about this issue, I hope this reassures you that we do have robust plans in place.

As always, if you have any concerns about your own financial arrangements or would like to discuss whether you are truly making the most of your money, please do not hesitate to call me.

With kind regards,

Yours sincerely

Graham Ponting CFP Chartered FCSI

Managing Partner

Festive Greetings!!!

Adam, Kim and I would like to take this opportunity to thank you for your continued support and of course to wish you and your family a very Merry Christmas and a Happy New Year!

At this time last year, I wrote the following:

“Who could have imagined at around Christmas time in 2019 what was soon to follow? A global pandemic that in some way or another has affected all of us and those we hold dear.”

Well, just as we thought we might be in for a recovery period following COVID, we have once again been knocked sideways by a War in Ukraine, an energy crisis, the like of which we haven’t seen since the 1970s and roaring inflation, which has wrong footed central banks …… again! I think it’s safe to say that 2022 has been another difficult year for everyone and yet all my wonderful clients and indeed family and friends have continued to face the challenges of living in such uncertain times with good humour and pragmatism!

As with quite a number of years now, in lieu of sending individual Christmas cards, we have decided to make a donation to a worthy cause.

I lost a dear friend, Den, earlier this year and at his funeral his sons spoke movingly of his very humble background in Liverpool. Den’s father died while he was very young and his mother struggled to cope on her own, something which I imagine was quite common in those days. One day, his closest school friend Pete said to his own mum, ‘Can Den come and live with us?’ He was thus taken in by another family without an adoption certificate in sight, a post War 1950s’ community at work.

Den went on to have a very successful career with United Biscuits and latterly running his own business, Imagine Consultants, named after his beloved Beatles, whose songs he would sing loudly at every possible opportunity.

When his beloved wife, Pat, succumbed to early onset Dementia, Den stepped up to the plate like a true champion, caring for her selflessly until eventually this was no longer possible; he was devastated by her passing in 2021.

He was a great skiing and cycling companion, he was a deep thinker, a wicked storyteller and a very compassionate man who cared greatly for those who were less fortunate than himself.

The picture below is of badges that his sons had made up for us all to wear at the funeral. I can say, without contradiction, that if we were indeed all ‘More Den’, the world would be a happier place.

At his funeral, Den’s family asked for donations in lieu of flowers to go to The Salvation Army, an organisation which meant a great deal to him and they are our chosen charity this year, I do hope you will approve.

I do hope 2023 brings you all you would wish for and, of course, a resolution to the war in Ukraine.

With very best Christmas wishes,

Yours sincerely

Graham Ponting CFP Chartered MCSI

Managing Partner

Just How Bad is the Energy Situation in Europe?

I am always fascinated when I read something that seems contra to the narrative we are being fed by the mainstream media and what follows really did have me scratching my head. If we are to believe what we are being told by the BBC etc. we are in the middle of a very serious energy crisis, supplies of gas to Europe have been restricted because of Russia’s invasion of Ukraine and the closing of the Nord Stream pipelines; resulting in incredibly high prices and threats of blackouts etc. BUT, maybe things aren’t quite as they seem.

The following is taken from a communication I received yesterday from 7IM Investment Management.  

“The English Channel is the busiest shipping lane in the world; more than 500 ships a day pass between Dover and Calais.

It’s even busier at the moment, because there are over 60 tankers moored smack bang in the middle – the red dots on the map below.

More than half of these are carrying Liquified Natural Gas, waiting to deposit it into specialist terminals in the UK, France, Belgium and the Netherlands – those green triangles.

Some of them have been bobbing around there for over a month.

But if we have an energy crisis, why aren’t these ships unloading? Is supply and demand dead?!

Source: 7IM/Bloomberg/ https://www.marinetraffic.com/

Well, no. Economics isn’t broken. It’s just really difficult!

There are two things at play here.

First, October 2022 was seriously warm – the seventh hottest since 1884. The mean temperature across the UK was 11.5°C, nearly 2% warmer than normal. In London on 29th October, it was 23°C! Lots of those tankers started their journeys (from the US or Qatar) expecting Europe to have already started turning on the central heating. But we didn’t. So, our day-to-day demand was lower.

