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For today’s discerning financial and investment professional

Investing for Income

April 2018







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CONTE NTS April 2018


Ed's Welcome




Brian Tora


an Associate with investment managers JM Finn & Co.

Better Business

Brett Davidson with a practical look at how asking great questions transforms the financial planning process

Richard Harvey a distinguished independent PR and media consultant.


Investing for Income Introduction Our special focus on some of the issues involved & alternative approaches available when generating investment income


Investing for income -Ed's Rant Michael Wilson examines key questions for advisers to consider when framing investment advice in the context of global change

Neil Martin has been covering the global financial markets for over 20 years.


Investing for Income - high yield bonds Michael Scott talks to Sue Whitbread as to whether there is still value in the high yield bond sector

Brett Davidson


FP Advance

Investing for income - a blended approach to asset allocation Ben Willis, Whitechurch Securities, outlines using a blended approach to asset allocation


Michael Wilson

Investing for income - an adviser's approach Patrick Connolly, head of communications at Chase de Vere, summarises their approach to Investing for Income

Editor-in-Chief editor


Investing for income - equity income Ryan Hughes, AJ Bell Summarises using equity income strategies when investing for income

Sue Whitbread Editor sue.whitbread


A pragmatic approach to income investing how shareholder yield is financed can make a difference to your clients’ investments


Alex Sullivan

Investing for income - secured lending

Publishing Director alex.sullivan

Sue Whitbread talks to James Robson and Pietro Nicholls about the alternative approaches for generating income


Investing for income - Investment trust dividend heroes

Annabel Brodie-Smith, AIC


IFA Magazine is published by IFA Magazine Publications Ltd, Arcade Chambers, 8 Kings Road, Bristol BS8 4AB Tel: +44 (0) 1179 089686

Investing for income - reflections

Brian Tora on the changing face of generating investment income

© 2018. All rights reserved


‘IFA Magazine’ is a trademark of IFA Magazine Publications Limited. No part of this publication may be reproduced or stored in any printed or electronic retrieval system without prior permission. All material has been carefully checked for accuracy, but no responsibility can be accepted for inaccuracies. Wherever appropriate, independent research and where necessary legal advice should be sought before acting on any information contained in this publication.

Don’t worry, be happy

Richard Harvey reflects that happiness is about a whole lot more than money


IFA Magazine is for professional advisers only. Full details and eligibility at:

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E D'S WE LCOM E April 2018

Wanted: A Little Spring in Our Step April is the cruellest month. Well, that’s what TS Eliot said, so I suppose it must be true? that this April marks a radical change in the way that risk capital is treated by the taxman. As the door closes on semi-safe “capital preservation” projects in favour of red-blooded, rooting tooting risk ventures, it’ll be interesting to see how many affluent investors feel that this is the time to take up the challenge? Trump Tramples It’s a month that doesn’t always know what it wants to do. Too late to have caught the January up-wave, too early to join the bearish throng that so often gets cold feet in June and July. And cold? Oh gosh, yes. In Britain at least, a miserable east wind that has seemed to embody all the ominous feelings that London has been expressing about an impending Brexit. European separatists in Italy, in Austria and in Catalonia are making disconcerting electoral strides. And in America? Aaah, America. That’s another story. Of which anon…. As we headed for press in mid-March, the equity markets were still circling in a very unspringlike fashion while bond yields softened disconcertingly. There had to be a reason why America’s rising interest rates and its apparently booming economy hadn’t stopped the dollar from weakening, but nobody seemed to be quite sure what it was. The VIX volatility index was twitching about like Galvani’s frog. It was all pretty inconvenient, considering


Out there in the wider world, there’s no getting away from the fact that President Donald Trump’s “modern presidential” style has been rattling the market’s nerves during the last few weeks. Trump’s snap decision to impose protectionist steel and aluminium sanctions on both friend and foe alike, against the advice of almost all his policy experts, has underlined the unpredictability of the situation. Trump’s decision to adduce a totally spurious “national security interest” before hammering European car manufacturers has raised eyebrows and has raised the real prospect of trade wars. And by sacking his state secretary (foreign minister) Rex Tillerson by means of a Twitter message, Trump has revealed a personal capriciousness and vindictiveness that does nothing to inspire confidence. Which is one thing that we really, really need. The Income Imperative However, this month our thoughts at IFA Magazine are focused elsewhere. We’re raising our sights above the smoke-strewn battlefield to survey the far horizon beyond. This month’s series of features on investing for income includes a look

at dividend performance, fund choices, tax issues, blue chips, the wider context of inflation, and the longer-term advantages of a growing income and knowing where that income is coming from. Not to mention the all-important economic background which underpins any investment strategy, and the whole question of how a portfolio should be shaped to meet the client’s life situation – whether before or after retirement. The role of professional advice is crucial to help clients make important investment decisions, which increasingly involve a myriad of complex choices. We make no apology for asking as many questions as we give answers – it’s for you to consider how these elements would affect the individual recommendations you will make to your clients. There’s such a thing as being able to sleep at night. It’s something that not everybody is managing to do particularly well at the moment. Peace of mind is one of the most important benefits for those clients who have built a long term relationship with their adviser based on trust and know that their situation is regularly reviewed to ensure they stay on track to live the life they want to lead. Helping advisers to consider how that advice is framed in the context of what is happening in the world, is part of what we try to do here at IFA Magazine. Hopefully you find it helpful. Oh, and what’s the cruellest month for equities? September, by a very long historical chalk. Who’d have thought it? Michael Wilson Editor-in-Chief


N EWS April 2018

New EIS fund structures proposed The smoke and uncertainty about alternative investing is finally beginning to clear. Last autumn’s Patient Capital Review may have resulted in a decision to double the annual tax-allowable investment sum for Enterprise Investment Schemes to £2 million – as long as they stick to “knowledge-intensive” companies – but until now the government had said tantalisingly little about how it would define that essential boundary, apart from the bit about applying an “eligibility test”. We already know that the Finance Bill aims to actively outlaw some kinds of low-risk EIS investments – or at least to end their eligibility. But how, the market wondered, would the new and enlarged allowance find the wealthy backers it was looking for? Chancellor Philip Hammond’s Spring Statement on 13th March offered some tantalising clues as to the Treasury’s thinking. The government, he said was consulting on the creation of a new type of collective EIS fund that would cater specifically for the knowledge-intensive sector, and which might carry any of four different forms of tax relief (or indeed, perhaps some combination of those four variants – the details are still sketchy).


One option, it seems, is to offer full exemption from dividend taxation on “knowledgeintensive” business holdings within these special funds once they have been retained for a minimum period. Another is to let investors off a capital gains tax bill from elsewhere (instead of just deferring it) if they put money into the new fund types. A third option is to stretch the back-period for which CGT relief or EIS investment relief can be claimed – which would effectively mean that the relief would no longer be restricted to the year in which the investment was made, but could be claimed for earlier years. The upshot of this, according to market analysts, is that the new EIS funds would create an avenue that would be particularly attractive to very wealthy investors – for instance, property investors seeking to shelter sizeable capital gains rather than merely deferring them. But as for the fine print, , we’re still guessing and waiting. The consultation is due to end on 11th May. We’ll keep you posted on the IFA Magazine website.


N EWS April 2018

Down, down, deeper and….up? The declining rate of average house price appreciation has actively gone into reverse, according to some measures. Well, that’s what the Halifax survey for February says. The value of the average home dropped by more than £2,000 in the three months to February, to just £224,353, from £226,408 in November 2017. But that wasn’t quite the whole story. Viewed as a year-on-year development, the Halifax says, house prices were still 1.8% above their February 2017 levels. (The Nationwide’s estimate is slightly higher at 2.2%.) And, says the Halifax, house prices


actually rose by 0.4% in February, after two months in which they had fallen. You can prove anything with statistics. But the picture for London properties remains gloomy, not least because Brexit worries are thought to have deterred home purchases by non-nationals. A new survey from estate agents Your Move declared in midMarch that some parts of the capital – notably Wandsworth, Southwark and Islington – have seen price drops of up to 15%. And that average prices across London have declined by 2.6%.

