Hub News #37

ISSUE 37

HUBNEWS SPRING 2018

SUCCESS FACTORS FOR MULTI-ASSET SELECTION

THE EUROPEANS ARE ENTREPRENEURS AFTER ALL

THE BIG TECH BACKLASH: IS IT SUSTAINABLE?

LOOKING AT A BUMPIER ROAD? Changing monetary policy, geopolitical tension.

A new environment looms for financial markets.

Advert Placement Goldman Sachs Asset Management (GSAM) is one of the world’s leading investment managers. With more than 2,000 professionals across 30 offices worldwide, GSAM provides institutional and individual investors with investment and advisory solutions, with strategies spanning asset classes, industries and geographies.

Our investment solutions include fixed income, money markets, public equity, commodities, hedge funds, private equity and real estate. Our clients access these solutions through our proprietary strategies, strategic partnerships and our open architecture programs.

For more information please contact gs-uk-tpd-adv@gs.com As of January 30, 2018. GSAM leverages the resources of Goldman, Sachs & Co. subject to legal, internal and regulatory restrictions. Š 2018 Goldman Sachs. All rights reserved.

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CONTENTS & WELCOME

CONTENTS 4. 3 Themes to Watch 6. Harnessing the Power of Human Adaptability 10. A New Dawn?

12. A New Retirement Landscape 16. Success Factors for Multi-Asset Selection 18. The Cyclical Drivers Behind Emerging Markets’ Renaissance 20. Meeting the Challenges of Politics, Economics and Markets 22. Saudi Arabia: The China of the Middle East?

24. Active Management, Mature Companies, and Margaret 28. Innovation Will Help Asian Companies Progress

WELCOME

30. Time to Focus on Europe’s Recovery 34. The Europeans are Entrepreneurs After All 36. Rhodes Show: A Decade at the Helm 39. When Markets Sneeze 40. Asia's Bright Future 43. T he Benefits of Compounding Growth 44. T he “Big Tech” Backlash: How Sustainable are Google, Facebook and Amazon?

It has not been an edifying start to the year for financial markets. Donald Trump has been making everyone nervous – from those who believe his tax cuts will generate inflation and prompt swift and unwelcome interest rate rises; to those who believe his tariffs threaten to disrupt global trade and make life difficult for companies doing business across the world.

In this environment, it is difficult to discern trends. While the ‘growth’ story appears to be over, it is not clear that it has yet been replaced by ‘value’. At the same time, while the US markets look too expensive, it is not clear that the other developed markets can offer the same growth or resilience. Reliable growth areas, such as technology, no longer look quite so reliable. In short, this is an environment in flux.

But investors still need to look somewhere. That may be emerging markets, as Neptune’s Ewan Thompson or Jupiter’s Ross Teverson argue, or by exploring unloved parts

of the bond markets, as Janus Henderson’s John Patullo suggests.

Multi-asset, done right, potentially presents a solution and Square Mile discusses its critical success factors.

There are opportunities in every market – Asia, Europe, even the unfashionable UK – and BlackRock, Baillie Gifford and Investec explore them here.

In other words, there is plenty still to play for, even if investors need to be a little more discerning. The road may be bumpier – and markets won’t do the heavy lifting – but global growth continues apace and there are still opportunities.

As ever, if you have any comments or queries on Hub News or any other aspect of the Adviser-Hub service, including our events section, please do not hesitate to get in touch at: enquiries@adviser-hub.co.uk.

Cherry Reynard Editor www.adviser-hub.co.uk

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MACROECONOMICS

3 THEMES TO WATCH GSAM discusses the three key themes in markets – global growth widening, fiscal policy loosening and monetary policy tightening — and the investment implications.

We are seeing greater confirmation of the broad and deep global expansion as we discussed in our 2018 Investment Outlook, with the Emerging Market (EM) vs Developed Market (DM) growth differential widening. However, the biggest change from our Outlook is the magnitude of the US fiscal expansion at a time when the economy is pushing past full employment. This creates upside risk to growth later

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this year, but increases the risk of overheating in the long term, as financial conditions remain easy despite monetary tightening.

How is the macro environment evolving compared to our 2018 Outlook? We are watching three main themes: global growth (on track), fiscal policy (looser than we expected) and monetary policy tightening (finally starting to matter).

MACROECONOMICS

GLOBAL GROWTH WIDENING Theme: EM vs DM growth premium widens Strong economic data continues to point to the health of the global expansion and further acceleration in EM growth – a core view from our 2018 Outlook. EM remains a bright spot as the gap between EM and DM growth rates widens and earnings momentum picks up.

Investment Implication: Bullish on EM equities The EM earnings recovery, underpinned by strong macro fundamentals, should support EM equities where valuations continue to look attractive relative to their DM counterparts.

FISCAL POLICY LOOSENING Theme: Higher near-term growth but more risk The US fiscal package has stimulated economic growth and risk assets in the short term, boosting corporate earnings optimism. In the long term, a further deterioration in the fiscal deficit in an economy with little slack raises the risk of overheating, while also reducing the policy tools available if the cycle were to inflect.

“THE BIGGEST CHANGE FROM OUR OUTLOOK IS THE MAGNITUDE OF THE US FISCAL EXPANSION AT A TIME WHEN THE ECONOMY IS PUSHING PAST FULL EMPLOYMENT. THIS CREATES UPSIDE RISK TO GROWTH LATER THIS YEAR, BUT INCREASES THE RISK OF OVERHEATING IN THE LONG TERM.”

Investment Implication: Cautiously optimistic on risk assets We remain cautiously optimistic on US equities and credit given the fiscal tailwinds, but remain alert to late-cycle risks and elevated valuations. Increased Treasury issuance to finance the growing deficit could weigh further on US rates.

MONETARY POLICY TIGHTENING Theme: Monetary tightening starting to matter With inflation inching closer to targets, more DM central banks are tightening policy, driving rates and volatility higher in response. However, the tightening impulse has yet to flow through to financial conditions, which would need to tighten to moderate growth and avoid more serious overheating in the long run.

Investment Implication: Bearish on US rates We remain bearish on US rates. We raised our forecast from three to four hikes in 2018, still above Fed and market expectations, even after the recent repricing. We expect volatility to persist, favouring a dynamic approach to asset allocation.

Get the full Macro Chartbook on GSAM.com to look at the three themes in more detail.

The views expressed herein are as of February 22, 2018 and subject to change in the future.

Individual portfolio management teams for GSAM may have views and opinions and/or make investment decisions that, in certain instances, may not always be consistent with the views and opinions expressed herein. Views and opinions expressed are for informational purposes only and do not constitute a recommendation by GSAM to buy, sell, or hold any security, they should not be construed as investment advice. Past performance does not guarantee future results, which may vary. The value of investments and the income derived from investments will fluctuate and can go down as well as up. A loss of principal may occur. Economic and market forecasts presented herein reflect a series of assumptions and judgments as of the date of this presentation and are subject to change without notice. These forecasts are subject to high levels of uncertainty that may affect actual outcomes. United Kingdom and European Economic Area (EEA): This material is a financial promotion and has been approved by Goldman Sachs Asset Management International, which is authorized and regulated in the United Kingdom by the Financial Conduct Authority. © 2018 Goldman Sachs. All rights reserved. Date of first use: February 22, 2018. 122524-OTU.

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MULTI-ASSET

HARNESSING THE POWER OF HUMAN ADAPTABILITY Sunil Krishnan joined Aviva Investors at the end of 2017 to head its multi-asset fund ranges. He discusses his early impressions and what makes the group’s multi-asset proposition stand out.

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MULTI-ASSET

Multi-asset investing is a crowded field.

How is Aviva's offering different?

Certainly, the number of investors in multi-asset investing has mushroomed, but some clear differences are emerging. How active are you with asset allocation? How much insight comes from internal research? We believe asset allocation needs to be done by the fund manager, rather than outsourced to third parties. Some do not have the culture and process to change asset allocation dynamically.

We believe that this is the bit we’re good at.

We also believe that diversification needs to be properly global. We don’t maintain a ‘home’ bias towards UK stock and bond markets, or seek the ‘comfort blanket’ of familiar names. It can be illusory anyway – with UK-listed companies having little UK revenue exposure, for example. We maintain complete freedom when deciding on the right blend. Investors need exposure to return opportunities wherever they are in the world.

You joined Aviva Investors relatively recently.

What are your early impressions?

You join a firm like Aviva Investors expecting to find smart colleagues and a strong client service ethic. But two areas have surprised me positively. The investment culture at the group is quite distinctive. Everyone talks about collaboration, many teams struggle to deliver it.

We believe in discretionary asset allocation and aim to harness the power of human judgement, by getting the right people in a room talking in the right way. This is better than a process that employs clever people but doesn’t pay attention to how they work together.

When we are debating ideas at our investment meetings, there will be a large number of investors in the room. Other firms find this results in ‘group think’, or over-deference to the more senior members of the team, but that is not how it works here.

People are allowed and encouraged to put forward ideas and this is backed up by the reward and progression structure. Tom Wells and Paul Parascandalo, who manage the five UK MAF funds in my team, exemplify this perfectly.

Both were promoted from within to become fund managers, based on their willingness to engage in the investment debate. Respectful disagreement is encouraged regardless of rank.

It is an environment of trust and I can say from experience that it is unusual in our industry.

The commitment of resources also shows an ambition to be the best. The management team at Aviva investors view multi-asset investing as the hub, drawing the best out of the other teams. This is seen in commitment of resources as well as culture. We pay what it takes to have the strongest risk systems and back-up; we are growing the team and adding resources across the multi-asset business. This improves our capacity to generate ideas and build good portfolios.

How much do you rely on a fixed asset allocation for the five portfolios in the multi-asset range?

One of the reasons we want to oversee every part of a portfolio is that sometimes seemingly innocent asset allocation assumptions – that

are based on lots of history – are where the greatest dangers lie. For example, today there is evidence that we are moving from a low volatility environment across all asset classes to one where average volatility is likely to be higher. The relationship between the equity market and bond market may also not be as benign as we’re used to – in fact, both asset classes may sell off together.

If you base your asset allocation only on what has happened in the past, this will show that when equities go down, bonds rise. While this is not bad as a starting point, multi-asset diversification needs to work when history doesn’t just repeat. It needs to reflect current market conditions and to be adaptable.

“IF YOU BASE YOUR ASSET ALLOCATION ONLY ON WHAT HAS HAPPENED IN THE PAST, THIS WILL SHOW THAT WHEN EQUITIES GO DOWN, BONDS RISE. BUT MULTI-ASSET DIVERSIFICATION NEEDS TO WORK WHEN HISTORY DOESN’T JUST REPEAT. IT NEEDS TO REFLECT CURRENT MARKET CONDITIONS AND TO BE ADAPTABLE.”

We’re entering a world where central banks are less supportive, which brings challenges for bonds and equities. We see some risks which could affect them both, but equities offer potential for greater reward.

To what extent do you invest into less liquid alternative assets?

We always aim to ensure adequate liquidity to investors even in stressful markets. This keeps us largely in listed equity and bond markets and, we find, gives us ample diversification. We can take very specific positions – such as our current position in the European banking sector – and get real focus on our investment view.

Use of liquid absolute return strategies allows us to benefit from an even wider opportunity set.

Asset allocation will lead, and then we look to implement it in the way that offers the best combination of risk and reward. With our European banking position, we were looking at the best long-term value opportunity to access the European recovery. Asset allocation is one thing, but can we add something through implementation? This is where we are looking for portfolio managers to exercise creativity and good judgement. We are just as accountable for the implementation of decisions as for the underlying macro view.

What is the current positioning across the portfolios?

We found some of our views challenged in 2017. The global economy is gradually reflating across all the major regions. Over time, that’s

eating spare capacity, leading to a normalisation of inflation. This allows central banks to step away from easier monetary policy and that might create more challenges, notably higher volatility, which requires more of a risk premium in “safe” assets. Those are views we had for much of last year.

However, in 2017 government bonds did not sell-off as aggressively as this scenario would suggest and in the equity market, some of the areas we’d expected to benefit – emerging markets, Japan, Europe – weren’t as strong as the US. The market’s strong bias to technology firms meant that the US was the best performer last year.

This year, our decision was not to fold and start again, but rather to stick with our convictions. We are seeing some validation of this; for example, emerging markets led global markets at the start of the year. Equity markets have seen higher volatility in recent weeks, and bond yields have moved sharply higher on evidence of stronger inflation. Some of what we saw in January and February has been coming for some time. Investors should get used to the idea of more volatility in the future.