Second, the campaign to stockpile gas ahead of the winter has been extremely successful – see the table below. Europe’s storage is at 94% of total capacity - with the understandable exception of Ukraine. That stored gas accounts for nearly one third of normal annual consumption for Europe, so those tankers aren’t needed yet.

Source: https://agsi.gie.eu/

Now, we don’t know how cold this winter will be. Or how windy it will be. Or what will happen with Russia. Commodity prices are influenced by so many external factors, it means any statements about gas prices in the next few months (higher or lower) should be treated with extreme caution. 

PS.

The data on Marine Traffic is incredible.

Just look below at the “Pleasure Craft”; all yachts leaving the Mediterranean and heading for the Caribbean for the winter …

Not at all relevant for investing, more for reasons of envy …

Source: 7IM/Wikimedia Commons/ https://www.marinetraffic.com/

I do hope you found the above as interesting as I did.

As always, if you have any concerns about your own financial arrangements or would like to discuss whether you are truly making the most of your money, please do not hesitate to call me.

With kind regards,

Yours sincerely

Graham Ponting CFP Chartered FCSI

Managing Partner

EBI Portfolio Rebalance – November 2022

If you hold your investments with Clearwater via the Transact or Standard Life Platforms and your portfolios are managed by Evidence Based Investments (EBI), you may have been wondering about some recent transactions on your account. These transactions, initiated by EBI, are as a result of a periodic rebalance; there are no charges associated with the rebalance.

You may recall that previous rebalances were carried out on an annual or ad hoc basis and your permission would have been sought, as part of this process. With the new Vantage Portfolios EBI have the discretion to conduct such rebalances without prior reference to the clients and that is what has happened on this occasion. In addition, EBI now conduct rebalances only when individual funds breach certain thresholds, this maximises efficiency and reduces unnecessary trading.

The following has been taken from the recent communication from EBI to us, explaining the rationale for the rebalance:

“EBI monitors the drift of all assets within the model portfolios and as of today, the Emerging Markets element of our Earth Portfolio range has drifted away from its initial target to breach the set tolerance limit. It is therefore important we carry out a rebalance to bring the portfolios closer towards their target asset allocation and ensure the risk profile is maintained.” 

Rebalancing is not carried out to obtain any performance advantage, although this can happen, it is to ensure that portfolios remain within the agreed risk parameters.

As a number of clients have queried these unexpected transactions, Adam and I have decided to notify everyone in advance next time.

I do hope the above makes sense but, as always, if you have any concerns about your own financial arrangements or would like to discuss whether you are truly making the most of your money, please do not hesitate to call me.

With kind regards,

Yours sincerely

Graham Ponting CFP Chartered FCSI

Managing Partner

Inflation

As we all wait with bated breath for the Chancellor’s statement tomorrow, I am indebted to 7IM for the following:

“We all know that “Beauty is in the eye of the beholder”. But that idea applies just as much to economics as it does to art. Take the hottest topic around – inflation.

A survey by the Bank of Japan last month found that 86% of the population had seen “unfavourable price rises”, with 46% of them saying the prices were “SIGNFICANTLY” higher than a year ago.

Sounds serious.

Until you realise that annual inflation in Japan is 3%.

It’s tempting to ask what all the fuss is about. After all, we’re at 10% inflation here in the UK (11.1% as of this morning)! But remember the “eye of the beholder.” It’s about what’s “normal.” Inflation has averaged 1% for forty years in Japan. So even a tiny increase feels brutal.

Compare that to somewhere like Sri Lanka, where inflation is a savage 66%. But actually, in Sri Lanka, surveys aren’t anywhere near as negative as in Japan. That’s because average inflation over 40 years has been 11% (and often above 20%). A different baseline for comparison – resulting in different behaviour.

Source: IMF WEO/7IM

Thinking about different inflation experiences around the world is a helpful reminder that what you’re used to defines what you expect.

And the follow-up to that is that what you expect dictates your reaction to what happens.”

I really enjoy considering how psychology influences financial decisions and stats like this are a reminder that whilst we think we all see the world in the same way, our interpretation is entirely dictated by how we frame it.

That’s why numbers are never the whole story when it comes to investing – it’s about the people behind the numbers as well.