Confused? Maybe we should point out that Wandsworth and Southwark have been particular hotspots because of significant new construction and redevelopment projects which have attracted new money into prestige properties. So the current price plunge would seem to indicate that the high end of the market is taking the deepest dive. Other, posher parts of London are confirming this trend. But it’s not all bad news – parts of the north west have seen double digit growth, with 10.3% being recorded in Warrington and a remarkable 16.4% in Blackburn.


N EWS April 2018

Financial services profession’s confidence in UK economic outlook is on the up, says CISI The CISI confidence indicator (sum of positives less sum of negatives) is -5 compared to -16 at the end of 2016.

The financial services profession’s confidence in the UK’s economic prospects has improved over the last 12 months, according to the latest Chartered Institute for Securities & Investment (CISI) survey.

the UK economy, compared with the end of 2016. “The result of our survey is in line with the latest forecast for the outlook for manufacturing for the year, with that sector expecting expansion by 2% according to the EEF manufacturers’ organisation.

Respondents were asked to compare how they felt about the UK’s economic prospects now compared with six months ago.

The CISI undertook the survey from 4 November 2017 – 18 February 2018.

The CISI has conducted the poll on average every six-12 months since Spring 2012.

Of the 743 respondents, 35% were less optimistic about the UK’s economic prospects (compared to 48% end 2016). Of those who responded, 30% felt more optimistic, with 35% unchanged (as opposed to 32% optimistic and 20% unchanged end 2016).

“The confidence level in our survey peaked in Autumn 2013 at 54%. From my own conversations with UK financial services CEOs I believe it is possible that our profession’s confidence levels in the UK’s economic outlook will become even more positive once we have moved beyond Brexit.”

Simon Culhane, Chartered FCSI, CISI CEO said: “Although we are still sub-zero at -5 in terms of sentiment, the financial services profession is showing a steady and improved growth in confidence in outlook for

Confidence in the UK Economy 70 60 50 40 30 20 10 0 -10 -20 -30


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N EWS April 2018

Foreign & Colonial Investment Trust delivers 150th consecutive dividend to shareholders in year of outperformance It’s a happy 150th birthday to the Foreign & Colonial Investment Trust, as it announced its 47th consecutive annual dividend increase recently. This ensured a dividend has been paid to shareholders in each of its 150 years since inception in 1868. The Company also reported strong investment performance for the year, significantly exceeding its benchmark. The proposed annual dividend for the year is 10.4 pence per share, an increase of 5.6% on the previous year. Subject to shareholder approval, a final dividend of 2.7 pence per share will be paid on 1 May 2018. With a share price total return of 21%, the Company comfortably outperformed the 13.8% return from its benchmark index, the FTSE All-World index. The net asset value (NAV) total return for the year was 16.9%*. The Board looks to the longer term and over a 10-year period the share price total return for the Company is 156.1%, the equivalent to 9.9% per annum, while over 20 years it is 453.4%, which equates to 8.9% per annum. The Company’s share price discount to NAV narrowed to 4.3% by the end of the year while the average level of 6.7% over the period was the lowest seen for over twenty years.


The Board has said that it will continue to use buybacks for the benefit of shareholders in pursuit of a sustainably low deviation between the price and NAV per share in normal market conditions. No reference will therefore be made in future to a specific attainment level for the Company’s discount. Throughout the year the Company maintained a higher weighting than its benchmark index in each of the highly performing areas of Europe, Japan and Emerging Markets, which added to overall returns. Commenting on the outlook for the remainder of the year, Paul Niven, Fund Manager of F&C Investment Trust, said: “The bullish earnings and growth backdrop looks set to continue into 2018. There is little, at present, to suggest a material slowdown in the overall growth trajectory in the global economy. Indeed, financial indicators suggest strong momentum continuing for the next twelve months, reflecting still supportive monetary and credit conditions.

Barring some shock, it now looks more likely than not that the US economic cycle will extend to the longest on record, into 2019.” The Chairman, Simon Fraser, commented: “It is remarkable to think that the original purpose of Foreign & Colonial Investment Trust has remained relevant throughout its long history. Indeed, the investment trust that launched an industry is as relevant today as it ever was. While our 150th anniversary will be marked in many ways, our focus will be on the Company’s future and on supporting broader financial education, particularly across schools and universities. The financial services industry needs simple to use transparent investment products that help all of us invest for our longer-term financial wellbeing. We still strongly believe that the best long-term investment approach is to hold a globally diversified portfolio of publicly listed and private equities. We are confident that Foreign and Colonial will remain an appropriate choice for any longerterm investor, however small or large, for many years to come.”



Better Business It’s all about the questions Brett Davidson, of FP Advance, gives practical advice on how you can develop the right skills to ask great questions - and transform your client relationships as a result What is the essence of great financial planning? As evidenced by where advisers spend most of their time, you’d think that coming up with amazing solutions to client problems is the magic. Some of the best advisers I know really pride themselves on their technical knowledge and experience. I’ve seen their work close up; they’re right to be proud of that hard-earned set of skills. But that’s not the magic. I’ve worked with a Life Coach, Kerri Richardson (@KerriCoach) for many years. In fairness to Kerri, at times she has come up with some fantastic solutions to situations I’ve been facing. However, 90% of the time she simply asks me questions and we discuss whatever comes back from me.

Even after the many years I’ve worked with her, I find this process incredibly valuable. Why? The value Kerri provides is in helping me identify the real problem or challenge that I’m facing, and she gets to it by asking me great questions. Daniel Pink talks about this issue in his book, To Sell Is Human: “If I know what my problem is, I can most likely solve it. If I don’t know my problem, I might need some help in finding it.” We’ve been led to believe that problem solving is our highest value task. However, Pink argues that it’s problem identification. Just think about your own interactions with clients. When you do all the talking, some clients actually do listen and act on what you say. With other clients, this same approach sees you getting into tricky and difficult terrain when they just don’t get it.

When you do all the talking (in the mistaken belief that people want solutions), you’re trying to encourage a client to do something that is technically brilliant and clearly in their best interests. The more you speak however, the more it sounds like you’re trying to sell them something and the more they resist. If they eventually leave your office, not having taken your advice, it’s almost humiliating. They walk away thinking a little bit less of you, when all you were trying to do was act in their best interests. Because we never know who we’re dealing with at a first meeting, it makes more sense to spend time asking great questions, because this approach works with both types of clients outlined above and it helps the client see and understand their problem first. I was taught that telling is not selling. If you say it, the client can disbelieve you (even when you’re 100% right). If they say it, it’s true. So ask better questions. If you’ve been around awhile you’ll have picked up some brilliant analogies or one-liners that help explain difficult concepts to clients. These are useful, if they’re used judiciously, but beware of overusing these skills, because you




might find yourself doing all the talking again, leaving you open to the problems I’ve already outlined. One of the big challenges all advisers face, is the client who is very focused on a specific issue; for example how best to generate income from their investments or they might have a pension problem. In the client’s mind this is what they need help solving. However, experienced advisers know that whatever the client presents with is almost never the real issue. No one buys a pension, do they? They’re actually buying future financial security, or peace of mind, or some deeper outcome. Yet most clients don’t immediately see that. A skilled adviser will help the client identify the correct problem to be resolving, before jumping to the solution. Mostly, once the correct problem is identified, the range of solutions is pretty obvious. They may still need some technical advice and assistance to implement a solution, but it’s the first part of this process (problem identification) where all the value has been added. So how do you do it? Ask the right questions At FP Advance we use what we call Our List Of Interesting Questions, to help advisers structure first meetings with new clients in a way that allows the real issues to come out, but in a non-confrontational way.Let’s look at an example. After initial discussions the client explains they want advice on their pension arrangements. They’re not sure if they have the right plan, if the annual fees are too hefty, and if they’re invested properly. Look at these two approaches: Approach 1 Adviser: “That’s not your real problem. What you want to work out is have you got enough money so that you can live comfortably when you don’t work anymore. For that we’ll need to look at all your assets, not just your pension.