We are still constructive on equities overall, believing they offer the best balance of risk and reward. Although they will be more volatile, they will continue to translate earnings growth into returns. This is particularly the case in trade-sensitive markets such as Japan and emerging markets.

How do you interpret the volatility since the start of the year?

There are now higher yields in government bonds, which is welcome and warranted, but the adjustment phase is not complete. As central banks become less supportive, it will lead to more volatility. Retail investors who have poured money into fixed income may have to re-evaluate. In credit, for example, it is easy to argue that the yields are better than cash, but a widening in credit spreads could erode this quickly through capital losses.

We see some parallels with 1987, when equities performed well as bonds sold off until there was a very sharp correction. The way that a stronger economy challenged the equity market was through the bond market. Bond yields rising made it quite difficult to ignore the returns available from bonds when weighing up equity allocations. Today, we need to see them rise much higher before this happens. It isn’t likely to happen in a matter of weeks but could happen over a couple of quarters.

What would cause you to rethink your current thesis?

Our rationale for being constructive on equities is that the economic environment is likely to support higher profitability for a wide range of companies. If the performance of equity markets became too narrowly focused and too small a number of companies were driving performance, our core thesis of a rising economic tide would come into question. It would suggest the market is leaning on a small number of companies. This would be a concern, and so we’re interested in the details of market performance, not just the headlines.

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ENGINEERED TO GO THE DISTANCE

Advert Placement Aviva Investors Multi-Asset Funds • Dynamic: targets optimal asset allocation • Precise: underpinned by robust risk management • Efficient: maps across a broad risk spectrum • Powerful: robust track record Aviva Investors Multi-Asset Funds (MAF) annualised performance 1 year

3 year

5 year

MAF I

2.53%

3.33%

4.26%

MAF II

5.94%

5.97%

7.07%

MAF III

7.83%

8.08%

9.17%

MAF IV

9.36%

9.21%

10.47%

MAF V

12.19%

11.32%

10.66%

Past performance is not a guide to future performance.

Source: Lipper, a Thomson Reuters Company, as at 31 December 2017.

R3 share class, annualised performance, bid to bid basis, net income reinvested, net of ongoing charges and fees.

Discover a range of funds engineered to align with your clients’ chosen risk and reward profiles, actively managed to target long-term capital growth.

Capital is at risk. The funds invest in derivatives which can be volatile. Investors may not get back the original amount invested. avivainvestors.com/MAF

Risk-rated by:

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For today’s investor

For professional clients and advisers only. Not to be distributed to or relied on by retail clients. Ratings are no guarantee of future performance and can change.

The Aviva Investors Multi-asset Fund range comprises the Aviva Investors Multi-asset Fund I (“MAF I”), the Aviva Investors Multi-asset Fund II (“MAF II”), the Aviva Investors Multi-asset Fund III (“MAF III”), the Aviva Investors Multi-asset Fund IV (“MAF IV”) and the Aviva Investors Multi-asset Fund V (“MAF V”) (together the “Funds”). The Funds are sub-funds of the Aviva Investors Portfolio Funds ICVC. For further information please read the latest Key Investor Information Document and Supplementary Information Document. Copies of these documents and the Prospectus are available in English free of charge on request or on our website. Issued by Aviva Investors UK Fund Services Limited, the Authorised Fund Manager.

Registered in England 1973412. Authorised and regulated by the Financial Conduct Authority. Firm Reference 119310. Registered address: St Helen’s, 1 Undershaft, London EC3P 3DQ. An Aviva company. www.avivainvestors.com RA18/0014/01062018

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Copyright – © 2018 Morningstar, Inc. All Rights Reserved. Morningstar RatingTM as of 31.01.2018, in the Global Large-Cap Blend Equity Morningstar CategoryTM. Investments should be made on the basis of the current prospectus, which is available along with the Key Investor Information Document and annual and semi-annual reports, free of charge on request by calling 0800 368 1732. Issued

by Financial Administration Services Limited, authorised and regulated by the Financial Conduct Authority. Fidelity, Fidelity International, the Fidelity International logo and F symbols are trademarks of FIL Limited. UKM0218/21685/SSO/0618

GLOBAL INVESTING

A NEW DAWN? For the first time in a number of years, 2017 saw a resurgence in global earnings growth. Fidelity Global Special Situations Fund Manager Jeremy Podger assesses whether this dynamic can continue to support markets and the likely implications for market leadership in the coming months.

After years of stagnant earnings growth (in US dollar terms), the rate of global earnings growth in 2017 was broadly similar to the rise in markets. Given this, we could say that we appear to have moved from a “revaluation” phase to a new “earnings-driven” phase of market growth.

At the end of last year, the consensus view was that US earnings should grow a further 12.6% in 2018. However, the passage of the tax reform bill – not in these estimates at the time – could propel US earnings growth into the teens (in percentage terms) this year. There may be scope for earnings to surprise positively outside the US as well.

This should be supportive of markets this 1 0 ADVISER-HUB.CO.UK

year, although one should note that growth in 2018 (and then 2019) is unlikely to be up to last year’s level. Against that is the expectation of a tightening of liquidity conditions with further rate rises in the US and some tapering of quantitative easing in Europe. Meanwhile, economic indicators are generally very positive (though admittedly there is a risk they can’t get much better).

Overall at this stage my working assumption is that the current benign economic backdrop is most likely to lead to investors focusing more outside the US now that earnings growth has reappeared and valuations are relatively more favourable.

The central case may be that the rest of the

world now outpaces the US, which is more expensive (even after tax reform), more mature in terms of the profit cycle and where companies have generally taken on more debt (unlike elsewhere in the world). However, if there is some kind of crisis, the US would be expected to exhibit more defensive qualities, as it has done in the past. A sharp sell-off could be caused by any of a number of possible geopolitical events – one example might be an oil price-related inflationary shock.

In the absence of this type of shock, it is reasonable to expect the US market to correct if and when monetary conditions are significantly tightened and earnings growth turns negative. This will happen at some point

GLOBAL INVESTING

but appears less likely on a 12-month view.

Looking at market levels, it is difficult to deny that low bond yields have had some influence in dragging up equity market valuations in recent years. The chart below shows the US equity Price/Earnings (PE) ratio compared to the “PE” of bonds (the inverse of the yield) since 1970. While investor sentiment in the US among private investors is very positive currently (less so among professional investors), we see that actual fund flows in the US have been more directed to bonds than equities since the financial crisis.

There has been a similar picture for other regions, suggesting it is at least possible that, with fixed income yield spreads now very compressed, investors could deploy more risk capital into equities in general in the coming year. Thus, at this stage I am inclined to be positively disposed towards European, Japanese (seeing very strong earnings growth currently)

PORTFOLIO MANAGER, FIDELITY GLOBAL SPECIAL SITUATIONS FUND

Fig 1

Jeremy Podger joined Fidelity in February 2012 and manages the Fidelity Global Special Situations Fund and the Fidelity World Fund (SICAV).

He is an experienced investor and has been managing global equities mandates for more than 20 years. His dedication and expertise led him to be named Fund Manager of the Year 2017 – Global Equities

by Morningstar.

“MY WORKING ASSUMPTION IS THAT THE CURRENT BENIGN ECONOMIC BACKDROP IS MOST LIKELY TO LEAD TO INVESTORS FOCUSING MORE OUTSIDE THE US NOW THAT EARNINGS GROWTH HAS REAPPEARED AND VALUATIONS ARE RELATIVELY MORE FAVOURABLE.”

Prior to Fidelity, Jeremy was Head of Global Equities at Threadneedle, a fund manager at Investec for seven years and a global and pan-European fund manager for Saudi International Bank. Jeremy has a degree from Cambridge University and an MBA from London Business School.

Trailing P/E ratios

23

21

19

23

15 13 Jan 15

Apr 15

Jul 15

Oct 15

Jan 16

Apr 16

and other Asian markets, and a little more cautious on the US, despite the recent boost from tax reform.

As an aside, technology far outstripped all other sectors in performance terms last year. This largely reflects some very powerful earnings growth so that earnings/cash flow-based valuations (relative to the broader market) are generally currently below long-term averages.

This does not mean, however, that many of the better performing names may not correct somewhat when the recent rapid growth inevitably slows down. The high profile mega-cap names are surely vulnerable in this regard.

In conclusion, barring unforeseen events, equities remain well supported. The focus, in the year ahead, remains on finding the best stock opportunities for our investors globally

Fig 2

S&P 500 Index

Jul 16

Oct 16

Jan 17

Apr 17

Euro Stoxx 50 Index

Jul 17

Oct 17

TOPIX Index

S&P 500 Trailing P/E vs 10-Year Treasury Price/Yield

75 65 55 45 35 25 15 5 Dec 87

Dec 89

Dec 91

Dec 93

Dec 95

Dec 97

Dec 99

S&P 500 Trailing P/E

Dec 01

Dec 03

Dec 05

Dec 07

Dec 09

Dec 11

Dec 13

Dec 15

Dec 17

10 Year Treasury Price/ Yield

Important information This article is for Investment Professionals only and should not be relied upon by private investors. The value of investments and the income from them can go down as well as up, so you may not get back what you invest. Past performance is not a reliable indicator of future returns. Investors should note that the views expressed may no longer be current and may have already been acted upon. The Fidelity Global Special Situations Fund uses financial derivative instruments for investment purposes, which may expose it to a higher degree of risk and can cause investments to experience larger than average price fluctuations. Changes in currency exchange rates may affect the value of an investment in overseas markets.

Investments in small and emerging markets can also be more volatile than other more developed markets. Reference to specific securities should not be interpreted as a recommendation to buy or sell these securities, but is included for the purposes of illustration only. Investments should be made on the basis of the current prospectus, which is available along with the Key Investor Information Document, current annual and semi-annual reports free of charge on request by calling 0800 700 000. Issued by Financial Administration Services Limited, authorised and Fig 1: Fidelity International, Bloomberg, 31 December 2017.

Fig2: Fidelity International, Bloomberg, Bank of America Merrill Lynch, 31 December 2017.

regulated by the Financial Conduct Authority. Fidelity, Fidelity International, the Fidelity International logo and F symbol are trademarks of FIL Limited. UKM0218/21566/SSO/NA

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RETIREMENT

A NEW RETIREMENT LANDSCAPE Retirement planning used to come in two distinct parts: pre- and post-. Retirees accumulated, de-risked and bought an annuity. The post-retirement phase needed only light management. Today’s environment, says LGIM’s multi-asset team, is fundamentally different, and pension planning needs to be a ‘straight-through process’. Cherry Reynard interviews Justin Onuekwusi and Andrzej Pioch from LGIM's multi-asset team.

The changes to the retirement landscape have brought about a parallel shift in the advice process. No longer can advisers plan up to retirement and stop, on the assumption that clients will buy an annuity. Planning needs to be a straight-through process in this ‘postfreedoms’ world. What do advisers need to consider in building a centralised retirement proposition today?

Andrzej Pioch, fund manager in the LGIM multi-asset funds team says: “The adviser has a different role. Previously when someone got to retirement they would de-risk, go into an annuity and needed only a light-touch afterwards. Today, the decision is more complex; money may be drawn from an ISA, a pension or general savings, each with different tax 1 2 ADVISER-HUB.CO.UK

implications. The whole advice process has completely changed.”

He points out that this is now attracting the attention of the regulators. Just as they focused on central investment propositions, today they are turning their attention to central retirement propositions (CRPs). This is still new territory and models are developing and evolving.

Suitability will be just as important on the retirement side as it is for a central investment proposition and advisers will need to ensure their processes are just as robust.

For Pioch, the focus of a CRP needs to be on total return, rather than income. He says: “It’s about taking an income while being able to maintain the overall pot. You have to be wary on capital. A retirement portfolio can now be

passed on to the next generation without incurring inheritance tax, for example.” This may change the way people draw down their retirement savings and advisers need to adjust their approach to accommodate these changes.

Suitability goes without saying. Risk profiling is vitally important on the accumulation and decumulation side. Justin Onuekwusi, multi-asset fund manager at LGIM, believes risk-profiling tools will be developed to assess the risk to income as well as capital. “All of our recent discussions with third parties indicate there will be a wave of innovative risk-profiling tools coming to the market for advisers to use for retirement planning."

Onuekwusi admits that volatility is only one measure of risk, and that any retirement

RETIREMENT

proposition will also have to reflect changing risks. He adds: “Some risks are less prevalent than they were. Traditional models always said you needed to be in more liquid and less volatile assets as you moved nearer retirement.

