Your Investment Update Q2 2021 by Seven Investment Management LLP

Your investment update Q2 2021

This document has been produced by Seven Investment Management LLP from internal and external data. Any reference to specific instruments within this document are part of widely diversified portfolios and do not constitute an investment recommendation. You should not rely on it as investment advice or act upon it and should address any questions to your financial adviser. The value of investments can vary and you may get back less than you invested.

Your Investment Update – Q2 2021

Contents 04

Welcome

Martyn Surguy Chief Investment Officer 06

Strategy After the storm Ben Kumar Senior Investment Strategist

Portfolio implementation The best of two worlds Uwe Ketelsen Head of Portfolio Management

Featured topic Stewardship and responsible investing at 7IM Dean Proctor Chief Executive Officer Terence Moll Head of Investment Strategy and ESG

Visit us at www.7im.co.uk to find out more about our latest news and views.

Your Investment Update – Q2 2021

Welcome MARTYN SURGUY Chief Investment Officer

A semblance of normality is beginning to appear in our lives as the toughest lockdown restrictions lift. But will things ever truly be the same as they were before the pandemic? Will mask-wearing be a permanent part of some of our daily lives? Can we ever look forward to being jostled at the bar in a crowded pub again? And will the office resume its role at the centre of our business world? We face similar questions in financial markets. Some longterm trends are at a critical juncture. Now is the time to think differently about these issues in order to preserve capital and generate attractive growth from here. The last 40 years has seen interest rates and bond yields fall steadily to, in some cases, multi-century lows. Perhaps surprisingly, inflation has remained dormant, bumping along at the bottom of historic ranges. This created an exceptional environment for portfolios simply split between equities and government bonds (the much vaunted 60:40 portfolio) to deliver attractive returns.

But, as Bob Dylan reminds us, “the times they are a-changing”. A 60:40 approach will not only not deliver as before but is likely to subject portfolios to real capital risk as both bond yields and inflation move up. The last three months might be an ominous portent for this. On the equity side, the first quarter has seen an abrupt halt to some established trends. Over the last ten years, growth has outperformed value by far, with investors looking to technology, communications and online retail areas, while shunning industrials and banks. However, following the development of COVID-19 vaccines this trend has come to a sudden stop as investors have rushed to position themselves for the reopening of the global

economy – flocking back to unloved cyclical sectors and industries. And there are signs that the US stock market might be knocked off its perch at the top of the performance leaderboard. This could be an important development for investment approaches that favour America. Thinking differently is going to be the key to navigating an investment world when long established norms start shifting. At 7IM we have a proud history of doing exactly that. For many years now we’ve used alternative assets as a counterbalance to the risks in equity and bond markets. The limited opportunities in bonds currently means our expertise and experience are more important than ever.

Your Investment Update – Q2 2021

Balancing risk and blending different types of assets is at the core of our approach." Balancing risk and blending different types of assets is at the core of our approach. We cannot be sure whether growth or value leads from here, or whether the US equity market loses its dominance. But we can be sure that strategies that look to balance between sectors, regions and styles are a sensible way forward for our clients. My colleagues expand on some of these themes in the following pages. Ben Kumar discusses our latest views and the challenges of the current environment. A special welcome to our new Head of Portfolio Management, Uwe Ketelsen, who provides some insights on building portfolios through blending styles. Uwe joined as Head of Portfolio Management at 7IM in February 2021. He has more than 20 years of experience in investment management, spanning top-down and bottomup research, asset allocation, fund selection, and portfolio and risk management across both traditional and alternative investments.

He brings great experience and knowledge to our firm and we’re delighted to have him on board. Finally, our CEO Dean Proctor describes the changes we have made at 7IM to become a more responsible corporate citizen. Terence Moll, our Head of Investment Strategy and ESG, discusses the highly topical and interesting work we are doing on responsible investing within the firm. I hope you enjoy the read and are looking forward to making up for lost time as summer approaches.

Your Investment Update – Q2 2021

Strategy After the storm Storm COVID

Storms make things simple. Especially the big ones, the ones with names, the hurricanes and typhoons. For most of us, a storm limits our options. Go outside to have a miserable and possibly dangerous time. Or stay inside and stay safe. If you’re a weather forecaster, your world is similarly narrow – you focus on a few key questions. How savage will the storm be? Where will it hit? How long will it last? When the storm finishes, things become less straightforward – but overall, more fun. We have more choices, but the dividing line between them is blurry. Is it sunny enough for the beach? Is the chance of rain too high? Will we take too many layers out walking? And for weather forecasters it’s the same. Back to normal. Intermittent showers. 50% chance of sun. Fairly cloudy. Back into the fuzzy zones. Trying to take lots and lots of data and form it into a coherent picture, but one that can never ever be precise.