Let’s work that out using my fantastic cashflow modelling software.” Client: “But I just want some help with my pension. I don’t want to talk about all my assets.” This adviser is solutions focused. He/she knows their onions and is dying to help the client solve their real issue. That’s to be commended. However, because they’ve jumped straight to a solution, there’s a disagreement and it can be very hard to get things back on track. Contrast that with Approach 2. Adviser: “Can I ask why you purchased these pensions in the first place? What were you hoping they would do for you? Client: “I wanted a good return.” Adviser: “And if they delivered a good return, what would that help you to do?” Client: “Well, then I’d be in a position to afford to retire at 60 with a good quality lifestyle. I just don’t enjoy my work enough to want to work beyond 60.” Adviser: “What concerns do you have about your current pension arrangements in helping you reach that objective?” Client: “The truth is, I don’t really know if I’m on track or not.” Adviser: “Have you ever worked out ‘how much is enough’? Remember, that number could be achieved using a range of your assets, not just your pension funds.”

Client: “I haven’t done that, you’re probably right; although I’m worried about my pension.” Adviser: “I hear you regarding your pension. We should definitely take a good look at it and give you some feedback on the issues you’ve raised. We can do that as part of this process. However, I also think we should be helping you work out ‘how much is enough?. If we did both of those things, you’d be in a much better position to know what the next steps are.” Client: “Yes, I would.” Adviser: “Do you have any objection to us starting with those two issues then? Client: “Not at all. That sounds great.” The second adviser understands that they need to get the client to see and understand the real issue; which is problem identification. Done well this is a hugely valuable skill. It’s helpful, it’s ethical and client focused. The aim is not to manipulate clients for a predetermined set of answers. The aim is to help people unravel their own problems with some expert help, just like my Life Coach, Kerri. The goal is to listen to the client’s answers and then help them shape a sensible, practical and hopefully simple solution to their situation. Now that’s a valuable service.

Brett is the Founder of FP Advance, the boutique consulting firm that helps financial planning professionals advise better and live better. He is recognised as one of the leading consultants to financial advisers in the UK. Professional Adviser magazine has rated him one of the Top 50 Most Influential people in UK financial services on three occasions. You can follow Brett online and via social media: Twitter: @brettdavidson Facebook: LinkedIn: Website:



April 2018

The income imperative: investing for income How can advisers obtain a reliable and rising income from an investment portfolio? This month, in an IFA Magazine special focus, we take a look at some of the issues involved and alternative approaches available when generating investment income

Whilst a completely comprehensive analysis of all the alternative approaches is somewhat beyond our scope in a single edition of IFA Magazine, we are pleased to introduce this month’s special focus on investing for income, bringing you different ideas and opinions from a range of experts. The idea is to try and help shape your thinking about some of the issues and indeed some of the possible solutions – to the challenge of providing your clients with a meaningful and sustainable level of investment income. Move with the times As we write this in mid-March, the 10 year Government gilt yield is just 1.50%. It’s no surprise therefore that investment in government stock has fallen out of favour. Investment grade corporate bonds are also not exactly flavour of the month, as concerns rise about how they will perform in an era of rising interest rates. Long term sustainability of the real value of investment income is critical. UK inflation recently fell back from its recent highs to its lowest level since July 2017. In February, the Consumer Prices Index fell to 2.7%, from 3% in January. However, this is still a significant figure when compared to the 10 year gilt yield of 1.50%. The Office for Budget Responsibility’s estimates for inflation for 2018-19 and 2019-20 are 1.8% and 1.9% respectively. Whilst lower, these are forecasts which must be considered by asset allocators when making crucial decisions.


It is even more significant when we compare the inflation rate to current cash deposit rates producing negative real returns. Ok, so many experts are expecting the UK base rate to rise as early as May, but the dilemma is clear. How do you achieve a realistic level of income from an investment portfolio, whilst minimising the risks to the investor? The equity income debate We can debate whether or not stockmarkets look overvalued, however the current dividend yield on the FTSE All Share at 3.82% remains attractive and supportive. This is especially so when we compare it to inflation and to the 10 year gilt yield. An equity income strategy has the scope to deliver not only an increasing level of income but also some protection to the real value of capital for the future too. But what about the risks? Can clients accept the volatility and downside risk to capital? The latest equity bull market has been largely driven by growth stocks. That leads us to question whether the rather unloved “value” style of investing might be set to make a comeback. As well as the more traditional approach of UK equity income, global equity income strategies are also becoming more popular allowing managers the scope to build portfolios with greater diversification in order to try and minimise volatility and risk.

The song remains the same Asset allocators look to reduce risk through effective diversification – geographically as well as of asset classes, of sectors, of stocks. Whether this is outsourced or managed in-house, the principles remain the same. The specific component parts of the portfolio will be largely determined by the risk tolerance of the individual client as well as the levels of income and growth which are needed – both now and in future – to fulfil the needs within the financial plan. So, with complex decisions about whether to combine UK with global equity income funds, between active and passive approaches, how to use fixed income, plus the use of alternative investments such as VCTs, EIS and many other options to, it’s a constant challenge for advisers. We thank all our contributors for their input and insight and hope you find our special focus to be of interest.



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This document is intended solely for the use of professionals, and is not for general public distribution. 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. Tax assumptions and reliefs depend upon an investor’s particular circumstances and may change if those circumstances or the law change. If you invest through a third party provider you are advised to consult them directly as charges, performance and terms and conditions may differ materially. Nothing in this document is intended to or should be construed as advice. This document is not a recommendation to sell or purchase any investment. Any investment application will be made solely on the basis of the information contained in the Prospectus (including all relevant covering documents), which will contain investment restrictions. Potential investors must read the prospectus, and where relevant, the key investor information document before investing. We may record telephone calls for our mutual protection, to improve customer service and for regulatory record keeping purposes. 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.

E D'S RANT April 2018


For Better, For Worse Where’s 2018 heading? Michael Wilson takes the elephant in the room for a random walk, taking good care not to step on the cracks

So what are we to make of 2018, then? We’re pretty much a quarter of the way through it now but, to answer the question, it rather depends on who you ask.

It’s the looming trade apocalypse that will put an end to a ten year bull run in equities, say some alarmists. It’s the inflationary jolt that spells the end of the low bank rate era, say others – an event which threatens to pitch the entire over-leveraged world into a wave of credit defaults. It’s the tipping point for fixed interest, which is about to suffer the twin humiliations of rising inflation and a fatally undermined high yield corporate sector. And blah blah blah. Honestly, it must be true, that’s what it says in the financial press, dammit. Warren Buffett says he’s running out of ideas because he can’t find any value

anywhere. Neil Woodford, who has his back foot neatly wedged in the exit door at the moment, is sounding more like Private Frazer from Dad’s Army every week. (“We’re doomed, Captain Mainwaring, doomed.”) And those cyclically adjusted valuations on the S&P 500 are still running at twice their historical averages. The Wall of Worry is there all right, and we’re halfway up it, and the first one to back down loses his performance bonus. And yet… Inconveniently, though, this just happens to be the healthiest spell of growth that the world has seen in maybe thirty years. The International Monetary Fund says that global output rose by 3.7% in 2017, and its projections for both this year and next year have just been upgraded to 3.9% - with 6.5% growth expected for developing Asia. Worldwide commodity markets are stable, and the worldwide cyclical upswing is set to




continue. And with vast amounts of investor cash waiting on the sidelines, it’s a little hard to take some of this doomy talk seriously. Either the right people are reading the wrong reports, or the reports themselves are skewed by their short-term perspective. So which is it to be? Synthesis, dear boy, synthesis Well, I’m not sure that I know. But I’ll tell you this much. The 36 years since I joined the Financial Times haven’t been completely wasted. Along the wibbly-wobbly way since before Big Bang, it has been my privilege to collect an entire scrapbook of truisms, and all they really need is for somebody to put them together and give them a bit of a spin, and then the world’s worries will be sorted. No, don’t thank me. But a Nobel economics nomination would be nice. Let’s start with the value of experience. As everyone knows, those who don’t learn from the mistakes of the past are doomed to repeat them. Except, of course, for those generals who are still trying to fight the battles of the last war, and the economists who correctly predicted 30 of the last 17 recessions, and everyone who thought that the new paradigm was a real thing.

opportunities when they present themselves. (That may have been why Mr Graham got wiped out in 1929, of course, but hey, everyone makes mistakes.) Always bearing mind, of course, that Keynes told us that the markets can remain illogical for longer than I can remain insolent. At least, I think that’s what he said? Not to mention all the black swans, blindfolded chimpanzees and random-walking elephants in the room who have been setting fire to our fevered imaginations over the last thirty years or so. If this is what a trampling herd looks like, I’m going to pack my tranquilliser darts.