Now as people are managing assets right through retirement, maybe volatility is more likely to be tolerated and they are more likely to be able to stomach illiquidity risk in, for example, direct property or infrastructure assets.”

It will also change the asset mix. “However, it is important dispel a common myth; just because you are managing a portfolio through retirement, it doesn’t necessarily mean your risk appetite is going to increase,” he says. He highlights LGIM does still draw a lot of assets into lower-risk funds in the accumulation phase.

"AS WE MOVE LATER IN THE ECONOMY CYCLE, IT BECOMES EVEN MORE VITAL TO BE DYNAMIC IN MANAGING THE INVESTOR’S ASSET ALLOCATION IN THE DECUMULATION OF THEIR INVESTMENT."

People who aren’t buying an annuity will often want a similar risk profile in a drawdown product. The real difference is the de-risking element. If an investor has the appetite to take equity risk, they will continue to do so in retirement.

The same is true for those taking an income

– there isn’t only one type of income investor, so LGIM has launched three options for different risk appetites. Pioch says it is important to achieve a balance between funds generating an income today, and those with the potential to grow that income into the future – which would come from a higher allocation to risk assets.

The biggest problem for all advisers in building a centralised retirement proposition is ‘sequencing risk’, also known as ‘pound-cost ravaging’. This is the risk that as the portfolio falls investors have to sell units in that fund to keep providing the same level of income. It then gets increasingly difficult to recoup these losses when the markets recover.

Onuekwusi sees three main ways to combat this problem: diversification – by spreading risk over different asset classes, it gives a smoother journey. This is a principle underpinning all LGIM multi-index strategies. This has undoubtedly become more difficult, but diversification needs to be global, and needs to look more broadly to new areas such as global equity sectors, regional emerging market bonds, and higher yielding developed market bonds such as Australia because many traditional asset classes that pay a higher income look expensive when compared to history. He says: “As we move later in the economic cycle, it becomes even more vital to be dynamic in managing the investor’s asset allocation in the decumulation of their investment. Otherwise drawdowns of asset classes may be much more than investors expect, leading to much smaller pension and savings pots."

The team also strives to take a ‘natural’ income. This means not supporting the yield

with derivative overlays or by taking money from capital. In times of stress, when asset classes fall, investors still get the income they need. Finally, it is about having a smoother income profile – rather than looking at an historic yield number. The LGIM multi-asset team look at the pounds and pence of the income expected from underlying investments and then aims to smooth the annual figure in a series of monthly distributions.

Pioch adds: “We still see advisers selling down assets to support the income requirements.

This is fine in upward trending markets, but the time will come when an adviser is selling down units in a falling market or will have to rely on natural income to provide the decumulation income. It’s so important now that advisers prepare themselves against that and consider the solutions designed with income investors in mind.”

He believes it is also worth considering the size of a client’s cash buffer. Advisers have often kept 2-3 years’ worth of income in cash. Again, this may appear to make sense when markets are trending higher, but in an environment of lower returns, that might be a significant drag on performance and distributions may not catch up with inflation. A solution managed to the investor’s risk appetite with an attractive level of natural income will mitigate that.

“We believe the regulator will be looking increasingly closely at the centralised retirement proposition. It is important to move, post-retirement, to solutions that directly address the key risks of longevity and sequencing. We have eight multi-index funds, five growth and three income, all risk-targeted.

We don’t believe in a one-size-fits-all for income or growth.”

ADVISER-HUB.CO.UK 1 3

Our Multi-Index Funds make it easier to keep everything on track.

Active management

Simplicity

Cost-effectiveness

Ongoing suitability

Multi-Index Fund Range In today’s complex environment, it’s easy for portfolios to veer off-track, but our Multi-Index Funds are bolted to their risk profiles at all times. And because they are actively managed, they can take the best route towards your clients’ goals.

Our Multi-Index Funds are largely made up of our index funds so they remain simple and, more importantly, cost effective. We have over £2bn* under management in eight risk-targeted funds, each focused on either income or growth. All designed to get your clients where they want to be.

†

0345 070 8684** • fundsales@lgim.com • www.lgim.com/ontrack

This is not a consumer advertisement. It is intended for professional financial advisers and should not be relied upon by private investors or any other persons. The value of investments and any income from them may fall as well as rise, and investors may get back less than they invest. Exchange rate changes may cause the value of investments and the level of any income to rise and fall. Multi-Index funds are sensitive to interest rate changes. At times, especially over shorter timescales, lower risk rated funds may fall in value by more than higher risk rated funds. Details of the specific and general risks associated with the funds mentioned are contained within the Key Investor Information Documents. *As at 30 June 2017. **Call charges will vary. †Citywire source and copyright: L&G Multi-Index Funds 3 & 4 awarded CityWire Gold Rated in the Mixed Assets – Conservative GBP sector. Square Mile rating applies to Legal & General Multi-Index Funds only. Legal & General (Unit Trust Managers) Limited. Registered in England and Wales No. 1009418. Registered office: One Coleman Street, London, EC2R 5AA. Authorised and regulated by the Financial Conduct Authority.

Free Independent Research and Insight • Fund opinion, ratings and factsheets • Video fund snapshots and talking factsheets • Adviser focussed educational papers Register for free at

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Why Square Mile?

• Square Mile is an independent investment research business that focuses first and foremost on in depth, qualitative fund research • We focus on identifying “best-in-class” funds and gaining the fullest possible knowledge and understanding of those funds • Rather than just explaining what a fund does and how it is constructed, we seek to understand how a fund behaves, whether it will consistently deliver on its objectives, and whether it represents good value for investors Important Information This advert is for the use of professional advisers and other regulated firms only. It is published by, and remains the copyright of, Square Mile Investment Consulting and Research Ltd (“SM”). SM makes no warranties or representations regarding the accuracy or completeness of the information contained herein. This information represents the views and forecasts of SM at the date of issue but may be subject to change without reference or notification to you. SM does not offer investment advice or make recommendations regarding investments and nothing in this presentation shall be deemed to constitute financial or investment advice in any way and shall not constitute a regulated activity for the purposes of the Financial Services and Markets Act 2000. This presentation shall not constitute or be deemed to constitute an invitation or inducement to any person to engage in investment activity.

Should you undertake any investment activity based on information contained herein, you do so entirely at your own risk and SM shall have no liability whatsoever for any loss, damage, costs or expenses incurred or suffered by you as a result. SM does not accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance is not a guide to future returns.

MULTI-ASSET

SUCCESS FACTORS FOR MULTI-ASSET SELECTION In an extract from Square Mile's most recent Multi-Asset Sector report, Diane Earnshaw, Head of Client Relationships at Square Mile Research highlights the key characteristics of a successful multi-asset strategy.

The demand for multi-asset funds and solutions has led to strong growth across the sector over recent years. For example, the IA Mixed Investment sectors have grown from circa ÂŁ40bn in 2010 to ÂŁ145bn in 2018, in excess of a 300% increase in a little over eight years.

We see little reason for the popularity of multi-asset funds and solutions to dissipate any time soon. The structural drivers supporting their use by advisers and investors seem firmly set. We think the sector is set to continue to grow, but we also think the pressure on costs is likely to remain.

1 6 ADVISER-HUB.CO.UK

M U L T I - A XS XS XE XT

CHARACTERISTICS OF SUCCESSFUL STRATEGIES Square Mile look for a number of key characteristics when analysing multi-asset funds. We have a preference for the following attributes when selecting multi-asset funds and strategies as we believe these attributes are most likely to drive success in the future.

These factors also support advisers in their job of recommending the right fund to the right client and ensuring a fund is: • Meeting a client’s suitability requirements • Meeting a client's investment objectives • Monitored for ongoing suitability and delivery of objectives

MEETING A CLIENTS' SUITABILITY REQUIREMENTS. Advisers can only make suitable recommendations if funds are clear about their performance and risk objectives and how they meet those objectives. At the same time, these funds need to offer good value for money.

Clear outcome At the outset, there needs to be a clear articulation of what outcome an investor can expect from their investment. This could be capital accumulation, income, inflation protection, capital protection or a combination of these.

Clear and measurable performance or risk objective A clear, measurable performance or risk objective will give a helpful expectation of what investors can expect from a fund. This objective sets the framework for the management of the fund and the level of risk that needs to be taken to meet the objective.

Articulation of an expected risk profile This is essential if an investor or adviser is to make a judgment on the suitability of the investment. Advisers retain responsibility for suitability even if they have “outsourced” investment management.

Risk measurement should include a range of measures including a focus on capital drawdown which aligns better than volatility with a client’s understanding of risk and their capacity for loss. Funds that can provide investors with clarity around the level of risk they are likely to take are desirable to advisers in their need to demonstrate ongoing suitability.

“WE THINK THE MULTIASSET SECTOR IS SET TO CONTINUE TO GROW UNDERPINNED BY STRONG STRUCTURAL DRIVERS, BUT WE ALSO THINK THE PRESSURE ON COSTS IS LIKELY TO REMAIN.”

Value for money We accept that active management is more expensive than passively implemented strategies. However, fees are the only known in investing and their compound effect on returns should not be underestimated. “Value for money” does not preclude higher-cost offerings, but they must demonstrate superior risk-adjusted returns. Cost transparency is essential to determine value for money which limits the appeal of traditional and new breed with-profits funds and of some DFM offerings.

INVESTMENT CAPABILITY TO MEET OBJECTIVE In short, are there enough resources to meet the fund’s ambitions? Do they have enough people to research a range of asset classes successfully? Is this approach diligent and repeatable?

Parent company commitment to multi-asset investing Where a parent group is committed to multi-asset investing, it is more likely to invest in appropriate resources to support success.

This will include recruiting talented investment professionals and investing in the necessary technology and infrastructure to deliver operational and trading efficiencies.

Strong team-based investment process A strong team-based process, ideally not centred around one star manager, serves investors’ interests best. Given the totality of the investable universe for multi-asset funds, breadth of knowledge and expertise is required to demonstrate the appropriate skill-set to execute these strategies successfully.

Well defined and articulated investment process A good and well-defined investment process helps to deliver continuity of approach and anticipated outcome.

Strong risk controls The investment process should have clear risk controls to ensure that managers do not exceed the remit of their mandate and expose investors to unintended and unexpected risk. Companies with strong risk management processes are preferred.

Flexibility Within the scope of the fund’s mandate, objective and investment approach, funds with flexibility and a wide tool kit have the potential to deliver more consistent returns through time.

DOES THE FUND REMAIN SUITABLE AND IS IT MEETING ITS OBJECTIVES? Funds are not static, and multi-asset funds need to be tested against their stated objectives to ensure they remain suitable for clients.

Good risk-adjusted performance Ultimately, good risk adjusted performance needs to be delivered in line with initial investor expectations. Many multi-asset funds that were launched after the financial crisis in 2008 have arguably yet to be fully tested, and often have track records of less than five years.

Transparent investor communication Reporting portfolio activity, positioning and performance transparently helps with ongoing due diligence, helping advisers and their investors to fully understand the fund they are using. This helps investors understand performance, particularly in relation to short-term performance issues that are explainable and reasonable in the context of the fund’s strategy.

For more information on Square Mile please visit squaremileresearch.com ADVISER-HUB.CO.UK 1 7

EX M X XEXR G I N G M A R K E T S

Ewan Thompson Neptune Investment Management

THE CYCLICAL DRIVERS BEHIND EMERGING MARKETS’ RENAISSANCE AFTER A LONG PERIOD OF UNDERPERFORMANCE, EMERGING MARKETS HAVE SHOWN CONSIDERABLE STRENGTH SINCE JANUARY 2016.

NEPTUNE’S EWAN THOMPSON, HEAD OF EMERGING MARKET EQUITIES, EXPLAINS THE BACKGROUND TO THIS IMPROVEMENT.

spike in volatility would normally see emerging markets The outperformance of emerging markets that began in suffer considerably more than developed markets. However, January 2016 has continued largely uninterrupted into this was not the case, with two of our most preferred the first months of 2018. Perhaps the most important driver markets – Brazil and Russia – extending their outperformance. behind this sustained strength – the first consecutive years A critical feature of the market correction was the extent of outperformance since 2009/10 – is the ongoing to which cyclical or value markets and stocks continued to synchronised recovery in global growth, underway since early outperform more traditionally defensive stocks. In our 2016. Emerging markets traditionally perform best view, this underscores the degree to which the when the economic backdrop is strong, as emerging market investment case has emerging market companies tend to offer the developed into a bottom-up story based on greatest operational leverage to global earnings recovery, rather than just a growth. Emerging market corporate “The reality is that top-down case driven by interest rate and earnings continue to recover rapidly. historically higher currency expectations.