I am delighted to report that none of my clients panic when confronted by volatility as part of a long-term investment strategy, and I like to think this is because I have conditioned them to expect it! None of us like it when it happens BUT, we know how to react when it does, and that is to wait for it to pass.  

I do hope the above makes sense but, as always, if you have any concerns about your own financial arrangements or would like to discuss whether you are truly making the most of your money, please do not hesitate to call me.

With kind regards,

Yours sincerely

Graham Ponting CFP Chartered FCSI

Managing Partner

The Optimist’s View

It is hardly surprising in recent times that there has been considerable volatility in the bond and equity markets; turn on the television, listen to a politician or open a newspaper, and there is a good chance you’ll see someone prophesying imminent economic doom.

Such claims serve to depress stocks (and bonds) in the short term, but they do also provide opportunities in the long term, the expected future return of the market is always greater after such falls, no matter how counter-intuitive that might seem.

Optimism

Kevin Kelly, the founding editor of Wired magazine, wrote in his essay The Case for Optimism that: “The psychological temperament of an optimist is not a sunny disposition or a Pollyanna delusion that everything is ideal. Rather, optimists believe that bad things are produced by temporary causes that can be overcome, while pessimists believe bad things always happen, and if anything good happens, it’s temporary.”

Optimism is always essential in long-term investment but especially in periods of drawdown (market falls). It gives us the chance to discern signals from noise and identify the gap between perception and reality.

Looking ahead

Entrepreneurialism and societal progress require a great deal of optimism because it reminds us of what is possible, and it helps us to imagine what the future might look like.

In 1889, Charles H. Duell was the Commissioner of US patent office. He is widely quoted as having stated that the patent office would soon shrink in size, and eventually close, because……..wait for it -

“Everything that can be invented has been invented.”*

Charles H. Duell*, 1899

How could anybody be so short-sighted, particularly after the motor car had only been patented by Carl Benz in 1886? Just think of all the inventions, innovations and advancements that were made after 1899 and throughout the 20th Century – the aeroplane, computers, space rockets, the mobile telephone, and the internet for example. With the advent of each of the above examples (and of course many others) entrepreneurs took risks, they sought investors, they employed many staff who then earned wages (on which they paid tax) and spent them in the economy, helping to perpetuate the virtuous circle we know as capitalism. It’s not a perfect system capable of leading to great inequality in the distribution of wealth, but it’s the best system we currently have and almost all advancements in living standards can be attributed to it. I am putting the creation of a welfare state to one side in this piece but that too must not be overlooked when reflecting on how we live today.

Charles H. Duell’s problem was that he wasn’t an optimist! The optimist in me says that capitalism, for all its faults, is likely to continue to drive invention and innovation and prosperity will follow.    

Most of us would agree that there is still much to be invented and discovered. We tend to think these new ‘inventions’ will be more extraordinary and advanced than those which preceded them, but that might not necessarily be entirely true. An invention or innovation need not be revolutionary, or even unique, to be significant, many ‘new’ inventions are derivative of their predecessors.

From door locks to light bulbs, shovels to toilets, and the classic mouse-trap, innovation comes in many forms and from many directions, often right under our noses. Sliced bread? Bottled water?

Nothing is so basic, or so great, that it cannot be made better

Levi Strauss & Company studied their evolving customer along with their 501 iconic denim blue jean, created in 1873. Levi’s noted that the most requested alteration for tailors “around the world” were for hemming and tapering the leg of the classic 501. Thus, this year, Levi’s re-invented the classic blue jean with built-in “customization and tapering:” the new Levi’s 501ct.

First there were leaves, then hand towels, and then cloth rolls one would pull and reuse. (disgusting when you think about it…) Next was the ‘folded paper towel dispenser’ and in recent years the ‘hot air dryer’ replaced the towel dispenser.

And, now, Dyson has replaced the air dryer with their ‘Airblade.’ Anyone who thought no more money could be made from people washing their hands in public lavatories was very much mistaken! Sometimes the innovations that drive up living standards and create great wealth for their creators and their investors (that’s us by the way) are just simple improvements on what has gone before.

Take the following example:

According to Wikipedia, “Belts have been documented as an item of male clothing since the Bronze Age.” — Roughly, 2500 B.C.

And yet, Randa Accessories, which is the world’s largest men’s accessories company, selling over 40 million belts each year, opened its ‘Belt Lab’ in 2015 with the goal of doubling the size of the entire belt market.