April 2018

integrated accounts and real-time stock and futures trading wasn’t just a flash in the pan, however glitzy it might have seemed. And nor were the online haulage databases that allowed a trucker from Poland to deliver to Somerset and then nip over to Plymouth to pick up a load that could be exchanged in London for something that needed to go to Berlin. Instead of returning with an empty lorry. It was proper progress. And the only mistake the markets made at the time was to think that the productivity increase from technology could be extended year by year, whereas it was a oneoff step change.

But seriously…. The sharp-eyed among you will have spotted an interloper among that list of nonsenses that I’ve just reeled off. So help yourself to my last Rolo if you saw that the new paradigm of the late nineties wasn’t a nonsense at all. Why not? Because it referred to a real change that was really happening, that’s why. The arrival of computer algorithms and

Or shall we look at the market’s behaviour? As Ben Graham told us, Mr Market is illogical and it’s pointless to look for clues from the fundamentals – instead, he said, you just have to take the



E D'S RANT April 2018


A checklist for Mr Trump And my point is? Simply this. That before we try to extrapolate from the past into the future, we ought to stop and think about whether our assumptions still hold. Are we trying to fight the last war’s battles? I don’t know. But, until we’ve taken stock of the following questions, we can’t honestly look ourselves in the mirror and say that we’ve got a firm grip on the realities of 2018. So, without further ado, here’s my checklist. I’m going to take 1987 as my baseline, because it was the last time we had a proper stock market rout. But if you’d rather reset the odometer to 2008, be my guest.


The World Has Changed its Shape

Back in the good old 1980s, before Deng XiaoPing declared that to get rich was glorious, China was just about the last place you’d go to get a computer built, or a car, or even a decent pair of jeans. With a chaotic manufacturing structure, starving peasants moving off the land, and three-storey cities with bad roads and no airports, it was at best a niche player. Now it’s the world’s biggest steel producer, it owns Volvo and half the mining capacity in Africa and South America (and a few


American steel mills!), and its economy has trebled since 2007. China is set to overtake the United States by 2025. Oh, and did we mention that it also bankrolls America’s booming federal debt? That’s not all good news, of course. China’s own debt ratio has also trebled since 2007, its air is foul and its banks are loaded with bad debts which are being kept well hidden. But you get my point?

2. Those Pesky Europeans Are Everywhere No need to labour this point, is there? The twelve European Community nations of 1987 are now 28, of which one might be about to leave, and the group’s collective GDP is neck-andneck with America’s. Now and then, the EU’s trade relationship with its eastern neighbour Russia puts it at odds with Washington. Just saying.

viable refuge currency, or the only solid basis for a bond issue. That fact affects government borrowing and investment decisions around the world, and many are opting to float bonds in their own small currencies as the dollar becomes semi-detached. And we haven’t even mentioned cryptocurrencies. Luckily, there isn’t enough space here, or we’d be arguing till next month…

4. The Quantitative Easing Detox is Starting The world is currently “detoxing” after ten years of QE, mainly in the UK, the US, the EU and Japan - and nobody has the slightest idea how it will impact on debt markets. Was it “free money” with no consequences, as some claimed at the time? Or will it have to be repaid by our grandchildren? Nobody really knows. That’s a factor we shouldn’t ignore.

3. Currencies: We

Now Have a Choice

5. Rising Bank Rates, Weak Dollar

It’s a hard reality for President Trump to swallow, but the euro (which didn’t exist until 1999) is now at least as important as the dollar when it comes to international bond issuance. That’s important because it means America can no longer claim to be the world’s only

This is a bit of an oddity, historically. In the past, a much stronger level of US government borrowing has generally fed straight through to a stronger dollar, which has generally increased America’s influence on the global markets.



And this year it isn’t working that way. Why is that? Could it be that the expected surge in bond issuance hasn’t attracted investors from abroad? Or is it that everybody knows that China will buy a large chunk of it, so as to stabilise its own currency? Wiser heads than mine are puzzled. Whatever can it mean?

6. Super-Low Interest and Inflation Rates Distorting the Market The last decade has seen a surge of investor interest in bonds that might once have been labelled sub-investment grade, and yields have tightened. Why are investors seeking out higher risks in search of returns, and how will it unwind if the business world stumbles?

7. Clever New Technologies Clever new technologies were, of course, blamed for the 1987 stock market panic, but they’ve come a long way since then. On the one hand, high speed algorithm trading forces efficiencies on the market – but only (pace, MiFID II) if the transactions are openly declared. And the easy availability of derivatives puts another safety net under portfolios.


And to think, we haven’t even mentioned exchange traded funds yet?

8. Cash on the Sidelines Nobody knows how much investor cash is sitting on the global sidelines at the moment, waiting for a suitable investment opportunity – Blackrock was being quoted in late 2016 as guessing $50 trillion, which if true would equate to about half the value of the world’s official stock markets. What we do know is that there’s a lot of it. And that it ought to provide a safety net in the event of any major market crisis.

9. Any More Issues? Dozens of them. Spend a few moments compiling your own list of things that have changed in ways that will make the lessons of the past seem – if not irrelevant – at least subject to qualification. It’s only by getting back to grips with these past issues that we can hope to see through the deceptions, and the self-deceptions, of the present. Should we be worried? Well, the best way not to be worried is to be aware. We can all do something about that.

April 2018

The demographic imperative One factor that really can’t be dismissed quite so lightly is the very reliable prediction that people are getting older. Yes, you read it here first. Every ten years, the UK population’s expected lifespan at 65 increases by two and a half years (for both sexes) – with men currently expected to average 84 years and women 86 years. That would be significant even if the statistical balance between working-age and over-65 age groups were stationary, but it isn’t, of course, because the boomer generation is forcing its unstoppable way through the labour statistics. And the murmurs are growing about how (and even whether) a stagnant working age population is going to pay for it all? The implication, inevitably, is that everyone is going to need to make better provision for old age, and that portfolios will need to adapt as a result. Younger workers with long time horizons don’t find it easy to invest, but at least they can embrace risk more confidently than their elders. The over50s, on the other hand, face a growing need to adapt their investments toward greater security – which, for most, means income investing of one sort or another, or in some countries, cash deposits.


E D'S RANT April 2018

In short, it’s arguable that the wrinklies and the middle-aged are keeping the global fixed interest scene in liquidity during a time when yields have become painfully strained. And that their increased need for balance and security is not going to disappear in a hurry. The challenge for advisers and investment managers, then, is to judge their sector allocations correctly. And for investment groups to generate products that will cater specifically for risk-averse investors. The impact of pension freedoms is significant as it places responsibility for key decisions on individuals who may or may not be sufficiently well-informed to consider all the factors involved – especially the risks. The need for sound professional advice has never been more important.



The numbers The Pensions Policy Institute forecast in 2015 that – even allowing for the increase in the State Pension age, especially for women – the numbers of women reaching SPA by 2040 would grow from 6.51 million in 2020 to 8.92 million. While males of State Pension age would swell from 5.48 million to 7.73 million. That would leave the SPA group equating to 37% of the working age population, up from 28% in 2020.