During the long period of emerging interest rates coincide The strongest performing markets are market underperformance from with emerging market therefore those displaying the greatest rate 2011-2015, one of the biggest concerns outperformance.” of change in underlying economic for the asset class was the potential for conditions and a resultant strong pickup in rising interest rates – most notably corporate earnings. Moreover, the rising demonstrated during the Taper Tantrum interest rate environment along with a renewed sell-off in 2013. It is therefore one of the most credit cycle has driven the rate-sensitive (and encouraging features of this recent recovery that it heavily weighted) financial sector higher, while sectors is playing out against a backdrop of sharply higher such as energy and materials have continued to perform interest rates. Indeed, the reality is that historically higher strongly as growth prospects improve. This strength has interest rates coincide with emerging market maintained the ongoing long-term rotation away from outperformance – as long as they are rising due to improving relatively expensive, defensive-type stocks that functioned as growth and not due to risk aversion (as was the case in 2013). safe havens during the period of emerging market A further encouraging feature of emerging market underperformance. Consumer staples and performance so far in 2018 is the extent to which this telecommunications have proved to be the weakest sectors outperformance has been maintained throughout the (as they proved to be in both 2016 and 2017). dramatic sell-off witnessed in February. The significant 1 8 ADVISER-HUB.CO.UK

EQUITY INCOME

MEETING THE CHALLENGES OF POLITICS, ECONOMICS AND MARKETS To mark the third anniversary of the Investec UK Equity Income Fund, Portfolio Manager Blake Hutchins recounts how he has managed the fund through a challenging market environment.

In the three years since the launch of the Investec UK Equity Income Fund we have seen unusual conditions in the realms of politics, economics and markets. Among the challenges, investors have had to contend with the ripple effects of Britain’s vote to leave the EU, an unpredictable oil price thanks to a combination of Opec cuts and rising shale production – and of course historically low interest rates, which have only now begun to rise after sitting at record lows for nearly a decade.

However a quick now-and-then comparison of the companies in the portfolio belies this tumultuous backdrop – two-thirds of the companies that featured in the fund at launch are still there today. For Hutchins, this clearly demonstrates what he and the team set out to achieve; find good-quality companies with a good runway for growth. ‘We buy a company in the hope of holding it forever,’ he says.

This quality approach is the cornerstone of the fund, but sometimes circumstances at a micro or macro level provide opportunities on which Hutchins can capitalise. This makes engaging with companies and understanding management decision-making even more vital.

Our ‘Quality’ investment team members attend more than 100 meetings a year with companies to ensure their strategies and capital allocation decisions are aligned with shareholder interests and the fund’s mandate to deliver a sustainable income stream to its investors.

These two scenarios illustrate the importance of engaging with companies, 2 0 ADVISER-HUB.CO.UK

understanding how they generate cash through the cycle, and how they can use that cash to fund sustainable dividend growth:

1. COPING WITH OIL PRICE VOLATILITY The oil price had long been supported by the commodities super-cycle, with China’s construction boom doing most of the heavy lifting. However back in 2015 when questions arose over how this rapid urbanisation was being funded, China’s debt overhang came into sharp focus, sending commodity prices tumbling. But it wasn’t just about China; the arrival of US shale added fuel to this fire too.

As Robert McNally, energy consultant and adviser to President George W Bush, puts it in his book on oil pricing, ‘Crude Volatility’, ‘We are going to be unpleasantly surprised by chronically unstable oil prices’. This reflects the rise of shale production which has rendered Opec unwilling or unable to control the market.

With Opec’s power ebbing, oil prices have fluctuated between US$28 and US$65 a barrel in the past three years, producing similar volatility for most oil-related equities. How then, has a company that depends on this very industry not just survived, but thrived?

That company is Rotork, the market-leading actuator manufacturer. It operates in any market where the flow of gases or liquids needs to be controlled, making it a vital component in the energy pipeline. Hutchins liked the ‘mission critical’ characteristics of the company.

The BP Deepwater Horizon explosion in the

Gulf of Mexico in 2010 turned out to be the largest marine oil spill in world history. A report after the disaster stated that, had the engines on the rig been fitted with automated combustion inlet shutdown valves instead of manual brass ones, the catastrophe could well have been prevented. Rotork is a wellestablished provider of such precautionary technology and has a good reputation in the actuator market. It also provided tools in the aftermath to fix the rig.

Hutchins adds: “Actuators are so important, but are very cheap in the context of an overall exploration project so it’s rare they are scrimped on – or at least they certainly won’t be again.” In spite of being exposed to the volatility of the oil price at a sector level, this is a company that can withstand shocks.

Hutchins increased exposure to the company when the oil price fell in the first half of 2017. ‘They get hit off the back of price movements, but they stay in business,’ he says, adding: ‘They stay profitable and cash generative which means they are able to sustain their dividend and even grow it through difficult times.’ ‘We don’t just invest in stocks that have no economic sensitivity. But for those that do, we ensure they’re in a position to grow their dividend across the cycle.’

2. PENSION FREEDOMS ARRIVE The April 2015 UK Budget saw the most radical changes to private pensions in the UK for a generation. Dubbed ‘pension freedoms’, the

EQUITY INCOME

3

reforms allowed anyone aged 55 and over to take their whole pension pot as a lump sum, paying no tax on the first 25% and the rest taxed as if it were a salary at their marginal income tax rate. Retirees weren’t the only ones helped by the new measures. As the UK’s leading pension provider, Hargreaves Lansdown came in for somewhat of a windfall too.

Given the company’s capital-light business model and dominant position in this structural growth market, exposure to Hargreaves Lansdown had already been beneficial.

However, pensions freedoms provided an additional long-term kicker to its growth. As Hutchins explains, “The UK savings market is a growth area as defined benefit pensions are closing – and on top of this there are new freedoms. As such, Hargreaves Lansdown is very well placed and it’s probably the fastest growing company in the fund. We’ve seen it increase its assets by about 15% a year.’

The company is capital light, which enables it to grow rapidly and sustain its dividend.

‘They’ve got their platform so they don’t have to go and build a factory – and the beauty of that is they understand that if they have cash

flow they may as well return it to shareholders as a dividend,’ says Hutchins.

Investments are concentrated in the UK and will vary according to company profits and market factors. As with all investments, your clients’ capital is at risk. The value of shares and the income from them can go down as well as up.

Find out more about Blake Hutchins’ Investec UK Equity Income Fund. A portfolio focused on delivering sustainable dividend growth from cash generative, attractively valued quality businesses, with low capital intensity. www.investecassetmanagement.com/UKEI #UpAndIncoming This communication is provided for general information only. It is not an invitation to make an investment nor does it constitute an offer for sale. The full documentation that should be considered before making an investment, including the Prospectus and Key Investor Information Documents, which set out the fund specific risks, is available from Investec Asset Management.

“CIRCUMSTANCES AT A MICRO OR MACRO LEVEL PROVIDE OPPORTUNITIES ON WHICH HUTCHINS CAN CAPITALISE. THIS MAKES ENGAGING WITH COMPANIES AND UNDERSTANDING MANAGEMENT DECISION-MAKING EVEN MORE VITAL.” ADVISER-HUB.CO.UK 2 1

XEXMX XE R G I N G E C O N O M I E S

Ross Teverson Jupiter Asset Management

SAUDI ARABIA: THE CHINA OF THE MIDDLE EAST? SAUDI ARABIA HAS ATTRACTED INTERNATIONAL ATTENTION RECENTLY BECAUSE OF THE REFORM AGENDA BEING DRIVEN BY CROWN PRINCE MOHAMMAD BIN SALMAN. As a fund manager, my approach emphasises the opportunities created by changing situations, so Saudi Arabia was a natural choice for a research trip. What became clear during my visit was that reform in Saudi Arabia is real, far-reaching and occurring rapidly.

projects to remove bottlenecks to economic growth. For example, a new Riyadh metro system and high-speed rail link to the airport are currently under construction.

Change brings both opportunity and risk Meeting companies on the ground made it clear to me that, Rapid and dramatic change while there are many positive changes taking place, a selective approach to picking individual stocks will probably To give a few examples: there has been a crackdown on corruption; the ultra-conservative elements in society have be key. For example, the Saudi Arabian banking sector looks been side-lined; an entertainment sector is being allowed to attractive at first glance, but my view is that there may be develop; and there are important improvements to women’s hidden asset quality risks for some banks. Furthermore, some rights, with surging female participation in the much-needed economic reforms, like the removal of workforce. At a stock market level, the planned fuel subsidies, the introduction of VAT and levies listing of the state oil company, Saudi Aramco on expat workers, could have a short-term would, in my view, make it one of the most negative effect on economic growth.

“I was strongly reminded of So while I certainly believe that change is valuable listed companies in the world. visits to Beijing or Shanghai Furthermore, the inclusion of Saudi Arabia in necessary to set Saudi Arabia on a more where political will created the MSCI Emerging Markets Index, currently economically sustainable path, it is likely the drive to complete there will be challenges along the way and due to happen in 2019, will put it more on projects rapidly." the radar of global passive and investors will need to be selective to identify the best opportunities. active investors.

The China of the Middle East?

In Dubai, the management of one company I met described Saudi Arabia as being as important for the Middle East as China is for Asia. That might sound like a bold claim, but there are certainly some interesting parallels with China.

Saudi Arabia will host the G20 summit in 2020 and I spent some time in the King Abdullah Financial District, where it will take place. Today much of the area is a construction site, but I was strongly reminded of visits to Beijing or Shanghai where political will created the drive to complete projects rapidly.

Also, Saudi Arabia appears to be taking cues from China’s fixed asset investment model, by investing in infrastructure 2 2 ADVISER-HUB.CO.UK

This document is intended for investment professionals and is not for the use or benefit of other persons, including retail investors. This document is for informational purposes only and is not investment advice. Market and exchange rate movements can cause the value of an investment to fall as well as rise, and you may get back less than originally invested. The views expressed are those of the author at the time of writing, are not necessarily those of Jupiter as a whole and may be subject to change. This is particularly true during periods of rapidly changing market circumstances. Every effort is made to ensure the accuracy of any information provided but no assurances or warranties are given. Jupiter Asset Management Limited is authorised and regulated by the Financial Conduct Authority and its registered address is The Zig Zag Building, 70 Victoria Street, London, SW1E 6SQ, United Kingdom. No part of this commentary may be reproduced in any manner without the prior permission of Jupiter Asset Management Limited.

The world’s first commercial mobile phone, the Motorola's DynaTAC 8000X, was released in 1983. It allowed 30 minutes of talk time, took 10 hours to charge, weighed 794g and stood 33cm high1. It was incredible.

Imagine if technology hadn’t continued to intelligently evolve?

First State Investments has applied its core strengths of active and responsible investment management to a new Fund.

Our Diversified Growth Fund is a smart evolution from the fixed asset allocation framework.

First State Diversified Growth.

A smart evolution.

FIND OUT MORE ONLINE

Specialist Equities

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Fixed Income

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Infrastructure

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Multi-Asset

Important Information: Investments may go down as well as up and are not guaranteed. You may get back significantly less than the

amount invested. For more information, see the Fund Prospectus and Key Investor Information Document which are available online. We recommend you seek investment advice before investing. Issued by First State Investments (UK) Limited which is authorised and regulated by the Financial Conduct Authority. First State Investments (UK) Limited and First State Investments International Limited are part of Colonial First State Asset Management (“CFSGAM”) which is the consolidated asset management division of the Commonwealth Bank of Australia ABN 48 123 123 124. CFSGAM includes a number of entities in different jurisdictions, operating in Australia as CFSGAM and as First State Investments elsewhere. The Commonwealth Bank of Australia (“Bank”) and its subsidiaries do not guarantee the performance of any investment or entity referred to in this document or the repayment of capital. Any investments referred to are not deposits or other liabilities of the Bank or its subsidiaries, and are subject to investment risk including loss of income and capital invested.

