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Gaia Investment Committee update

The Investment Committee in charge of our Gaia portfolios met today to review recent market events. After a difficult October, with both equity and bond markets falling, there has been a strong recovery this month that has seen those losses more than recouped, taking us back into positive territory for both the quarter and the year to date. Clearly, it would be pleasing if this ‘Santa rally’ continued to the end of the year. However, with some funds having risen by high single digits in the month to date, and one even rising by double digits, we agreed that it would probably be overly optimistic to expect it to continue at the same pace, and we would settle for modest gains to the year end, as that would at least make the year a reasonable one.

We considered whether or not the recent economic data, that has shown signs of improvement, especially around inflation, justified increasing the duration of our Fixed Interest exposure within the portfolios. After all, should we be at peak interest rates, any future moves down would see long-duration bonds benefit more than short-duration ones. However, we decided that it was too early to make such a call. In addition, the style bias of our equity holdings is naturally towards ‘growth’ companies that tend to move more sharply in relation to interest moves than the market as a whole. Therefore, should interest rates fall (or even interest rate expectations), we would expect to see an enhanced performance upside from our equity holdings. Therefore, we felt no need to change our position currently, preferring to maintain a relatively short-duration position in bonds to protect against any nasty surprises, confident that we will still participate well should things move more positively.

We discussed one area of the portfolios in particular, namely our exposure to renewable energy companies and all parts of the energy transition value chain. At our recent Client Presentations, we talked about the energy transition, and the recent challenges that it has faced. The news headlines have focused on the UK government moving target dates for several parts of the plan to achieve ‘net zero’ from 2030 to 2035. However, we have been equally interested in difficulties within the offshore wind market, with no bidders at all for the most recent UK auction of licences, and several companies, such as Orsted, pulling out of previously agreed projects in the US. These issues have arisen because the rise in interest rates, alongside increases in input costs, has meant that companies require a higher price for the energy that they generate to make developments profitable. Therefore, it has been pleasing to see the UK government acknowledge the problem, announcing an increase in the maximum price that companies can charge for offshore wind energy of between 52% and 66%, depending on the type of project. Such pragmatic changes from political leaders provides us with confidence that recent events are a bump in the road, rather than a change to the long-term story, so the committee decided that it was happy to maintain our exposure through the current volatility.

As a result of the above, no changes were made to the portfolios.

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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