In short, it’s arguable that the wrinklies and the middle-aged are keeping the global fixed interest scene in liquidity during a time when yields have become painfully strained

Let’s also remember that Britain or (especially) the United States, with large migrant working-age populations, have relatively young workforces compared with Germany or Japan or China, where the problem of working-age balance is far more severe than it is over here. We could try to insist that those countries’ issues don’t really need to impact a UK investor’s retirement portfolio, but that would be to ignore the fact that the UK accounts for only 6% of the world’s financial markets, and that the kinds of income producers we buy in London may be buoyed up by the demand from retirees in other parts of the globe as well. The big picture is getting bigger all the time. And that’s another thing that isn’t going to change any time soon.


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April 2018

Is there still value in the high yield bond sector? Michael Scott is the dynamic manager of the Schroders High Yield Oppor tunities Fund which invests in fixed and floating rate securities worldwide. He has managed the fund since 2 0 1 2 a n d h a s e s ta b l i s h e d a n e nv i a b l e p e r f o r m a n c e re c o rd . S u e W h i t b re a d caught up with him to talk about his high conviction approach which is based on in-depth credit research and how he is making the most of oppor tunities in the current market environment

SW: Can you talk us through your investment approach to management of the High Yield Opportunities fund? What are the fund’s objectives? MS: We designed the High Yield Opportunities fund to focus on providing a very solid return, whether clients are looking to grow their capital in a diversified portfolio or seeking regular sustainable distributions. The investment outcome for our clients is the main priority, so we


believe a flexible strategy is of key importance, whether a fund is benchmarked or unconstrained. Flexibility allows us to take advantage of opportunities where they arise and to improve diversification. To deliver strong returns, we believe that you have to go the extra mile. You have to dig down into the market to discover value at the issuer level rather than relying on the market or sectors of the market to do it for you. While economic growth is a major

influence on the performance of companies, there are a lot of other things happening in the world that can play a pivotal role in their future outlook. Take the retail sector, for example. Strong global growth provides a positive footing, but any retailer that fails to adapt their business model to take advantage of the rapid development of on-line retail is likely get into trouble. Demographic changes are another factor that businesses must contend with.



If a company fails to target its products at the right group, it can fail, irrespective of its size. So, our approach is to try and understand how the world is changing and to work out which companies are at risk and which are undervalued by the market. I think this is a very risk-balanced approach. SW: Do you have a set yield target for the fund or is it flexible? MS: We haven’t set a target yield but work hard to ensure that investors receive an attractive income stream as part of their total return. We believe that this fund is very capable of generating above 6% per annum over the cycle. Given that, it’s important to remember that past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amount originally invested.

It may surprise some people, but we really like the UK market. Brexit has put a lot of people off the UK market, which has cheapened a lot, especially when compared with the Eurozone. This means that we’re finding plenty of bonds from good UK issuers with well-managed business models trading at attractive valuations. We also see value is in some eurodenominated, B rated issuers. This market experienced a bout of volatility towards the end of last year that opened up some value. Some Latin American markets have also become a fertile hunting ground. In Brazil for example, the bond market is seeing the benefit of a marked improvement in economic fundamentals over the past few years from a very low base. Unemployment has improved, inflation is under control and as a result interest rates are falling. Let me stress, however, that in all of these areas, the right security selection is important.

SW: Where are you seeing the best opportunities for growth in the high yield bond sector currently? Could you briefly explain the reasons why?

SW: How do you capitalise on those opportunities in the fund whilst minimising the default risk?

MS: The current economic environment is undoubtedly positive for the market, when viewed from above. There has been a synchronised uptick in growth and defaults are low which is great for credit. However, a lot of this good news is already fairly reflected in price so if you focus on the market in aggregate, as many observers do, it can be difficult to see much compelling value. The problem with observing from above is that you don’t see what’s going on within.

MS: It’s very important to maintain diversification. This doesn’t just mean having a lot of bonds; if they are all sensitive to the same risks then you are not diversified. When I talk of diversification, I mean in terms of strategy. We start by identifying around 10-20 different themes that we think will play out over various horizons but will have a meaningful impact on corporate fundamentals in a forward-looking way. These themes give us a very useful


April 2018

starting point. Then we really drill down to understand how these themes could impact each issuer’s ability to meet their debt obligations. As investors, we should be taking a forward-looking view and our themes provide a framework for that. SW: Where do you see the main downside risks to performance at the moment and how do you mitigate those? MS: While volatility in general was extremely low through much of last year, it’s prudent to expect this to normalise in 2018. With aggregate valuations across all risk assets priced to reflect a very positive outlook, this is likely to lead to bouts of periodic short-term negative returns as investors shuffle asset allocations to try and time market movements. Funds which have the flexibility to diversify, which look for opportunities globally, and which have managers who specialise in bottom-up selection, should shine in this environment. SW: What are your main constraints on the fund? Is it constrained by a benchmark for example or do you prefer to have full flexibility around investment choice? MS: The main constraints are set by the Investment Association (IA) sector definitions, such as holding at least 80% in High Yield, but we also allow up to 50% in US dollar denominated bonds where we hedge the currency back to Sterling. We don’t manage the fund against a benchmark because doing that would tie the fund’s return to that benchmark, give or


SCH RODE RS April 2018

The challenges and concerns over Brexit seem set to persist and continue to result in attractive valuations in good quality UK issuers

take relative outperformance. Instead, we think that having more flexibility is aligned with the return needs of clients. SW: Looking ahead, with concerns over interest rate rises, what’s your view on the outlook for high yield bonds in general and also for your fund? MS: Our expectations that volatility would rise from extreme lows and potentially present investment opportunities have played out, at least to some extent, in the early part of the year to date. One notable shift in February was a move higher in expectations for 2018 US rate hikes. Expectations for 2018 hikes now look more realistic, but there may still be bumps along the way. The volatility-induced widening of spreads was not dramatic and does not, in our view, constitute a decisive reset in market dynamics. The initial spark for volatility seemed to be an upside surprise in hourly US wage growth. Moderately rising inflation is consistent with economic fundamentals and there is a way to go before inflation becomes problematic. We remain constructive, both on a top-down and bottomup perspective, and actively seeking attractively-valued opportunities.



The broad and synchronised cyclical upswing in the global economy continues to provide a good backdrop for credit fundamentals. Europe may be near the cycle peak with valuations reflecting the positives. Certain parts of high yield appear attractive. By comparison, the US cycle may extend beyond 2018 on fiscal loosening so monitoring inflation remains crucial.

We continue to watch the rise in leverage in the loans market, which can indicate a late stage in the credit cycle. We will look out for increased mergers and acquisition (M&A) activity too whilst remaining vigilant about political risk. The challenges and concerns over Brexit seem set to persist and continue to result in attractive valuations in good quality UK issuers.

The withdrawal of ultraaccommodative monetary policy will continue gradually, but the market will remain sensitive to any perceived shift in tone from central banks. The new Chair of the Federal Reserve, Jerome Powell, seems marginally more bullish and therefore hawkish than his predecessor, Janet Yellen. Rates, and yields, are likely to rise gradually which, on balance, should be welcomed by credit investors.

In-depth credit research is key to identifying value. The importance of high conviction security selection becomes ever more visible when aggregate spreads are low. In the current environment the ability to differentiate between issuers provided by Schroders’ research capability is likely to play an increasingly important role in generating returns and managing risk.

Source: Financial Express bid to bid net income reinvested as at 28 February 2018. Source for ratings Citywire, Fund Calibre, Morningstar, Rayner Spencer Mills, Financial Express as at 31 January 2018.




















Q4 - Q4


























April 2018

Risk factors •

The fund can be exposed to different currencies. Changes in foreign exchange rates could create losses.

High yield bonds (normally lower rated or unrated) generally carr y greater market, credit and liquidity risk.

A rise in interest rates generally causes bond prices to fall.

A decline in the financial health of an issuer could cause the value of its bonds to fall or become worthless.