At times, the year-long struggle with COVID-19 has felt like a prolonged period of stormy weather for society: we’ve been forced to stay inside most of the time, unable to do anything in the face of nature, and with the occasional, terrifying lightning flash of news of a friend or family member with a positive test. Now, as the clouds clear, we’re getting ready for normality again. It won’t always be sunny, but that’s OK. Some sun is better than none. From a personal point of view, I’m as happy as everyone else is to be stepping back into the world. I can’t wait to have a drink with friends, and a meal with my family. I’m looking forward to seeing my colleagues face to face, and to being able to finally stop walking the same roads in South London over and over!

Your Investment Update – Q2 2021

At times, the year-long struggle with COVID-19 has felt like a prolonged period of stormy weather for society.” How’s the investment weather? But as an investment manager, I’m also aware that we’re more like weather forecasters. Having one big thing to focus on can make things simpler. Although investing was never easy in 2020, the big issue was obvious. COVID-19 rendered the normal subtleties of investing irrelevant. In the last twelve months, there was one simple (but difficult) question for investors to answer: how long would it take before lockdowns finished, and the economy could be taken off pause? The shape and the size of the recovery was determined largely by how soon society could return to normal – so we were monitoring the levels of

financial stimulus, the progress of COVID-19 cases, and the development of vaccines. Our focus narrowed, correctly, in the same way as a meteorologists’ does when looking for clues about the ferocity of a storm. However, the world is now moving past COVID-19, in both an economic and epidemic sense. This means that the outlook for investing is now more nuanced than it has been in the past year. We’re returning to our more established models and methods of thinking, where there’s far more than just one factor to consider. >>

BEN KUMAR

Senior Investment Strategist

Your Investment Update – Q2 2021

Strategy Continued

The long range forecast The outlook for growth over the next two years is very strong. The lockdown recession was extremely short – so short that it caused surprisingly little economic scarring. No business model or industry has been ruined and relatively few people have lost jobs permanently or been forced to switch careers due to lack of work, thanks to furlough schemes. Restaurants will still open, and chefs will still cook. Pilots will still fly planes, and actors put on shows. But while socially it will feel like 2019 again, economically, the picture is quite different to two years ago. It’s a lot better. Because consumers have far more money in their bank accounts – put there by governments, or through saving more. The damage from COVID-19 was shorter and shallower than expected, but governments prepared and paid for the worst-case scenario. At the start of 2019, the US consumer had $1 trillion of savings. In 2021, that number is $4 trillion. Imagine being at the start of 2019, but with four times as much in your savings account. What would you have done differently? You might not have spent it all, but the temptation to have an extra holiday, or a trip to the theatre, or a shopping spree would be, for most people, irresistible.

That sets the stage for our long-term investment weather forecast. As vaccinations continue and lockdowns ease, we expect a wave of consumer spending across the global economy (see graph). This should lead to big growth numbers that haven’t been seen for decades – something likely to surprise investors conditioned to the post-financial crisis doldrums. This growth boost will translate into company earnings growth which again, may well be far higher than markets have been conditioned to expect. This could be a real tailwind especially for the cyclical areas of the market. We’ve positioned the 7IM portfolios accordingly, tilting towards areas such as capital goods, automakers and financials, as well as those smaller businesses that have the operating leverage to ramp up supply without increasing costs. Of course, the most important part of being an investment weather forecaster is to acknowledge that things can change, and be prepared to tweak the forecast. We’ll keep an eye on the skies and on the data, and adjust our portfolios if needs be.

Your Investment Update – Q2 2021

Post-War recovery: Lessons for 2021? History suggests a wave of spending is coming across the world as economies open up and consumer confidence recovers. The US in 1945 is an interesting analogy. After the Second World War ended, savings rates were very high, due to low incentives and opportunities to spend in a wartime economy. When the war finished, and the troops returned, those excess savings were spent on new houses, new clothes and new experiences – generating a boom that lasted for many years. Fortunately, COVID-19 hasn’t been nearly as terrible as WWII, but similar trends are likely to play out. US savings and consumption growth 1944-46

28% 23%

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12%

6% 3% 1944

US Savings Rate Source: Cornerstone Macro

1945

1946

US Consumption Growth (year on year)