1

Gadgets Then and Now - TIME.com (2010)

FIXED INCOME

FOR PROFESSIONAL INVESTORS | FOR PROMOTIONAL PURPOSES

ACTIVE MANAGEMENT, MATURE COMPANIES, AND MARGARET John Pattullo, Co-Head of Strategic Fixed Income at Janus Henderson Investors and Co-Manager of the Fixed Interest Monthly Income Fund discusses his approach, current positioning and why he always thinks about ‘Margaret’.

What do your strategies seek to deliver for your investors?

The Strategic Fixed Income team at Janus Henderson manages just over US$6bn in assets under management. We employ two strategies: total return and income. In the ‘total return’ strategy, which invariably is quite income heavy, we also make macro asset allocation decisions between loans, investment grade and high yield corporate bonds, sovereign bonds, between countries and throughout the economic cycle.

The second is an ‘income’ strategy, generally for retired or retiring people. The funds in this strategy such as the Fixed Interest Monthly Income Fund are normally fully invested to provide the necessary income and so could be higher beta than those in the total return strategy. Some of our funds pay quarterly and some monthly, but the sole objective of the strategies is to provide a reliable, sustainable and achievable income stream for retired people. That philosophy is a very important part of our thinking.

What are the key features of your investment philosophy?

As bond investors we are always watching the downside as we hate to lose investors’ money.

We want a sensible income stream without too much stress and that affects the kind of companies that we lend money to.

We have studied the Japanese experience quite a lot and have recently become more macro orientated, spending our time where we think the best returns are likely to be for our clients. Sometimes that would be in stock selection, sometimes asset allocation, or at times macro overlay strategies.

An important aspect of our current style and philosophy is a non-consensual approach 2 4 ADVISER-HUB.CO.UK

to bond markets – we have a very different view on government bonds to many in the industry and many of our peers; we believe that we are still living in a low inflation and low growth world. Although the recent climate, in which a cyclical upturn in the world economy has caused a melt-up in risk assets, may seem less favourable to bonds, we would suggest that this cyclical uptick should not be confused with the long-term structural reasons impeding growth and inflation such as; ageing demographics, tech disruption, balance sheet recession (debt trap) and poor productivity, to name a few.

Other aspects of our philosophy include being index agnostic and fiercely selective. We believe investing in an index can corrupt the investment process, resulting in lending to sectors and companies that are highly leveraged, in need of capital and more likely to become fallen angels. We are also very selective when choosing bonds for our portfolios and frequently say no to invitations to participate in new bond issues by investment banks. We are not driven by what the market wants to sell us, our focus is very much on the end client and what is appropriate for them.

Why should investors take an active approach in your asset class?

In our opinion, active management has a role for all investors. We are aware of the costs of active management versus that of passive, however, as active fixed income fund managers we can add value through asset allocation and the use of interest rate sensitivity (duration).

We can alter asset allocation to suit the prevailing economic backdrop: rebalancing the portfolios between high yield and investment grade corporate bonds, loans and sovereign

bonds and between countries. This is not possible in a passive strategy. Our willingness, need and desire to actively asset allocate probably generates the majority of the returns in our funds. Currently, stock selection is less important but at other times, such as in a high default rate environment, it becomes particularly important.

Which sectors do you like and which do you avoid?

We look for companies with reasonable growth prospects and try to avoid late cycle traps – people invariably become bullish in a late cycle, seeking value where there is none.

Thus, we look for mature companies, which still have room to grow but are not structurally challenged in their industries and that can provide a predictable and reliable income stream. These tend to be large-cap, non-cyclical industrial companies with relatively reliable

"WE CAN ALTER ASSET ALLOCATION TO SUIT THE PREVAILING ECONOMIC BACKDROP: REBALANCING THE PORTFOLIOS BETWEEN HIGH YIELD AND INVESTMENT GRADE CORPORATE BONDS, LOANS AND SOVEREIGN BONDS AND BETWEEN COUNTRIES. THIS IS NOT POSSIBLE IN A PASSIVE STRATEGY."

FIXED INCOME

earnings and a moderate amount of debt on their balance sheets, which gives them the ability to pay a reasonable coupon and to continue to do so in the years to come. We also like global titans such as AT&T and the companies operating in the modern economy such as Apple or Verizon.

We believe certain industries are too cyclical and/or unpredictable such as commodities, airlines and shipping, while others are in structural decline. One of the slogans on our desk is don’t lend it money ‘if it rolls, floats or flies’; the airlines sector for example is a very tough industry and one which, in our opinion, does not suit leverage. The retail sector is another that we avoid; the receding prospects for department stores are a case in point.

What does your client base look like?

The client base for the Janus Henderson Fixed Interest Monthly Income Fund is predominantly female. When we think about suitable investments for the portfolio, we always think about ‘Margaret’. She is the average investor in the fund, seventy six years old and lives in Bournemouth. The demographic split of the fund’s investor base includes more people above 80 years of age than over 60 and a good many centenarians. Our focus is entirely on delivering an output for this base by providing a sensible, monthly and consistent income. We are proud that we have been able to deliver good returns (first quartile every year over the last five years*) for Margaret and the rest of our investors, by staying faithful to our philosophy of choosing understandable investments with predictable outcomes, while managing the downside risks.

These are the fund manager’s views at the time of writing and may differ from those of other Janus Henderson fund managers. The information should not be construed as investment advice. Before entering into an investment agreement please consult a professional investment adviser. Past performance is not a guide to future performance.

The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested. Issued in the UK by Janus Henderson Investors. Janus Henderson Investors is the name under which Janus Capital International Limited (reg no. 3594615), Henderson Global Investors Limited (reg. no. 906355), Henderson Investment Funds Limited (reg. no. 2678531), AlphaGen Capital Limited (reg. no. 962757), Henderson Equity Partners Limited (reg. no.2606646), (each incorporated and registered in England and Wales with registered office at 201 Bishopsgate, London EC2M 3AE) are authorised and regulated by the Financial Conduct Authority to provide investment products and services. © 2018, Janus Henderson Investors. The name Janus Henderson Investors includes HGI Group Limited, Henderson Global Investors (Brand Management) Sarl and Janus International Holding LLC.

*Source: Morningstar, Janus Henderson Investors, I Inc share Class, net of fees, based on cumulative GBP midday pricing, nav-nav, net income reinvested, as at 31 December 2017.

ADVISER-HUB.CO.UK 2 5

Capitalising on stock picking opportunities Investing in Asian equity markets for 20 years Our focus has been on investing in companies whose share prices are substantially below our estimate of fair value.

This includes both companies with strong growth characteristics that are underappreciated by the market, and those with limited prospects but with a share price that is implying too pessimistic a scenario.

Using this long-term, active approach and our 18 years of average experience across the team, we’ve been successfully investing in Asian equity markets for over 20 years, growing assets under management to £15.1bn across all funds.1 Please read the investment risks that relate to Asian equities.* Put our experience to work for you at invescoperpetual.co.uk/asianequities Follow us @InvescoInsights

This ad is for Professional Clients only and is not for consumer use. *Investment risks: The value of investments and any income will fluctuate (partly due to exchange-rate fluctuations) and investors may not get back the full amount invested. When investing in emerging and developing markets, there is potential for a decrease in market liquidity, which may mean that it is not easy to buy or sell securities. There may also be difficulties in dealing and settlement, and custody problems could arise. Invesco Perpetual is a business name of Invesco Asset Management Limited. Authorised and regulated by the Financial Conduct Authority. 1 Source: Invesco Perpetual, as at 31 December 2017.

AEM 1a

INNOVATION

INNOVATION WILL HELP ASIAN COMPANIES PROGRESS Demand for innovation has driven strong growth in R&D spending, with a likely windfall for Asian companies that have been investing for the future. William Lam, Asian Equities Fund Manager at Invesco Perpetual, explains.

2 8 ADVISER-HUB.CO.UK

INNOVATION

Innovation matters. In the past, Asian innovation has been linked with taking existing technologies and improving them. It’s a development that has underpinned Asia’s export growth model, but productivity gains and innovation have helped Asian companies move up the value chain.

Recent research from UBS suggests that Asian R&D spending is on track to exceed that of Europe and the US combined by 20201. This is largely driven by the North Asian economies of China, South Korea, Taiwan and Japan. As can be seen in the chart below, South Korea now has one of the world’s highest rates of R&D spend to GDP, an increase that has been fully supported by government policy.

China may lag in aggregate, but in absolute terms it is set to surpass the US level by 2019 – again thanks to government policy and improved education – with 4.7m recent graduates in Science, Technology, Engineering and Mathematics, more than eight times the level of US graduates in those subjects2.

Measuring and valuing innovation remains a challenge. Asian companies continue to struggle with scepticism surrounding their ability to turn R&D spend into profits. We have greater confidence that they can deliver.

Samsung Electronics already is – spending over US$14bn per annum on R&D, investment that has led to market share gains and higher profits. Samsung may have been in legal wrangles with Apple over similarities in smartphone design, but its innovation in memory chip and OLED screen technology ensures that it remains a valued component supplier for Apple and is likely to ensure it remains a global leader over the longer term.

We believe South Korea’s commitment to R&D can help support a re-rating in its equity market, particularly where absolute and relative valuations are relative to both regional and global averages. As South Korean companies start reaping the dividends from their increased

investment in R&D, they may even join Samsung in paying bigger dividends themselves.

Chinese internet companies are also investing huge amounts in R&D, looking for ways to capitalise on the vast wealth of data the country’s 772 million internet users generate3.

Baidu, which operates the world’s second-largest search engine, invests 15% of its revenue on research, and is renowned for its commitment to market-leading artificial intelligence.

Meanwhile, Tencent and Alibaba are leading innovation in the booming fintech industry, particularly in mobile payments and online lending. The valuation opportunity in Chinese internet companies may be less evident than in South Korea, but further evidence that these companies can monetise their R&D spend will help them sustain strong earnings growth.

Park Drive, Henley-on-Thames, Oxfordshire RG9 1HH, UK. Authorised and regulated by the Financial Conduct Authority.

Investment risks The value of investments and any income will fluctuate (this may partly be the result of exchange-rate fluctuations) and investors may not get back the full amount invested.

Important information This article is for Professional Clients only and is not for consumer use. This document is marketing material and is not intended as a recommendation to invest in any particular asset class, security or strategy. Regulatory requirements that require impartiality of investment/investment strategy recommendations are therefore not applicable nor are any prohibitions to trade before publication.

The information provided is for illustrative purposes only, it should not be relied upon as recommendations to buy or sell securities. Where William Lam has expressed opinions, they are based on current market conditions, they may differ from those of other investment professionals and are subject to change without notice.Invesco Perpetual is a business name of Invesco Asset Management Limited, Perpetual Park, Perpetual

“SAMSUNG ELECTRONICS ALREADY IS – SPENDING OVER US$14BN PER ANNUM ON R&D, INVESTMENT THAT HAS LED TO MARKET SHARE GAINS AND HIGHER PROFITS.”

2005

Isreal

Isreal

Vietnam

Thailand

India

Hong Kong

Newzealand

Malaysia

UK

China

Singapore

Australia

US

Germay

Taiwan

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Korea

Isreal

Chart 1: R&D as % of GDP, 2005 vs 2015

2015 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0

1: UBS Research, 25 September 2017 2: World Economic Forum, Human Capital Report 2016 3: China Internet Network Information Centre (CNNIC), February 2018

Fig 1: UBS as at 25 September 2017.

ADVISER-HUB.CO.UK 2 9

EUROPE

TIME TO FOCUS ON EUROPE’S RECOVERY After years of stagnation, Europe is now benefiting from improving economic and corporate fundamentals. But is the recovery sustainable, and will it translate into stronger stock markets? Jon Ingram, Portfolio Manager of the JPM Europe Dynamic (ex-UK) Fund, considers the outlook for European equities and suggests a compelling strategy for investors looking to capitalise on Europe’s recovery.

Full speed ahead for Europe Slow growth and worries over the euro have put investors off European equities for much of the last decade. But Europe’s economy is growing again, and – perhaps most crucially for investors – the recovery looks sustainable.

Several indicators have turned positive, including retail sales and industrial production, while business sentiment surveys are on the rise. This all suggests that the recovery is broad-based and that growth should remain healthy.

3 0 ADVISER-HUB.CO.UK

Perhaps the most encouraging sign for investors is the ongoing fall in the unemployment rate. A rise in the number of people in work suggests growing corporate optimism and should help boost consumer spending. Given there is still plenty of room for the unemployment rate to fall in Europe, the improving labour market should continue to support economic growth and corporate earnings.