Recent innovations include the reinvention of the holes in belts — now reinforced with ‘industrial-strength’ materials sandwiched between layers of leather, an improved ‘patent-pending’ reversible belt buckle technology (black to brown, leather to fabric, dress to casual), a new leather ‘stretch’ belt feature, new point-of-sale fixtures, new size, and colour replenishment modelling, and more.

To most of us, a belt is just a belt, a commodity, but to Randa it’s not; it’s much more than that, it’s a lifestyle accessory that can be refined adjusted and improved, seemingly endlessly, for greater profit!

Necessity can be the mother of invention, and/or innovation and it can be found in every facet of our lives.

In summary, we don’t need something as fundamental as a new internet to be invented every year for the stock market to go up and for investors to have a successful long-term investment experience, something Charles H. Duell would have done well to figure out.

I do hope the above makes sense but, as always, if you have any concerns about your own financial arrangements or would like to discuss whether you are truly making the most of your money, please do not hesitate to call me.

With kind regards,

Yours sincerely

Graham Ponting CFP Chartered FCSI

Managing Partner

* There is no documentary evidence he actually said this but I really hope he did!

Does a Simple Equity/Bond Asset Allocation Still work?

When sitting in my office, I often try to imagine what questions my clients might like to ask me if they were sat with me and that is often how I come up with the material for these regular communications. This week I have been pondering whether clients might understandably be asking the question posed in the title?

Over the past few weeks, I have written that low risk investments have been falling at the same pace, if not faster than high risk investments and that being the case, it seems reasonable to question whether a portfolio containing equities (to provide long-term growth) and bonds (to smooth out volatility) is still a sensible mix.  

The following article written by Giulio Renzi-Ricci, head of portfolio construction at Vanguard, Europe, answers this question:

“It has been a difficult year for equity and bond markets.

With inflation at record highs, sharp reversals in monetary policy and a perfect storm of events driving down prices, it is understandable that investors want to be sure their investment strategy is appropriate for the times.

Indeed, it is particularly in times of volatility that advisers can help investors consider the bigger picture and retain focus on their long-term goals. We believe the evidence is clear that a well-established approach to asset allocation – in which a balanced, risk-adjusted portfolio of equities and bonds is held for the long term at a low cost – continues to serve investors well.

Share-bond diversification in historical context

Some investors have been unnerved by equities and bond prices declining in lock step over the course of the year. In fact, brief, simultaneous declines in shares and bonds are not unusual, as our chart shows.

Viewed monthly since early 1995, in GBP terms, the nominal total returns of both global shares and investment-grade bonds have been negative around 13 per cent of the time. That is a month of joint declines a little over every seven months or so, on average.

Historically, once the market has had time to adjust, the negative correlation between bonds and equities has re-established itself within a matter of months. Our analysis of recent prolonged market downturns suggests the longer a crisis drags on, the more likely bonds are to play a stabilising role.

Bonds as ballast

This is particularly important, as the primary role of bonds in an investment portfolio is not to drive returns but to act as a stabiliser. We are cautious of proposed alternatives to investment grade bonds as the main counterweight to equities in a balanced portfolio.

Asset classes such as real estate (property) introduce cost and liquidity concerns. Sectors such as commodities and high-yield debt can help with hedging unexpected inflation but exhibit equity-like behaviours.

Hedging strategies such as put options introduce complexity, while still being exposed to considerable drawdowns. This is not to say there is not an investment case for these approaches in particular circumstances. Rather, there is not a compelling substitute to the benefits high-quality fixed income provides with regard to diversification, transparency, relative simplicity and cost.

Equally, it is unlikely that long-term investors will be able to preserve returns simply by coming out of the market. Short-term market timing is extremely difficult even for professional investors and, we believe, doomed to fail as a portfolio strategy.

Markets are incredibly efficient at quickly pricing unexpected news and shocks, such as the invasion of Ukraine or the accelerated and synchronised central bank response to global inflation. Chasing performance and reacting to headlines tend not to work in the long term since it often amounts to buying high and selling low.

What might the future hold?

It is also important to remember that, with the painful market adjustments year-to-date, the return outlook for the 60/40 portfolio has improved.