A failure of a deposit institution or an issuer of a money market instrument could create losses. In difficult market conditions, the fund may not be able to sell a security for full value or at all. This could affect performance and could cause the fund to defer or suspend redemptions of its shares.

In difficult market conditions, the fund may not be able to sell a security for full value or at all. This could affect per formance and could cause the fund to defer or suspend redemptions of its shares

Failures at ser vice providers could lead to disruptions of fund operations or losses.

Mortgage or assetbacked securities may not receive in full the amounts owed to them by underlying borrowers.

The counterparty to a derivative or other contractual agreement or synthetic financial product could become unable to honour its commitments to the fund, potentially creating a partial or total loss for the fund.

A derivative may not per form as expected, and may create losses greater than the cost of the derivative.

When interest rates are ver y low or negative, the fund's yield may be zero or negative, and you may not get back all of your investment.

The fund uses derivatives for leverage, which makes it more sensitive to certain market or interest rate movements and may cause aboveaverage volatility and risk of loss.

Michael Scott Credit Fund Manager Michael Scott is a Credit Fund Manager at Schroders. He has been managing funds since 2012. Michael joined Schroders in 2006 as a European Industrials Credit Analyst. Prior to Schroders Michael worked at Cazenove Capital Management. Qualifications: BA (Hons) in Geography from Oxford University. CFA Charterholder





The investment portfolio construction process Ben Willis, Head of Research at Whitechurch Securities, outlines his approach of using a blended approach to asset allocation

The times they are a-changin’ for income seekers as we move into a new phase in markets. Even though we are still living with emergency interest rates, the age of loose monetary policy is coming to an end. With relatively stable global economic growth and higher inflation numbers, interest rates are trending higher. What does this all mean for income investors? Historically low interest rates have meant that even the most cautious income investor has been forced to take on more and more risk in order to meet their income requirements. This demand for income has been a key driver in the bull market in bond and equity markets for the last nine years. Looking ahead, bonds are under pressure due to inflation and the prospect of rising interest rates, whilst recent stockmarket declines are a timely reminder that equities are risk assets and they do not always go up! Against this precarious backdrop, I favour using a broadly diversified approach to constructing an income portfolio, including the use of a blend of yielding assets such as bonds, equities and commercial property. Blending different approaches for diversification UK companies have traditionally delivered strong of dividend yields, and so the core of my income portfolio would be invested into a blend of complementary UK equity income funds. I’d spread the exposure here, ranging from the more defensive, large-cap focused funds through to funds investing in dividend paying mid and small cap UK companies.


Go global

Don’t forget bricks and mortar

To further diversify the portfolio income stream, sourcing dividend income from overseas is sensible, utilising a number of globallyfocused, equity income holdings. This could be done either by using global income funds or by investing in specific regional market funds - or a combination of both of course. Thematic funds could also play a part. As an example of this, within the current inflation / interest rate-focused environment, I would favour exposure to income-producing Financial equities, which have tended to thrive in this scenario in the past.

Finally, I would allocate some of my portfolio to UK commercial property funds. Although we witnessed a liquidity crisis in the asset class following the Brexit vote, this was largely due to investors reacting to negative sentiment. Commercial property returns are loosely correlated to the overall health of the UK economy and this has remained remarkably robust in the face of the Brexit scenario. As a result, property is once again delivering consistent incomedriven returns for investors, which are relatively attractive when compared to gilts. In addition, property aids diversification within the overall portfolio as it is uncorrelated to both equity and bond markets.

Fixed interest looks overpriced After years of delivering equity-type performance, in my view fixed interest markets are looking overpriced, with bond yields in several areas now standing at historical lows. Even though I am generally negative on the outlook for fixed interest markets, the asset class does still have an integral role to play within a balanced income- focused portfolio due to the diversification attributes and yield that it provides. I would avoid UK conventional gilts, believing that these are looking overpriced with an asymmetrical risk profile (i.e. too much downside risk). My preference would be for investment using strategic bond fund managers who have a proven track record of unlocking value across fixed markets.

Pick and mix Of course, how much you decide to mix and match the different types of income-producing assets mentioned will depend on how much risk you can tolerate and what level of income you need to generate for the portfolio or client objectives you are seeking to fulfil. However, holding a blend of these assets is a tried and tested method of delivering a growing income stream together with producing an element of capital growth over the long-term.

Ben Willis Ben joined Whitechurch in 2006 and is a senior investment manager on the Prestige and Portfolio Management services and heads up the research function. He has 18 years' experience and is one of the leading commentators in the industry on fund research and investment strategies. He joined from Chartwell Investment Management where he was an investment manager. Ben holds the IMC and the Diploma in Financial Planning, and is a Chartered Member of the CISI.


Variety Exchange Traded Funds, from Factor Investing to Sustainable. UBS ETF. / ts etf-insigh

For professional investors only. For marketing and information purposes by UBS. This document has been issued by UBS AG, a company registered under the Laws of Switzerland. Issued in the UK by UBS Asset Management (UK) Ltd, authorised and regulated by the Financial Conduct Authority. This document is for distribution only under such circumstances as may be permitted by applicable law. The products or securities described herein may not be eligible for sale in all jurisdictions or to certain categories of investors. Source for all data and charts (if not indicated otherwise): UBS Asset Management. Š UBS 2018. The key symbol and UBS are among the registered and unregistered trademarks of UBS. All rights reserved.


April 2018

An adviser approach to investing for income Patrick Connolly, head of communications at Chase de Vere, summarises the firm's approach

At Chase de Vere, our starting position is that income investors should have a guaranteed income to, at the very least, cover their basic living costs. For those in retirement this is likely to come from a combination of the State Pension, defined benefit pension schemes and lifetime annuities.

We do have concerns about the number of people who have gone into pension drawdown without taking independent financial advice and who could effectively be gambling with their future standard of living.

Increasing demand for investment income However, we must recognise that with State Pension ages increasing, the decline in defined benefit pension provision and many people put off by the lack of flexibility and perceived low rates on annuities, that an increasing number of people are relying on their investment portfolios to generate a steady income. In theory, it is a sensible approach for income seekers to have a portfolio which naturally produces the level of income they need on an ongoing basis. However, this would result in many having to make difficult decisions in terms of the level of income they want or need and the amount of risk they’re prepared to take to achieve it.

Suitability requirements come first As advisers, before we consider a client’s particular income requirements, we must look at the overall circumstances and attitude to risk that relate to that client. In terms of constructing and managing an investment portfolio, this means getting the asset allocation right and worrying about the yield on different investments and asset classes later. This is where independent advice adds real value, as all other assets the client holds should be considered, whether they can be used to provide some of the income required, how secure the asset is and importantly, how any income generated or withdrawn will be treated for tax purposes.




If investors focus on achieving the maximum level of initial income, this is likely to mean being exposed to higher risk areas and having very limited growth prospects, increasing the danger not only of capital losses but also that the effects of inflation will reduce the real value of their capital and the spending power of their income over time.

Diversification is key As advisers it is our job to help our clients meet their long term objectives by developing a suitable investment portfolio that will continue to meet their needs in future, as well as in the present. We know that equities have the best long-term potential for income and growth. However, holding everything in equity-based assets is too risky for many income clients, especially if a market downturn could impact significantly on their finances. Equities may be needed for their growth potential but should be held as part of a diversified portfolio alongside other assets such as fixed interest and commercial property, which both produce a regular income and provide some protection if stock markets fall. Many income investors hold too much of their money in UK assets. This is typically through UK equity income and UK fixed interest funds and commercial property funds which invest only in UK properties. As it makes sense for growth investors to spread risks geographically, the same is also true for those seeking income. There is now a wide range of global and international equity income funds available, many strategic bond funds will hold overseas assets as do high yield funds, where the major markets are in the US and Europe, and there is an increasing number of other global bond funds available too. Having achieved the right asset allocation, we can then consider income requirements. Rather than simply just looking at high yielding assets, if the resultant portfolio doesn’t produce sufficient natural income for the


client’s needs in its own right, this can be topped up by making capital withdrawals, which could even prove to be a more tax efficient way to generate income. Some of our favoured funds for delivering income are: Artemis Global Income

The fund manager looks at both the macro economic outlook and individual stock picking and spreads risk by investing in a mix of companies which pay high levels of dividends, those with more growth potential and special situations stocks. This approach works well as the fund has a strong track record and currently pays an annual income of 3.6%. Invesco Perpetual Global Equity Income

This fund adopts a team approach with experienced underlying fund managers sharing their best stock ideas. Nick Mustoe, the Chief Investment Officer at Invesco Perpetual, then takes these ideas and is responsible for the overall asset allocation. It is a stock picking fund, investing mainly in large cap, quality companies and has a current yield of 3.1%.