Room for growth in earnings Earnings growth really matters for the performance of European equities. European companies have struggled to grow their earnings since 2011, thanks to a combination of slow growth and little corporate pricing power.

European equities could therefore benefit from continued economic recovery if it feeds through into corporate earnings growth. These hopes are being lifted by an improvement in analyst forecasts. For several years, earnings

EUROPE

expectations for Europe have started the year high and then been downgraded subsequently.

In 2017, however, earnings expectations were not revised down.

And it’s not only expectations that are improving – actual delivered earnings are now growing as well, with this growth broad-based across most sectors.

Focusing on the best that Europe has to offer Investors looking to gain exposure to European equities in the current environment may consider an unconstrained approach that can help them fully capitalise on potential stock market returns.

The JPM Europe Dynamic (ex-UK) Fund invests in our highest-conviction stock ideas, irrespective of benchmark weighting. This dynamic approach allows the fund to shift its portfolio allocations to ensure it always has exposure to the companies that stand to benefit the most from Europe’s recovery, while avoiding those that may be left behind.

The end of European equity underperformance?

There are some concerns that the recent stronger trend in the euro may derail earnings.

But the period prior to the 2008 financial crisis suggests that a rising currency does not necessarily mean that European earnings cannot grow strongly.

An encouraging sign for earnings is that margins in Europe are starting to rise from depressed levels as stronger nominal growth boosts sales and operating leverage amplifies revenues into even stronger earnings growth. As European margins are coming off such a low base, they have room to rise further.

The other major headwind for European

To find out more about the JPM Europe Dynamic (ex-UK) Fund go to: jpmorgan.am/eud

For Professional Clients only – not for Retail use or distribution This is a marketing communication and as such the views contained

BEBAS

herein are not to be taken as advice or a recommendation to buy or sell any investment or interest thereto. It should be noted that the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Past performance is not a reliable indicator of current and future results. There is no guarantee that any forecast made will come to pass. Investment is subject to documentation which is comprised of the Prospectus, Key Investor Information Document (KIID) and either the Supplementary Information Document (SID) or Key Features/Terms and Condition, copies of which can be obtained free of charge from JPMorgan Asset Management (UK) Limited. Our EMEA Privacy Policy is available at www.jpmorgan.com/jpmpdf/1320694304816.pdf. This communication is issued by JPMorgan Asset Management (UK)

“PERHAPS THE MOST ENCOURAGING SIGN FOR INVESTORS IS THE ONGOING FALL IN THE UNEMPLOYMENT RATE. A RISE IN THE NUMBER OF PEOPLE IN WORK SUGGESTS GROWING CORPORATE OPTIMISM AND SHOULD HELP BOOST CONSUMER SPENDING.”

Limited, which is authorised and regulated in the UK by the Financial Conduct Authority. March 2018 | 0903c02a820b62c3

Europe ex-UK equities: Earnings Eurozone yearly earnings. EPS, % change year on year 18

equities in recent years - political instability - is also abating. In fact, the European Central Bank has noted that politics is now becoming a tailwind for Europe. There are concerns around the Italian election result, but with the new German coalition government now being formed, politics should hopefully be less of an issue for European equities, allowing investors to focus on the improving economic backdrop.

The return to economic growth and expectations for stronger earnings has already lifted sentiment among European investors.

Markets have already enjoyed strong returns and some investors may fear they are too late to the party in European equities. However, fund flow data suggests that not all of the money that came out of European equities has yet returned, and with economic growth looking sustainable and earnings on the cusp of a recovery, the best in Europe may still be yet to come.

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Expected earnings growth Delivered earnings growth Source: IBES, MSCI, Thomson Reuters Datastream, J.P. Morgan Asset Management. Expected earnings growth and delivered earnings growth are calculated using IBES consensus estimates for next 12 months’ EPS and last 12 months’ EPS respectively. Year on year growth rates are calculated using year end data.

Guide to the Markets – UK. Data as of 31 December 2017.

ADVISER-HUB.CO.UK 3 1

BE DRIVEN

BY POTENTIAL, NOT POLITICS

Which is why our “best ideas” JPM Europe Dynamic (ex-UK) Fund focuses on European economic recovery. jpmorgan.am/eud

LET’S SOLVE IT.

SM

Past performance is not a reliable indicator of current and future results.

Your capital may be at risk.

Morningstar Analyst rating, FE Crown rating, Rayner Spencer Mills rating, Square Mile Research rating and The Adviser Centre rating as at 1 March 2018. Morningstar RatingsTM © 2018 Morningstar. All rights reserved. The methodology and calculations used by companies that provide awards and ratings are not verified by J.P. Morgan Asset Management and therefore are not warranted to be accurate or complete. Investment is subject to documentation which is comprised of the Prospectus, Key Investor Information (KIID) and either the Supplementary Information Document (SID) or Key Features/Terms and Condition, copies of which can be obtained free of charge from JPMorgan Asset Management (UK) Limited.

LV-JPM50114 | 03/18 0903c02a82010d27

BAILLIE GIFFORD EUROPEAN FUND

WITH AN ACTIVE SHARE OF 88%, THE EUROPEAN FUND HAS THE POTENTIAL TO DELIVER SOME APPETISING RETURNS.

RIPE FOR THE PICKING. The Baillie Gifford European Fund invests in a variety of high quality businesses. Its goal is to identify companies with attractive industry backgrounds, strong competitive positions and management teams whose interests are closely aligned with those of their shareholders.

Once we find these firms we hold onto them for the long term – like owners not traders.

Why not take a glance at the juicy figures in the table below?

Performance to 31 December 2017*: 5 years

10 years

European Fund

114.5%

171.8%

Average of IA Europe Sector Excluding UK

86.4%

82.3%

As with any investment, your clients’ capital is at risk. Past performance is not a guide to future returns.

For financial advisers only, not retail investors.

Explore the difference, call us on 0800 917 4752 or visit www.bailliegifford.com/intermediaries

Long-term investment partners

All data as at 31 December 2017. *Source: FE, B Acc shares, single pricing basis, total return. Your call may be recorded for training or monitoring purposes. Baillie Gifford & Co Limited is the Authorised Corporate Director of the Baillie Gifford ICVCs. Baillie Gifford & Co Limited is wholly owned by Baillie Gifford & Co. Both companies are authorised and regulated by the Financial Conduct Authority.

EUROPE

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“EUROPEAN COMPANIES TEND TO BE HIGH QUALITY WITH MORE SUSTAINABLE GROWTH THAN THE MARKET EXPECTS. THEIR BUSINESS MODELS ENABLE THEM TO GENERATE ATTRACTIVE RETURNS AND CASH FLOW. FUNDAMENTALS LIKE THESE ARE EVENTUALLY REFLECTED IN THE PRICE.”

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EUROPE

THE EUROPEANS ARE ENTREPRENEURS AFTER ALL Europe lacks entrepreneurship, is the common view. Not so, says Stephen Paice, Co-Manager of the Baillie Gifford European Fund, you just have to look in the right places.

”The trouble with the French is that they don’t have a word for entrepreneur”. George W Bush may not actually have said this, but it highlights a popular cliché about the Europeans.

This would seem like a tough environment for a manager who is specifically searching for entrepreneurial companies, but Stephen Paice, co-manager of the Baillie Gifford European Fund, believes the European market is richer than most people think.

He admits there aren’t the obvious consumer technology names, such as Facebook or Google, but there are plenty of so-called ‘hidden champions’. These tend to be in less glamorous areas – areas such as industrial engineering, chemical distribution, industrial enzymes or medical devices. He describes them as ‘growth companies with grit’ that tend to fly under the radar.

“If you ask someone on the street, they probably won’t be able to name these companies, but if you ask suppliers or retailers who they believe makes the best air compressor or surgical microscopes, they will suggest these names. They dominate smaller niches.”

These businesses tend to have a number of qualities in common. They will be owned and managed by people Paice trusts, often families or founders. Around 80% of the fund is in companies with meaningful inside ownership.

‘Black Swan’ writer Nassim Taleb wrote in his most recent book about asymmetries: “Skin in the game means that you do not pay attention to what people say, only to what they do, and how much of their neck they are putting on the line”. Paice believes these businesses are not only more resilient but tend to be more successful over long periods of time.

This gives them the capacity to grow. That said, they are often overlooked by most investors. He said: “We are focused on identifying the most entrepreneurial businesses in Europe that can expand into large markets.

They have the potential to grow to multiples of their current size.”

These are typically smaller companies, who – Paice believes – drive innovation ahead of larger, stodgier companies in areas such as

pharmaceuticals, consumer staples and the other big index sectors. Many are the ‘Mittelstand’ companies based in Germany, and their counterparts in Scandinavia or Switzerland.

Paice says: “We believe they are some of the best businesses in the world. We have a bias to the mid-cap end, and business-to-business companies. This is where we see a lot of innovation and the ability to adapt.”

Given this focus on specific businesses in specific niche areas, Paice believes it unnecessary to devote significant time to analysing where the European economy is headed, or inflation or oil prices. In common with other Baillie Gifford managers, his time is spent in on-the-ground research and meeting companies. The process is intensive: turnover is just over 15% and the fund holds 48 stocks.

That means Paice only needs to find around eight new ideas each year.

These companies will often be undervalued by the “extremely inefficient” market, says Paice.

“European companies tend to be high quality with more sustainable growth than the market expects. Their business models enable them to generate attractive returns and cash flow.

Fundamentals like these are eventually reflected in the price.”

One of the recent additions to the portfolio is Sartorius. This is a German company, which makes single-use equipment for the manufacture of biologic drugs for treating cancer, among other things. Paice says: “This is a company with a strong heritage. It started in the 19th century and the family is still invested, owning the majority of the shares. Making a biologic drug is a little like making bread but it requires all the equipment to be sterilised afterwards. Having single-use equipment is cost-effective for the healthcare system and lowers the risk of contamination.” In addition to low penetration rates, these benefits could drive growth above 10% for many years.

More recently, Paice has been moving away from the relatively few large-cap names in the portfolio, including Unilever and Nestle, which are seeing disruption from smaller, more nimble companies. They may seem unusual choices for

the fund in the first place, but with Nestle in particular, he was attracted to its brands, including Purina pet food, and its coffee franchise. Other consumer-facing businesses in the fund’s top ten holdings seem to be better placed: Ryanair through its low-cost business model, and Zalando through technology investments in its online clothing platform.

This activity reflects Paice’s approach to investing with conviction, and he believes that the active management industry needs to look at its approach to restore trust. “Think of the US$5 trillion that has evaporated from our industry in the last decade. Investors need to be looked after better and know what they are going to get.” For him, this means high active share, investing for the long term and providing good value for money.

The European team made some evolutionary changes to portfolio construction three years ago, seeking to take a more team-based approach. Position sizes are driven by individual and team conviction, which allows some of the more interesting and controversial names to get into the portfolio. The fund is currently fourth in its sector over three years, up almost 60%. It would seem that the Europeans do understand entrepreneurship after all.

Important Information and Risk Factors For financial advisers only, not retail investors. As with any investment, your clients’ capital is at risk. All data to end February 2018 and source Baillie Gifford unless otherwise stated. The information contained within this article has been issued and approved by Baillie Gifford & Co Limited, which is authorised and regulated by the Financial Conduct Authority (FCA). Baillie Gifford & Co Limited is a unit trust management company and the OEICs’ Authorised Corporate Director.

The views expressed in this article should not be considered as advice or a recommendation to buy, sell or hold a particular investment. The article contains information and opinion on investments that does not constitute independent investment research, and is therefore not subject to the protections afforded to independent research. Some of the views expressed are not necessarily those of Baillie Gifford.

Investment markets and conditions can change rapidly, therefore the views expressed should not be taken as statements of fact nor should reliance be placed on them when making investment decisions.

ADVISER-HUB.CO.UK 3 5

GLOBAL DIVIDENDS

RHODES SHOW: A DECADE AT THE HELM It is almost 10 years since the launch of the M&G Global Dividend Fund. Since then it has grown to over £6bn in size, investing in companies growing their dividends around the world. Manager Stuart Rhodes discusses the highs and lows of the past decade.

Have you achieved what you set out to achieve 10 years ago?

We had a number of specific goals, but the most important was to deliver a growing income stream.

We sought to focus on companies with growing dividends, so we could grow the distribution from the fund. We’ve done that. We started with a distribution of 3.6p on a launch price of £1. Last year, we distributed 5.6-5.7p and this year, we should pay over 6p.