Driven by lower share valuations and higher interest rates, our forecast for the 10-year annualised average return outlook for the 60/40 portfolio is to 6.7 per cent. That is more than three percentage points higher than at the start of the year.

Over the next 30 years, we predict the average return of a 60/40 portfolio to be around 6.9 per cent in GBP terms. The inherent volatility of markets means these returns will always be uneven, comprising periods of higher or lower – and, yes, even negative –returns.

No magic in 60/40, just balance and discipline

The broader, more important issue is the effectiveness of a diversified portfolio, balanced across different asset classes, in keeping with an investor’s risk tolerance and time horizon. In that sense, 60/40 is shorthand for an investor’s strategic asset allocation, whatever their actual target mix.

We do not believe in one-size-fits-all solutions in this regard. Investors can dial up or down the risk-return profile of their portfolios depending on their investment goals, investment horizon, risk tolerance and a set of realistic expectations for asset returns (net of costs).

The last thing investors should be doing, however, is to abandon the principles of good asset allocation.”

I do hope the above makes sense but, as always, if you have any concerns about your own financial arrangements or would like to discuss whether you are truly making the most of your money, please do not hesitate to call me.

With kind regards,

Yours sincerely

Graham Ponting CFP Chartered FCSI

Managing Partner

The Mini-Budget and some Context!

When I last sent one of these communications on 22nd September, I ended with the following, “Things will improve when inflation appears to be coming under a degree of control and if/when there is some kind of resolution in Ukraine; I do hope to be able to write with more positive news soon.” This was of course, before Kwasi Kwarteng’s so-called ‘Mini-Budget’, which has spooked the currency market, the UK Gilt market and, to some extent the UK equity market. As a result, I do not have any good news to report just yet, but I do want to provide some context which I hope might settle some nerves.

I don’t want to get into the politics of announcing the removal of the 45p tax rate at a time of hardship for many (it’s not now happening of course) but it does seem that this is the aspect of ‘Mini-budget’ that the media and opposition parties have latched on to. The inference in the media has been that it was this announcement that caused the pound to crash and the Gilt market to go into freefall – it wasn’t! Out of a total package of tax cuts announced amounting to some £40 billion, the loss to the exchequer from repealing the 45p rate would have only been about £2 billion (5% of the total) and it could have led to higher tax receipts as the wealthy lose the incentive to find convoluted ways to avoid it. No, the markets (unlike the media) responded to the important bit, the other £38 billion of cuts and how they were to be funded - through borrowing! When Kwarteng publishes the Fiscal Plan, now at the end of October and not 23rd November (thankfully), the markets might settle down a little, until then the markets are staring into the dark, unsure of the impact on the financial stability of the UK, further volatility can therefore be expected.

So, where is the context that might settle clients’ nerves? Well, Clearwater portfolios (constructed and managed by EBI) are not just invested in the UK Gilt and Stock markets; the geographical spread (top 10 countries) of our most popular portfolio Vantage Earth 60, is currently as follows:

1. United States (US) 50.68%

2. United Kingdom (GB) 6.98%

3. Japan (JP) 6.58%

4. Germany (DE) 4.90%

5. France (FR) 3.43%

6. Canada (CA) 3.22%

7. China (CN) 2.37%

8. Switzerland (CH) 2.26%

9. Australia (AU) 2.18%

10. Italy (IT) 1.43%

The gyrations in the UK are certainly having an impact on the performance of our portfolios but it is what is happening in the wider world that is much more important, the global fight against inflation and the war in Ukraine.

If there is a silver lining to the clouds around us, it is actually in the weakness of the pound relative to the dollar because of the weighting we have in the US. The following chart shows how far the S&P 500 has fallen since the beginning of the year in Dollar terms:

As you can see, a fall of 23.76% since the start of the year! This second chart shows the same index but in Sterling terms:

We still see a substantial fall of -6.85% but the pounds weakness has provided a welcome hedge against the worst of the falls. It is important to understand that a significant strengthening of the pound would unwind this position but let’s hope that any such strengthening accompanies a recovery in the US stock market.

