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Gaia Investment Committee update

The Investment Committee in charge of our Gaia portfolios met yesterday to review recent market events. The recovery in markets that began last month accelerated into December, as hints from the US Federal Reserve that they expect to cut interest rates next year drove prices of bonds and equities higher. Bond markets have become especially bullish, with our position in UK long-dated gilts rising over 10% since the committee last met. We discussed whether markets may have got a bit ahead of themselves again, especially given that, just 3 months ago, they were selling off on the expectation that rates would stay higher fort longer, and we agreed that they are certainly priced optimistically. However, we have a significant bias to the less volatile, short-dated part of the market, so we agreed to main our long-dated exposure for now, and see how things evolve in the weeks ahead.

This reduction in interest rate expectations has been beneficial for the infrastructure position that we initiated in September, after a prolonged sell-off in the asset class. Therefore, we agreed to increase our exposure in Gaia Presto and Gaia Vivace, as well as adding a new position in Gaia Moderato. We are positive about the long-term prospects for the asset class, and the only thing missing was a turning point in sentiment, which may now have arrived. This move will be funded by a reduction in Liontrust SF Global Growth. The fund has a bias towards mid- and small-cap companies, so has benefited from the short-term improvement in sentiment, up 5.8% since our last meeting. However, we hold two other funds run by the same team, focused on the UK and Europe respectively, all of which have shown strong correlation recently, as well as elevated volatility. Therefore, we have been slowly reducing our holding in the Global fund for a while, and recent market moves provide a good point at which to do so again.

With very few trading days left in the year, portfolio returns year to date range from 6.5% at the lower risk end to 7.5% at the higher risk end. Of course, the numbers cannot be finalised until we hit year end. However, it is pleasing that they are higher than the cash rates available during the year. Many investors were tempted to sell out of risk assets, when a risk free rate of 5.5% on deposits seemed very attractive. We said at the time that we felt that short-dated credit, within a diversified portfolio, provided a more rounded way to deal with the situation, providing equivalent or greater potential upside, as well as protecting against the possibility of a recessionary environment. Whilst we can never be certain that any decision will prove to be correct, it is pleasing that our clients have seen this one play out well.

Should you wish to discuss anything in this note, or about our portfolios in general, please feel free to contact me on 020 3697 8902 or andrew.shaw@phoenix-wm.co.uk.

Andrew Shaw, Chief Investment Officer

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