At the same time, the income has been consistent. We’ve raised it every single year. This is regardless of markets or currencies – most geographic regions and sectors have their time in the sun, but the fund has delivered consistent compounding. Looking forward, this will continue to be our ambition.

What have been your biggest challenges?

When we launched in 2008, we went straight into the financial crisis. The first quarter of 2009 was tough, the worst dividend environment since the Second World War. In the end, the circumstances probably helped us build some of our track record, but a lot of funds blew up and it was certainly a difficult and nerve-wracking time to invest.

More recently, we had a period of underperformance for 18 months or so in late 2014/15. This happens to all active managers, but it was a challenging time nevertheless. We were confident in the underlying businesses in our portfolio, but we were getting a lot of questions from clients. We continued to do the work and some of those positions – notably those in energy and materials – paid off in the end. In the last two years, we have been rewarded for holding the line.

One thing I would add about these two tricky periods is that they both gave us the greatest opportunities to invest at fantastic prices. We had done enough analysis to go against the grain.

Are there any businesses that you have held from inception?

If we find a business that can grow sustainably, we don’t see any reason to sell it – as long as the valuation is reasonable, of course. As such, there are some investments we’ve held for a long period of time, including some right from our launch – such as 3 6 ADVISER-HUB.CO.UK

Arthur J Gallagher and Methanex. These investments (and others) have stayed in the portfolio all the way through and could stay for a lot longer.

Where are you positioned today?

Markets have gone up quite a bit. We run a global fund and that gives us a big universe. We can still find some compelling investment ideas, but the opportunity set is certainly narrower than it was.

With companies trading at higher valuations, it is even more important to know what you are looking for and do the work on individual companies.

This is the type of market environment where it will matter more. Investors have tended to get caught up with popular trades and there are some companies where valuations are simply not justified.

In consumer staples for example, prices have gone up significantly and we believe there may be quite a long way to fall for businesses that show operational weakness. We are spending a lot of time on individual stocks, getting into the weeds. We don’t believe a particular trend or theme will dominate – we simply need to have a deep understanding of the businesses in which we’re invested.

On the flip side, we are still finding opportunities in companies that the market has treated pessimistically. To our mind the more attractive valuations sit within cyclical areas today.

What do you see as the key risks for markets?

If we got a broader trade war, it could become problematic. Trade wars tend to have nasty implications for supply chains generally. At the moment, we have just seen some early shots fired.

That said, there are always risks. It is the beauty of investing in equities and why they tend to do well over time. It is our role to try and understand whether the risk delivers an opportunity or not.

In 2017, we saw low volatility and this didn’t throw up many opportunities. 2018 may be trickier, but it is where real investors should be rolling up their sleeves. If you don’t have the kind of personality where you get a little excited in tougher times, you’re in the wrong job.

For Professional Clients only – not for Retail use or distribution

GLOBAL DIVIDENDS

“IN 2017, WE SAW LOW VOLATILITY AND THIS DIDN’T THROW UP MANY OPPORTUNITIES. 2018 MAY BE TRICKIER, BUT IT IS WHERE REAL INVESTORS SHOULD BE ROLLING UP THEIR SLEEVES. IF YOU DON’T HAVE THE KIND OF PERSONALITY WHERE YOU GET A LITTLE EXCITED IN TOUGHER TIMES, YOU’RE IN THE WRONG JOB.”

10

ADVISER-HUB.CO.UK 3 7

IM GINE

AN INVESTMENT

PARTNERSHIP THAT WORKS FOR YOU

M&G is committed to your business today – and in the future.

We’ve built our reputation by working in partnership with our customers, clients and the community to bring investment ideas to life.

The value of investments will fluctuate, which will cause fund prices to fall as well as rise and you may not get back the original amount you invested.

mandg.co.uk/imagine

For financial advisers only. Not for onward distribution. No other persons should rely on any information contained within. This financial promotion is issued by M&G Securities Limited which is authorised and regulated by the Financial Conduct Authority in the UK and provides ISAs and other investment products. The company’s registered office is Laurence Pountney Hill, London EC4R 0HH. Registered in England No. 90776. MAR 18 / 272210

V O L A T IXLXI TXYX

Naomi Waistell BNY Mellon

WHEN MARKETS SNEEZE VOLATILITY RETURNED WITH A VENGEANCE IN FEBRUARY. NEWTON FUND MANAGER NAOMI WAISTELL LOOKS AT THE RAMIFICATIONS FOR EMERGING MARKETS.

Growth (%)

Fig 1

Investors will recall the old adage that when the US would lead to a domestic inflationary spiral and finally a sneezes the rest of the world catches a cold. February’s default on that US dollar debt. sell-off kept true to form, with equities in Europe, Japan and Now, with far fewer EMs pegging their currencies to the emerging markets all following the S&P500 down after US dollar and with a surge in local currency bond issuance2, higher-than-expected wage growth data raised the spectre of this cycle has been broken. This means that the old rising inflation. correlations of emerging to developed markets are no longer For Newton fund manager Naomi Waistell, one of the the same, even if they are often still widely assumed. remarkable things about February’s sell-off was not the Beyond currency pegs, though, other factors underline a return of volatility after its long absence but rather how far change in EMs, says Waistell. Consider the composition of emerging markets (EMs) held the line in terms of EM indices, for example. Before the financial crisis in the performance. Their 10.2% decline from peak to mid-2000s, energy and materials comprised close to trough in January and February almost exactly 40% of the MSCI EM index. This has now fallen to mirrored the S&P500, the Nikkei225, the c.15%, far overtaken by technology, thus FTSE100 and the Euronext 1001. In previous reducing the importance of commodity“The old correlations intensive sectors on the index. sell-offs, EMs were often the hardest hit by of emerging to developed Says Waistell: “Even if investors haven’t spikes in volatility but this time things were markets are no longer the fully woken up to it yet, we think EM capital different. Why? same, even if they markets can thrive on their own terms with For one thing, says Waistell, there have are often still widely far less reference to the S&P500 or other been positive changes across EMs since assumed.” developed capital markets, so long as the real 2013’s ‘taper tantrum’ which serve to shore up economies remain supported. For now, this seems to their economies against external shocks and be the case.” adverse global financial conditions. “Crucially, these changes include the relative absence of EM/dollar Past performance is not a guide to future performance. currency pegs – but reduced foreign debt, lower rates of The value of investments can fall. Investors may not get back inflation, lower current account deficits, and currency the amount invested. adjustments also play their part,” she says.

There is no guarantee that the Strategy will achieve its objectives.

Of these, the reduction in US dollar pegs is possibly the Emerging Markets have additional risks due to less-developed most significant. Historically, says Waistell, negative cycles market practices. would follow a well-worn path: confronted with a spike in volatility, an EM country would deploy its FX reserves to defend its currency and maintain its US Dollar peg.

Eventually the rate of attrition on these reserves would For Professional Clients only. This is a financial promotion and is not investment advice. become unsustainable, forcing a devaluation and the printing Any views and opinions are those of the investment manager, unless otherwise noted. For of new currency to service existing debt (often denominated further information visit the BNY Mellon Investment Management website. INV01240 in US dollars and so now far more expensive). This in turn Exp 15 June 2018.

Performance: Newton Energy Markets Strategy

70 60 50 40 30 20 10 0 -10 -20 -30

62.52%

Fig 1. Newton. As of 31 December 2017.

Performance calculated as total return, income reinvested, gross of fees, in USD. Fees and charges apply and can have a material effect on the performance of your investment.

The MSCI Emerging Market index NDR is used as a comparative index for this strategy. The strategy does not aim to replicate either the composition or the performance of the comparative index.

16.47%

Dec 13

Dec 14

Dec 15

Newton Emerging Markets (USD) Composite, gross of fees

Dec 16 MSCI Emerging Market Index NDR

Dec 17

1. Bloomberg, based on the MSCI EM Index, US dollar terms, 26 January-9 February 2018. All other indices in US dollar terms.

2. Well over 80% of total outstanding EM debt is denominated in local currencies. Source: Business Insider: ‘Global debt has hit an eye-watering $215 trillion’, 5 April 2018

ADVISER-HUB.CO.UK ADVISER-HUB.CO.UK 3399

ASIAN EQUITIES

ASIA'S BRIGHT FUTURE Andrew Swan, BlackRock’s Head of Asian and Emerging Market Equities, gives his views on Asia in 2018, after a strong 12 months for the region.

Economic and profits growth turned strongly positive across Asia last year and we see a continuation of that process into 2018. The backdrop is strong economic growth in the region, supported by strong global growth. Nevertheless, markets have gone sideways and shown some volatility – a reflection of the uncertainty around trade policy globally. In general, investor sentiment is more positive on the region. There is optimism emerging and we have seen more inflows year to date, but markets are not yet in full risk-on mode.

Will markets find equilibrium from here?

For us to become defensive, we would need to have a strong view that the trade issue is going to escalate and lead to a deterioration in fundamentals. It may weigh in the short term, but ultimately a trade war would be a tax on the US consumer and we believe the US administration is aware of that. As such, we believe the trade position of the US administration is a negotiating point and a deal will be thrashed out between the US and China. The fundamentals in Asia are very good and we believe there is potential upside to markets when sentiment clears.

What is the team’s view on the US dollar and its impact on the region?

We have been quite bearish on the US dollar. This was due to a shift in the policy environment globally, with the end of monetary easing. This has historically signalled improving global growth. Accelerating growth usually means rate rises are justified and emerging markets outperform. Emerging market investments are usually associated with higher investment risk than developed market investments. Therefore the value of these investments may be unpredictable and subject to greater variation.

There has also been fiscal expansion. The US tax cuts are only now starting to hit the labour force and infrastructure spend will have an impact in the second half of the year. We believe China will pull back on its spending. This points to a weak US dollar. The only thing that might disrupt this is a shock to global growth.

This is a possibility if the trade war were to escalate, and rate rises to reverse.

How do valuations in Asia look compared to their history and the rest of the world?

There has been a strong run in markets, but this has only taken Asia back to its long-term averages. Some quality growth and 4 0 ADVISER-HUB.CO.UK

ASIAN EQUITIES

structural growth companies are expensive, but in aggregate valuations do not look stretched.

‘Value’ areas such as materials, energy or industrials still look cheap and benefit most from economic recovery. Value continues to underperform the region in spite of strong economic growth, which is not what we had expected.

What is the impact of Chinese President Xi Jinping’s increased term?

The election of President Xi Jinping’s solidifies the reform agenda in the short term. The process of policy reform against entrenched views has been remarkable. The economy is shifting away from investment to services and is now deleveraging. He is in power and will pursue this process. On a longer-term view, the risk is that there are entrenched views that don’t get refreshed.

What is the team’s view on Chinese banks?

The old economy in China sucked up a lot of credit. A lot of these sectors had over-capacity, pricing power was eroded and profitability disappeared. The government has gone through supply-side reform to allow companies that are well-run to re-establish some pricing power.

Therefore, they will start to repay their loans.

After this supply-side reform and an improvement in the global economy, they are back to decade lows. We believe the banking sector looks as good as it has looked, but investors remain very sceptical and valuations are low.

We have a number of positions in the sector.

What is the team’s view on Indonesia and India?

These are parts of Asia that look attractive long term to investors – credit to Gross Domestic Product (GDP) is good and demographics are strong. We have started to get more interested in Indonesia: the economy is showing pockets of strength and we like the Indonesian banks, which give us exposure to domestic growth.

In India, growth has been slowing, partly due to the reform process. We’re past the inflection point now, but there is some risk that Mr Modi is not as popular as he was and will have to focus on being re-elected. That may put the reform agenda on hold. Global investors have been moving neutral/underweight from overweight, but we are building up our domestic exposure.

“WE BELIEVE THE TRADE POSITION OF THE US ADMINISTRATION IS A NEGOTIATING POINT AND A DEAL WILL BE THRASHED OUT BETWEEN THE US AND CHINA. THE FUNDAMENTALS IN ASIA ARE VERY GOOD AND WE BELIEVE THERE IS POTENTIAL UPSIDE TO MARKETS WHEN SENTIMENT CLEARS.”

The team has been underweight technology – is that likely to change?

We believe that it is difficult to get leverage to an economic recovery by investing in technology, but rather through financials, energy and materials. These sectors have been very out of favour and our view has been wrong so far. Technology drove the market until November last year even though the economic story has played out.