In terms of fixed interest exposure, only 11.36% is in the UK and only some of this is invested in UK Gilts which have been hit so hard by recent events. The following chart compares the performance of our Bonds vs the UK Gilt Market as a whole, since the beginning of the year:

What the charts above demonstrate is the benefit of diversification. Investments across multiple countries and multiple sectors ensures that we are never going to be at the bottom of the pile when shockwaves are felt, unfortunately it does not mean our portfolios can buck global trends. The battle against global inflation and the war in Ukraine will continue to cause substantial volatility in markets but this volatility comes hand-in-glove with long-term investing.

One last chart to provide more context – this one shows portfolio Vantage Earth 60 (simulated returns) over the past 20 years.

When we look back over many years we can see plenty of incidences of extreme volatility BUT we got through it in the end! While writing to one of my clients this week, I was reminded of Boris Johnsons’ tribute to the late Queen, he referred to her broadcast to the children of the nation during World War II, age 14, during which she offered these encouraging words; “We know, every one of us, that in the end all will be well.” I think that attitude of optimism is the best way to get through each day whilst markets are gyrating all over the place, we will come through it ……. eventually.   

I do hope the above makes sense but, as always, if you have any concerns about your own financial arrangements or would like to discuss whether you are truly making the most of your money, please do not hesitate to call me.

With kind regards,

Yours sincerely

Graham Ponting CFP Chartered FCSI

Managing Partner

Update

Yesterday, the Federal Reserve in the US increased interest rates by the widely expected 0.75%, but the markets still fell sharply following comments by chairman Jerome Powell that central banks still have “some way to go” in their fight against inflation. He indicated that rates have only just reached levels in the States where they are starting to have the necessary effect on prices. This hawkish stance is not helpful to equity or bond markets, meaning there is no hiding place from the pain just now.

I was interested that in the UK equity markets rose yesterday, even though on the Today programme on Radio 4 yesterday morning, I listened to Sergei Markov, a former adviser to Vladimir Putin, all but threaten the West with full scale nuclear war. I fully expected the markets to fall off a cliff at the open but of course they didn’t, as most see these statements as the empty threats they almost certainly are, let’s hope they are right.

It is clear that the equity and bond markets are focussed firmly on inflation and the actions that central banks are taking to tackle this, with even the prospect of nuclear war having very little effect.

Against this febrile backdrop I thought an update on how the Clearwater Portfolios, managed by EBI, have been doing might be welcome.

This first chart shows how EBI Vantage Bond, EBI Vantage 60 (60% equities, 40% bonds) and EBI Vantage 100 have performed since the start of the year. In this chart we can see how the portfolios containing equities rallied during the period June to August, but that the Bond portfolio continued its downward slide, due to the continuing increases in interest rates.   

This next chart focusses on the market rally from 16th June to 19th August. Here we can see that the 100% equity portfolio rose by over 14% in a period of just over 2 months, highlighting why it is so important to stay invested through periods of volatility – we never know when sentiment is likely to change, and markets tend to respond very quickly when it does.  

We must then look at what has happened since 19th August. The following chart shows a renewed slide caused almost exclusively by the hawkish stance being taken by central banks to combat inflation. Interest rate rises had previously been priced in to some degree but as inflation around the globe has proved so persistent, central bankers have turned up the heat even further and consequently, markets have given back most of the progress that was made earlier in the summer.

I am conscious that I quite often provide updates on how our portfolios are performing but what I don’t often go into is, how are our portfolios performing when compared to others? The following couple of charts address this.

These are slightly different charts which look at returns on the vertical access, with volatility (risk) on the horizontal access. If you think about it, the perfect portfolio would appear in the top left corner, because this would mean the portfolio had performed spectacularly well but with very little volatility – sadly, no such portfolio or fund exists.

This first chart looks at the same portfolios above and compares them with the appropriate sector averages over the year 31st August 2021 to 31st August 2022.

If we first look at point E towards the bottom left of the chart, this represents the EBI Vantage Earth Bond portfolio, and compare this with point F, which represents the pension sector average. Here we can see that the sector average has delivered a worse return and with greater volatility, this is a good result (relatively) for the EBI portfolio. The EBI portfolio has still fallen over the course of the year, but it hasn’t fallen as far, and it has been less volatile.
The same is true for the EBI Vantage Earth 60, against its peer group and also EBI Vantage Earth 100, against the global equity sector. In each example we can see better performance from EBI with lower volatility.   