Your Investment Update – Q2 2021

Portfolio implementation The best of two worlds Many investors think that a fund manager’s return consists of the market return (‘beta’) and the outperformance resulting from the manager’s clever stock picking (‘alpha’). That’s not the whole story. There is a third source of returns: style premia. Every manager has an ‘investment style’ – basically her or his investment philosophy and process. A ‘growth style’ targets companies with strong earnings and capital growth, while a ‘value style’ looks for shares that are underpriced in relation to a company’s current assets and cashflows. Neither of these investment approaches is better than the other, both have room in an investor’s diversified portfolio. Different market conditions

can favour different styles: value stocks in the US have outperformed growth stocks by 20% or so since September 2020. However, cumulatively over the last 10 years, the return from US growth stocks was twice the return from value style; a trend that almost led to the extinction of value style managers! See graph. We help our clients navigate not only through various asset classes and geographical markets, but also to achieve the right style exposures. Looking at a fund manager’s underlying holdings allows us to blend strategies. On a net basis we can ‘tilt’ portfolios to the degree of growth, or value, or small cap exposure that we find appropriate. For example, we hold two European equity funds in active portfolios, Lightman European Fund and Miton European Opportunities. Lightman is a value investor with a focus on undervalued companies with a high free cash flow yield, a positive operational momentum and improvement in revenue and margins. This manager is currently positioned for a rebound of European economies, with an overweight in materials, industrials and consumer discretionary – which broadly reflects our own view.

UWE KETELSEN

Head of Portfolio Management

Your Investment Update – Q2 2021

Our holding in Lightman is balanced with Miton, who run a mid-cap focused strategy with a growth bias. So both managers are invested quite differently from our Europe equity benchmark (MSCI Europe) but complement each other very well. The beauty of combining these two funds: on a ‘net’ basis we are positioned for a European economic rebound, but in a diversified way. Since both managers are comfortably beating their style-specific benchmark, we are capturing ‘double alpha’ whilst remaining diversified. Finally, we can remain long-term investors in these funds, even as our market view may change. This reduces portfolio turnover and allows us to achieve lowercost access to well-managed strategies.

Returns of global value and growth styles (to 31/03/21) 'Value' stocks are businesses trading for less than they are worth in the long run. Typically, they have well-established business models that aren’t exciting or flashy - they’re unlikely to double sales each year. Intel, Vodafone and Toyota are good examples. 'Growth' stocks tend to be valued for their long-run potential. Investors are attracted to the possibility that the company will one day be in a position to make a lot of money, even if it isn’t right now. Uber and Tesla are currently in that position – as were Amazon and Apple a while back. Source: Bloomberg

77%

161%

39% 17%

Last 5 months

Last 10 years

Value

Growth

Your Investment Update – Q2 2021

Featured topic Stewardship and responsible investing at 7IM Why stewardship matters more than ever

The disruption caused by the spread of COVID-19 over the past 12 months has been unprecedented. It has forced us to change how we interact with the world around us and made us reassess our priorities, both personally and professionally. For us at 7IM this has meant taking a long and hard look at how we run the business. And over the past year or so we have embarked on a journey to put culture, sustainability, responsibility and stewardship at our core. Culturally, we have gone through a huge transformation programme to ensure we continue to have a culture that is positive, inclusive and supportive of all colleagues. Some of the initiatives that have been implemented have been family focussed, such as changes to the maternity policy and to flexible working. Others have been around areas like our recruitment process, where we have introduced anonymised recruitment to remove conscious or unconscious barriers during the selection process. My belief has always been that if you get the culture right, and if your colleagues feel valued and supported, then they in turn will

deliver value, regardless of how difficult the environment is. The COVID crisis has also been a reminder that companies can’t ignore the broader context within which they operate. We have spent the last year taking a deeper look at our credentials in the environmental, social and governance (ESG) space, both as an investor and a business. We believe that financial services have a key role to play in a sustainable future – and that our industry can achieve this via good stewardship. Firms that focus on stewardship – that think of the needs of their staff and clients, that worry about business risks, that consider ESG issues when they act – are the firms that investors want to work with. And we believe 7IM is among them. Our stewardship activities guide our business, shape our investment process, are reflected in our risk management and help create long-term value for clients and beneficiaries.

Your Investment Update – Q2 2021

Our stewardship activities guide our business, shape our investment process, are reflected in our risk management and help create long-term value for clients and beneficiaries.” Part of good stewardship means understanding how a business acts as a corporate citizen. Good governance means a firm should aim to minimise its negative impact, inside and outside of the office. At 7IM we have identified opportunities to reduce our carbon footprint by reducing air travel, utility consumption and streamlining our supply chain. Where we cannot eliminate all carbon emitting activity, we are looking to offset our carbon emissions created e.g. by tree-planting.

Good stewardship is also about making a positive impact in the community and doing things such as supporting community activities and ongoing local charity work. We have a longstanding charity committee at 7IM and during the tough COVID months, the team’s fantastic fundraising activities meant we were able to make donations of £25,000 to different charitable causes.

With the end of the COVID crisis seemingly in sight, it could be all too easy for us to lose focus on ESG and stewardship considerations as the world returns to ‘normal’. But if anything, this is the time for us to double down on thinking responsibly, making responsible choices and taking responsible action. Behaving responsibly is good for our people and culture, for our investors, and for the future of the society we all live in. >>

DEAN PROCTOR Chief Executive Ofiicer

Your Investment Update – Q2 2021