The valuations in the technology area have gone up a lot. From here, there is likely to be more dispersion between winners and losers. It is important to be selective. China is setting itself up in a strong position long-term to drive AI. In developed markets, there is a growing backlash in the way data is collected and used by technology companies, particularly around

privacy. This is likely to limit the amount of data these companies can acquire. The contrast with China, which is on an incredible pursuit of data, could be a turning point for technology globally.

China could leapfrog developed markets on a long-term view.

Capital at risk The value of investments and the income from them can fall as well as rise and are not guaranteed. You may not get back the amount originally invested.

Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy.

Changes in the rates of exchange between currencies may cause the value of investments to diminish or increase. Fluctuation may be particularly marked in the case of a higher volatility fund and the value of an investment may fall suddenly and substantially. Levels and basis of taxation may change from time to time.

Risks Emerging market investments are usually associated with higher investment risk than developed market investments. Therefore the value of these investments may be unpredictable and subject to greater variation.

Investments in China are subject to certain additional risks, particularly regarding the ability to deal in equity securities in China due to issues relating to liquidity and the repatriation of capital.

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COMPOUNDING

Chris St John Axa Investment Managers

THE BENEFITS OF COMPOUNDING GROWTH MANY UNDERESTIMATE THE CUMULATIVE EFFECTS THAT RESULT FROM COMPOUNDING GROWTH – SMALL VALUES IN THE SHORT TERM CAN GROW INTO LARGE VALUES IN THE LONGER TERM. AXA INVESTMENT MANAGERS DISCUSS WHY GROWING EARNINGS, PROFITS AND DIVIDENDS ARE KEY TO DRIVING EQUITY RETURNS. The power of compounding is well understood: however importantly, that will reinvest for future growth – could harness its potential is often underestimated. The ability of an the power of compounding to maximise investment returns. asset to generate earnings that, once reinvested, generate Investing in equities involves risks, include the loss of capital. their own earnings, is a fairly easy logic to follow. But the cumulative effect of building on these incremental gains can often be overlooked.

This communication is for professional clients only and must not be relied upon by retail Take the example of grains of rice on a chessboard: if you clients. Circulation must be restricted accordingly. Any reproduction of this information, place a single grain of rice in the first square and you double in whole or in part, is prohibited. Before making an investment, investors should read the the number of grains in each subsequent square so that relevant Prospectus and the Key Investor Information Document, which provide full becomes two, then doubling that again becomes product details including investment charges and risks. The information four, and so on. If we fast-forward to the last contained herein is not a substitute for those documents. If you are unsure about any of the information provided please speak to a square on the chessboard (square 64) we financial advisor. If you do not have an adviser you can find one at would have amassed 461 billion tonnes of "At the early stages of the www.unbiased.co.uk.The source of all information in this rice. This is 1,000 times the annual global development cycle document is as at 9 February 2018, unless stated otherwise. This production in 2011. budding companies are document does not constitute an offer to buy or sell any AXA While this is an extreme example, it small enough to grow Investment Managers group of companies’ (‘the Group’) does illustrate the sheer power of quickly and benefit from a falling cost of capital." product or service and should not be regarded as a solicitation, compounding: that building upon a invitation or recommendation to enter into any investment growing base can lead to exceptional transaction or any other form of planning. It is provided to you for outcomes. information purposes only. The views expressed do not constitute Investors might ask how they can benefit investment advice, do not necessarily represent the views of any company from the same phenomenon. And the good news is within the Group and may be subject to change without notice. Whilst every care is taken, that the concept of compounding growth can just as easily no representation or warranty (including liability towards third parties), express or be applied to equity markets. By identifying companies with implied, is made as to the accuracy, reliability or completeness of the information growing profits and dividends, investors can harness two key contained herein. Past performance is not a guide to future performance. The value of drivers of equity markets returns. At the early stages of the investments, and the income from them, can fall as well as rise and investors may not get development cycle, budding companies are small enough to back the amount originally invested. Due to this and the initial charge that is usually grow quickly and benefit from a falling cost of capital. During made, an investment is not usually suitable as a short term holding. Framlington Equities this phase companies with the discipline to grow their is an expertise of AXA Investment Managers UK Limited. Issued by AXA Investment Managers earnings and reinvest those back into productive activities to UK Limited which is authorised and regulated by the Financial Conduct Authority in the UK. generate even more growth, can deliver superior returns over Registered in England and Wales No: 01431068. Registered Office: 7 Newgate Street, London the longer term.

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BIG TECH

THE “BIG TECH” BACKLASH: HOW SUSTAINABLE ARE GOOGLE, FACEBOOK AND AMAZON? The soaring scale, wealth and influence of the internet giants have led to growing scrutiny from society and regulators. Could their wings finally be clipped?

In recent months it has felt like the tide is turning against big tech. Google has been fined for market abuse in the EU. Silicon Valley heads have been hauled in front of the US Senate and the UK Parliament to answer for the abuse of their platforms by extremists and Russian saboteurs. The repeal of net neutrality1 regulations in the US has swung the balance of power away from internet companies and back towards infrastructure providers. The imminent introduction of GDPR (General Data Protection Regulation) in the EU will increase complexity 4 4 ADVISER-HUB.CO.UK

and risk for companies dealing with consumer data.

As investors we have spent a lot of time debating the positive and negative effects of these businesses. What is their impact on wider society? Is there a long-term risk from a growing regulatory burden?

THE NETWORK EFFECT One of the most compelling characteristics of the tech giants’ business models is the so-called “network effect”, whereby the value of their service increases with a higher number of users.

Social media platforms are the prime example here. With each new user, the pool of potential connections and scope for content sharing increases. For Google, this effect is visible through its algorithmic improvements: each search conducted on its platforms improves the usability and efficiency of its services. For Amazon, the more merchants and consumers that are on its site, the more valuable it becomes to both buyers and sellers.

By delivering “natural monopolies”, the network effect has created a number of market

BIG TECH

darlings, but this degree of market control has also made regulators twitchy. Google captures over 85% of desktop search queries, a number that rises to 95% on mobile. At the end of 2017, Facebook had over 2 billion monthly active users. In 2017, Amazon commanded almost half – some 48% – of all US online retail, up five percentage points year-over-year. Even so, through the traditional lens of anti-trust policy – focused on prices and harm to consumers – it is difficult to accuse these businesses of abusing their market power.

but again we see little evidence here to see that their dominance of ecommerce is resulting in consumer harm. In fact, Amazon’s disruptive impact has resulted in massive deflation across a wide range of products and industries, largely by cutting out the middleman of distribution/ retail and improving price transparency. The reality or threat of being “Amazoned” has prompted innovation across the economy.

In the most traditional sense therefore, consumers do not appear to have been harmed by the market dominance of these firms.

BENEVOLENT MONOPOLISTS? For a start, most of the products provided by Google and Facebook are ostensibly free, resulting in huge consumer surplus. One study cited in the Economist estimated that users value “search” at around US$16,600 per year, maps at US$2,800 and video at US$900. Google also provides its Android operating system free of charge to third-party device manufacturers (largely, of course, to secure its dominance in mobile search).

Clearly, we as users are creating value for the firms as they harvest our data, which they can then monetise through sales to advertisers.

In surveys, consumers claim that we value our data highly and are not willing to trade it for services, but our behaviour strongly suggests otherwise. We unthinkingly tick consent boxes and allow cookies rather than interrupt our browsing/purchasing experience, and data breaches appear to have little to no impact on our behaviour. A recent study found that students were prepared to offer up their email contact lists for as little as a free pizza.

Forthcoming GDPR regulation will in theory allow consumers in the EU to withhold their data, but it is very hard to see many users not consenting to share their data if the alternative is to be ‘cut off’ from services they use multiple times a day. In any case, the value of any individual’s data on its own is negligible: the reason networks are so valuable is because of the sheer volume of data they collect. If pushed by regulators, one could envisage Google and Facebook introducing a ‘freemium’ model, whereby consumers either pay a premium for privacy or continue to trade data for free services: our bet is most would stick with the status quo.

So is it the advertisers that are being squeezed on price? Here too, the evidence is far from damning. Google’s ad pricing is determined by auction, so they are not price-gouging on this front; Facebook’s is set by the company but their current “cost per thousand impressions” (CPM) is still only around US$2, cheaper than almost any other medium.

Looking at it another way, Facebook currently generates revenue of just US$20 a year from each user – almost all from advertising – versus a value of US$750 that users derive from the platform according to a recent MIT study.

Facebook has been particularly cautious of increasing its ad load, wary that any improvement in near-term monetisation might come at the cost of reduced user engagement.

This is exactly the kind of behaviour we hope to see from “sustainable” companies.

Amazon’s business model is very different,

"GOOGLE CAPTURES OVER 85% OF DESKTOP SEARCH QUERIES, A NUMBER THAT RISES TO 95% ON MOBILE. AT THE END OF 2017, FACEBOOK HAD OVER 2 BILLION MONTHLY ACTIVE USERS. IN 2017, AMAZON COMMANDED ALMOST HALF - SOME 48% - OF ALL US ONLINE RETAIL, UP FIVE PERCENTAGE POINTS YEAROVER-YEAR."

CREATIVE DESTRUCTION Tech giants have also been accused of stifling innovation by gobbling up promising start-ups and monopolising the best talent. Google, in particular, has such a huge balance sheet and such a broad reach – from internet balloons to drones to “smart” contact lenses that measure blood glucose levels – that it could be argued to be “crowding out” potential innovators. Critics point to the precipitous decline in the number of start-ups in recent decades, with most years seeing more companies fail than start.

In our view, Google and Amazon have not only been hugely innovative on their own account but also prompted new and established companies across the economy to raise their game. In the same way that Amazon dragged retail into the 21st century, Google has put the fire under telecoms operators to accelerate their rollout of high-speed broadband and the auto industry to invest in developing self-driving cars.

Start-up activity, growth, and entrepreneurship have ticked up encouragingly since 2014, suggesting the dip was more a function of the economic environment than structural change.

That said, we do agree that in hindsight it was too lax of regulators to allow Facebook to acquire WhatsApp and Instagram, both of which could have gone on to become potential competitors. Disruptive competition cannot emerge if the tech giants are allowed to subsume all possible rivals.

enables subdivision and targeting of audiences on social media far more effectively than ever possible for conventional media. Even in its most benign application, profiling social media users can mean that a tailored content experience only ever echoes existing views, hindering effective and informed debate. The more malign use of this data, of course, could be to more directly manipulate what a user sees.

Social media can, on the other hand, be seen as an important platform for free speech. It can elevate civic engagement: a boon to democracy, especially for marginalised or repressed groups.

For example, Facebook played an important role during the 2011 Arab Spring, allowing protestors to disseminate information, organise demonstrations, and raise local and global awareness of events.

This leads us to ask to what degree social media platforms should continue to be treated as just that – platforms – versus publishers, which would entail taking responsibility for content posted on them. If widely mandated, this would be extremely challenging due to the sheer volume of content. The equivalent of 65 years worth of video is uploaded to YouTube every day. Already, Facebook, and to a lesser extent YouTube, are proactively increasing their scrutiny of content, improving their artificial intelligence and hiring real people to identify and remove false and extremist material.

Balancing the need to protect users without tipping over into censorship is extremely difficult, risking reputational damage and undermining user engagement.

FOR THE GREATER GOOD? Measuring “social value”, and how much of it is created or destroyed by big tech, is far from straightforward. On balance, we are comfortable that – for now at least – these companies are contributing more to society in the form of free products and innovation than they are detracting by monopolising our data and crimping competition. We will, however, continue to monitor developments and remain wary of tail risks that could threaten the long-term durability of their business models.

We see the most likely risk as taking the form of regulation on the one hand and/or consumer backlash on the other.

Katherine Davidson, Portfolio Manager, Global and International Equities, Schroders.

The companies mentioned above are for illustrative purposes only and are not to be considered a recommendation to buy or sell.

SOAP BOX OR ECHO CHAMBER? Things become more difficult to gauge – particularly in reference to social media – when we step away from pure economics.

The unprecedented level of access to data

1. Net neutrality is a term to describe the principle that internet service providers should treat all of the data they are providing to customers equally, and not to use their own infrastructure to block out competitors.

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Every day, the number of fish in a pond doubles.

If it takes 24 days to fill the entire pond with fish, how long does it take to fill half the pond?

Most people get the answer wrong and say 12 days. Using instinct instead of analysis, your unconscious mind can get things confused. We believe that understanding your own mind can help you make better investment decisions. And if you’re still stumped, the answer is 23.

Know your own mind. Take the investIQ test. schroders.com/investIQ

Please remember that capital is at risk.

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