The chart above just looks at the past 12 months, which I think we can all agree, has been unusual. The following chart, however, covers the 20-year period from 31st August 2002 (The EBI portfolios haven’t existed for 20 years, so these are simulated returns). Even over this much longer time period, the results are the same, except for the Bond portfolio. Over this longer period, the sector has marginally outperformed, BUT it has done so with considerably more volatility.  

I hope the above charts have helped provide some reassurance that, although things are not going particularly well at the moment, on average our investment solution is faring as well (if not slightly better) than alternative offerings.

Things will improve when inflation appears to be coming under a degree of control and if/when there is some kind of resolution in Ukraine; I do hope to be able to write with more positive news soon.  

I do hope the above makes sense but, as always, if you have any concerns about your own financial arrangements or would like to discuss whether you are truly making the most of your money, please do not hesitate to call me.

With kind regards,

Yours sincerely

Graham Ponting CFP Chartered FCSI

Managing Partner

The Energy Transition

The following is a piece I was reading this morning from LGT Wealth Management. I thought it was interesting and hope you do too.

“The global energy complex is under pressure. Supplies, already constrained due to Russian sanctions, have been further strangled by the impact of the summer heatwave. In France, which frequently relies on up to 70% of its energy from nuclear, the rivers essential to the cooling of the reactors are too warm, reducing current nuclear energy production by half. Germany’s Rhine River is currently too shallow to transport cargo, including traditional energy, and the Sichuan province of China which relies on hydropower for 82% of its power generation, is seeing its worst drought in more than half a century halving hydropower capacity and causing a number of factories to close. Even efficiency of solar energy is impacted by hot weather. For every degree above 25C, the efficiency of a solar panel can drop by as much as 0.5%. When a panel temperature reaches 45C, the solar efficiency could fall by 10%.

You could be mistaken for thinking that the soaring traditional energy prices are a source of distraction from investment in green energy, which ironically is made more inefficient by the summer heatwave. In fact, it is quite the opposite.

The US

Last month, the US passed a historic Inflation Reduction Act. Whilst many countries have recently approved climate packages and enforced regulation, the size and scope of this Act should not be underestimated. It represents more than $370billion of investment and subsidies to be spent over 10 years dedicated to climate and energy measures. These include tax credits for EVs, $20bn spent on clean vehicle manufacturing facilities, 10 years of consumer residential energy tax credits and $20billion to support climate-smart agricultural practices.

The EU

In response to the outbreak of war in Ukraine, the European Union published their plan to reduce reliance on Russian oil and gas. This represents spending of circa €300bn by 2030[1] and includes investing in solar and wind power, energy storage investment, green hydrogen innovation and promotes awarding of permits to renewable energy projects.

China

Whilst these significant commitments by some of the developed world’s largest economic powers seem encouraging, they pale into comparison to the levels of deployed climate investment since already this year by China. Last year, China accounted for 46% of the world’s new construction of renewable energy infrastructure, investing $380bn, more than any other country during 2021. China’s solar energy spending for the first six months of this year has totalled $42 billion (173% higher than last year). The country’s spending on new wind projects totalled $58 billion (107% above 2021 levels). According to China Renewable Energy Engineering Institute, the country is set to install a record 156 gigawatts of wind turbines and solar panels this year. By comparison under the Inflation Reduction Act, additions to US wind capacity could increase from 15 to 39 gigawatts per year in 2025-2026, according to researchers at Princeton University.

China leads global energy transition spending
Public and private investments, 2012-2021

Source: BloombergNEP, Note: The UK is included in EU calculations until 2020

The energy transition represents one of the most environmentally, but also economically, important shifts of recent times.”

Inevitably this transition will throw up exciting investment opportunities around the globe which our highly diversified portfolios (managed by EBI) are well positioned to take full advantage of.

I do hope the above makes sense but, as always, if you have any concerns about your own financial arrangements or would like to discuss whether you are truly making the most of your money, please do not hesitate to call me.

With kind regards,

Yours sincerely

Graham Ponting CFP Chartered FCSI

Managing Partner

1 G. Lengauer, F. Esser, R. Berganza, Negativity in political news: A review of concepts, operationalizations and key findings. Journalism 13, 179–202 (2012)