April 2018

Rathbone Ethical Bond

This is a high conviction fund which looks at investment themes, credit analysis, valuations and risk, before conducting ethical screening. The ethical emphasis means that the fund contains some interesting bonds paying good yields, such as a UK disability charity supporting disabled people and their families, a not-for-profit company focusing on social housing and a mentoring programme for ex-offenders working with social housing associations. It has a yield of 3.8%. Janus Henderson UK Property

This is an income-focused fund managed by an experienced investment team. While the portfolio is diversified in terms of the types of properties it holds, it currently has a large weighting in the South-East of England, which the managers believe should provide the best protection in a downturn. The yield of 2.7% is lower than usual, in part because the fund currently holds about 20% in cash.

Rathbone Income

This is a risk-focused UK equity income fund with an experienced manager in Carl Stick, who has a consistent record of increasing income payments year-on-year. The manager seeks to invest in high quality UK companies, at a sensible price, and the fund currently pays an income of 4.1%. Janus Henderson Strategic Bond

This fund usually pays a competitive level of income as the managers tend to have significant weighting in high yield bonds. The current concentration is at the bottom end of investment grade and top end of high yield, which is an approach the managers are happy with while default rates remain low. The current yield is 3.3%

About Patrick Connolly Patrick is Head of Communications at independent financial advisers, Chase de Vere. He is qualified as a Certified Financial Planner and Chartered MSCI through the CISI. He was named as the Financial Adviser of the Year, Investment Adviser of the Year, At Retirement Adviser of the Year and Value of Advice Ambassador at the Unbiased Media Awards 2017.



April 2018

Using equity income strategies when investing for income Ryan Hughes, head of active portfolios at AJ Bell, highlights some of the funds which he feels are well positioned to deliver income for investors in current market conditions Investing for income has been a popular investment strategy for advisers and UK investors for many years, whether it is for actually distributing the income or reinvesting it for long term growth. Over recent years, the way in which fund managers operate has evolved. They are now far more comfortable looking for yield in different areas, notably further down the market capitalisation spectrum. Smaller cap equity income plays have seen huge growth as investors look to diversify their income streams and no longer rely on investing in the large household names from the FTSE 100 index which have been seen as the traditional income payers. The spectre of rising UK interest rates ahead means that there is a more challenging outlook for fixed interest markets going forward. My preferred route is to look to equity income strategies as they offer the scope to deliver an increasing income for investors over time, as well as the opportunity for capital growth, which may be particularly important should higher inflation take hold. Which funds look attractive?

When looking at specific funds, I would highlight a number of strategies: •


For a traditional UK equity income strategy, the Threadneedle UK Equity Income fund is on my list. It is managed by Richard Cowell who is a very experienced investor and is backed by a strong team. The fund is typically focused towards larger companies and looks to deliver an above average yield making it interesting for those seeking a higher level of income.

Smaller cap income is also an attractive area. Here, I’d select the Montanaro UK Income fund. This fund will be unknown to many reading this but is supported by one of the largest independent small cap research teams in the market. A focus on quality companies that are well managed and cash generative, makes it a good choice to diversify from traditional equity income funds.

Away from the UK, the Artemis Global Income fund offers something of interest for advisers and investors looking further afield. Manager Jacob de Tusch Lec is pragmatic in his approach and happy to adjust the portfolio away from the benchmark. While it can be a little more volatile, it focuses on investing in companies that have the generation of dividends at the heart of their corporate strategy. It also has the flexibility to invest in parts of the market that other income strategies may ignore.

My final choice would be the Jupiter Asian Income fund managed by Jason Pidcock. Asian companies have hugely developed their dividend culture making it one of the higher yielding regions around the world. Jason focuses on investing in higher yielding companies that have a commitment to share profits through dividends while also paying close attention to the macro and political environment in order to manage risk. With a yield of over 4%, this fund is attractive to those seeking higher level of income who can accept there may be some capital volatility.

In summary

Overall, advisers are faced with a huge number of different options from investing right across the globe, when looking to help income seekers to generate income from investments. In my view, the key to making effective choices is to try to identify those funds which are capable of delivering a sustainable income alongside the opportunity for this income to grow in real terms, which may prove to be very valuable if the economic environment becomes more challenging.

Ryan Hughes Head of Active Portfolios AJ Bell Investments Ryan has over 15 years’ investment experience. Prior to joining AJ Bell he was a fund manager and discretionary portfolio manager at a leading global investment management firm. Before that he spent eight years as a Senior Fund Manager at one of the UK’s largest investment groups, sitting as a member of their investment committee and global asset allocation committee.



O F I FA BUSINESSES Retirement? Time for a change? There are countless reasons to dispose of an IFA business, just as there are countless reasons to get hold of one.

W E A R E A SPEC I ALIST FIN AN CIAL S ALE S , CO N S ULTA N CY A N D B R O K E R AGE B U S I NE S S . Gunner & Co.’s mission is to work directly with you, whether you are looking to realise the capital in your business, or you are looking for growth through a merger or acquisition. We consider every business to be unique, and therefore finding the right solution for you starts with a thorough understanding of your business operations and your wish list. Only from here can we make valuable introductions which align to both party’s needs. If you would like to discuss options to sell, exit or retire, or acquire IFA businesses, please get in touch for a confidential discussion.


April 2018

A pragmatic approach to income investing UBS report highlights analysis showing that how shareholder yield is financed can make a difference to ETF selection

Many investment strategies target high yielding stocks for income and capital enhancement, even though this might come at a risk. Ideally, companies should strike the right balance between cash distributions and reinvestments to ensure future business growth. That’s the call from UBS Asset Management, as they suggest that advisers should pay greater attention to how shareholder yield is financed by the underlying companies in which a fund invests and highlight how ETFs can be used effectively in this area. It’s time to look beyond the headline yield figures and examine a company’s capital structure to get the real picture as to how sustainable dividend income is likely to be in future. The MSCI Total Shareholder Yield Index is derived by taking into account both equity and debt considerations, thus building on a more holistic view of each respective company's capital structure. When seeking longterm shareholder value, the key is to focus on companies that finance dividends and/or buybacks from free cash flow, rather than from capital structure arbitrage. Dividends or share purchase? Companies may return excess cash to their shareholders either through dividend payments or by the repurchase of outstanding shares (buybacks). Both methods generate value for shareholders. While a dividend provides a fixed return at payment date (income subject to taxation), share


buybacks lead to an increase in per-share measures of profitability (earnings, sales, etc.), due to a reduction in the number of shares outstanding. Buybacks are frequently interpreted as a signal that a company's management perceive their stock price to be undervalued relative to its intrinsic value. Let’s get technical The study of Brav et al. (2005) reports that perceived undervaluation is one of the key factors that drives a stock repurchase decision (tax advantages and protection against potential hostile takeovers being other important drivers). Buybacks usually drive a share price higher, resulting in significant capital gain, which is taxable if a shareholder decides to realise the profit. Many investors pursue these yielding stocks for income and capital enhancement, even though this might come at a risk. Ideally, companies should strike the right balance between cash distributions and reinvestments (capex) needed for future business growth. Index benchmarks are available which capture the performance of stocks with above-average dividend and/or buyback yields. These allow investors to access the risk premium indexed investments and to evaluate their performance. The value of dividends and/or buybacks can be initially assessed by looking at the basic indices that reflect the performance of shareholder yielding stocks. For example, the S&P 500 Buyback

Index measures the performance of 100 stocks with the highest buyback yield in the broad S&P 500 universe, whilst the S&P 500 High Dividend Index reflects the performance of 80 stocks with the highest dividend yield amongst the S&P 500 underlying stocks. Both the S&P 500 Buyback Index as well as the S&P 500 High Dividend Index have simplistic methodological frameworks, where the S&P 500 underlying stocks are ranked in descending order, based on their respective yield, and the top 80 to 100 stocks are selected and equally weighted to formulate the index. The equal weighting scheme underpins the maximum diversification approach, with no explicit tilt towards higher yielding stocks, regardless of company size or the source of financing repayments. Inherent sector bias between dividend yield vs. share buybacks The graph shows the dividend yield and buyback yields per sector for the S&P 500 universe. Importantly, if an investor buys a dividend index, then they overweight sectors according to the orange values (i.e. only high dividend yielding companies), while they ignore the buyback yield. These two ways of returning capital to investors should be equivalent assuming efficient capital markets. Hence, as UBS have highlighted, what really should matter to investors is the total shareholder yield, which is the sum of dividend and buyback yields.



Additionally, the graph makes clear that looking just at dividends for example would underweight a number of key sectors: IT, Consumer Discretionary, Healthcare, Financials etc., as in these sectors, companies have historically preferred share buybacks over high dividends. While the highest dividend yielding sector may be Telecoms followed by Real Estate, if one looks at the full picture of dividends combined with share buybacks, Consumer Staples actually comes out on top. (See graph below) Key consideration: debtfinanced shareholder value A number of studies have discussed the value of cash repayments, and argue that in recent years, amid low interest rates and cheap debt financing, debt issuance has been excessively used for stock buybacks and dividends. As Andrew Walsh, Head of Passive & ETF Specialist Sales at UBS AM suggests, "this essentially rewards equity holders at the cost of bondholders (debt/ equity arbitrage), and implies that companies maximise short-term shareholder value rather than investing for the long-term". The current incentive structure, implied by low interest rates and tax inducements, works against long-term investments and supports levered buybacks. In the view of UBS, when seeking long-term shareholder value, it's worth focusing on companies

that repay shareholders from free cash flow and which have healthy balance sheets, rather than from those employing capital structure arbitrage. Factor indexation of shareholder yield: more sophistication The MSCI Total Shareholder Yield Index, for US and Eurozone equities uses a methodology derived from the aforementioned equity-debt considerations, thus building on a more holistic view of the each respective company's capital structure. This index targets companies that have returned above-average capital to shareholders (through dividends and/or buybacks), whilst aiming to minimize exposure to the companies that have concurrently raised their debt levels, assuming that debt issuance has been used to fund share buybacks. Within this framework, the focus is on the companies that favour long-term shareholder value. The index construction used here is a rules-based process (with semi-annual rebalancing) where for each variable (dividend yield, buyback yield and debt repayment yield) a 'Z-score' is computed and then averaged, resulting in the composite Z-score used to rank stocks in view of their shareholder value. The Z-score concept uses standard deviation analysis so as to more easily compare like for like. In contrast to a basic index

April 2018

structure, the MSCI approach favours top shareholder-valued stocks by overweighing them in the index composition. Exchange Traded Funds provide effective access UBS AM offer two Exchange Traded Funds (ETFs) that provide access to the MSCI Total Shareholder Yield indices, for the USA and the Eurozone (EMU) equity markets. For European market access, the UBS ETF (LU) Factor MSCI EMU Total Shareholder Yield UCITS ETF (EUR) fund invests in those European large and mid- cap stocks which have the strongest yield and share buyback profiles as defined by the MSCI EMU Total Shareholder Yield index. As Andrew Walsh explains, "typically, the number of stocks which 'make the grade' would represent about 25% of the constituents of the MSCI EMU parent index. Similarly, the UBS ETF (IE) Factor MSCI USA Total Shareholder Yield UCITS ETF (USD) invests in those US large and mid-cap stocks which have the best profiles in this respect and also represents c. 25% of the MSCI USA parent index". Finally, it should be noted that within the distributing share class, the dividends are distributed (income), whilst buybacks result in a capital gain, if the underlying price has moved up. This capital gain is reinvested in line with the index methodology.

Showing a picture as of end Q3 2017, based on the S&P500 index. The data is from S&P Dow Jones Indices 7%

Dividend Yield

Buyback Yield

6% 5% 4% 3% 2% 1% 0% Telecom. Services

Real Estate



Consumer Staples





Health Care

Consumer Discretionary

Information Techn.


RM FU N DS April 2018


An alternative approach to generating income Other than fixed income, what other options are available for advisers to consider in order to deliver a steady and consistent level of income within client portfolios? James Robson and Pietro Nicholls of RM Funds talk to Sue Whitbread about how secured lending can provide appropriate opportunities

SW: RM Funds may be a new name to some readers so can you give us some background to the business? James Robson: “RM Funds is the alternative credit business from RM Capital. RM Capital was established in 2010 and has been involved in fixed income and capital markets advisory activity since then. To put it into context, we’ve arranged or advised on over £1.5billion in transactions through our advisory team. RM set up a fund management business in 2015 to focus on alternative credit fund management. Alternative credit as an asset class is relatively new and the focus is around assets which exhibit stable and consistent cash flows as a substitute for traditional fixed income investments. Looking at the regular fixed income space – like government and corporate bonds –there’s a dearth of yield, however within the alternative credit space there are opportunities with attractive yields with stable and visible cashflows. That’s where RM operates and with more than 120 years of experience between us in the team, we have established ourselves as a specialist alternative asset management firm focused on credit products & secured lending.


SW: For those who are not that familiar with secured direct lending, Pietro, can you highlight what’s involved and what are your key areas of operation? JR: “Within the alternative credit space there are a number of sub sectors ranging from Aircraft Leasing to Specialist Real Estate and one of these sub sectors is direct lending. In essence, it’s nothing new, it’s just lending. The fund lends money to corporates – as opposed to them raising finance from the banks. The types of businesses that we lend to are typically SMEs or

mid-market corporates. These are not micro businesses of course, they can be fairly large - generating £50m in revenue for example. The kind of business we back are in areas which have suffered since the banks have retrenched from lending to anything other than their blue chip client bases. We help those firms which have good assets, good business models, strong management teams and we provide the financing to support their growth and development. We go through a rigorous credit process of course, which I’ll explain now as it’s important to understand.

Origination & Sourcing In-House Capabilities

On-Going Monitoring

Credit Analysis

Monthly / Quarterly Reproting

Financial, Credit, Capital Structure


Due Dilligence

Security & Covenant Package

Legal, Technical, insurance, Financial



April 2018

SW: James, can you talk us through the investment products you have available– and which you think are of interest for advisers, planners and paraplanners?

“It all starts at stage 1, when someone reaches out to us with a requirement for funding or we see an opportunity to invest in a debt instrument. By stage 2 we proceed to the due diligence process – where we understand exactly what the business does – digging down to see where the risks are, what kind of shape the management team is in etc. This is an involved process which costs the borrowers money so they need to be committed to it. Our credit function then sits over the top of these areas, to make sure we’re taking the right kind of risks and that we’re generating the right kind of returns for that level of risk. The next phase is execution where we actually document the transaction or purchase


a Loan. Thereafter, it goes into M&C – monitoring and control – where we monitor the investment throughout its life. It’s important when we invest that we have effective sets of reporting requirements, covenants etc. in place that the borrowers agree to. The fifth box is one we’d hope not to have to step into, which is in a case where something has gone wrong. Depending on what that is, will determine what action we take. In the worst case scenario, we would seize the assets of the business to the value of the loan to protect our investment. Of course, it’s something we’d rather not have to activate but it’s an important part of the process to have in place.”

JR: “In 2016, the first product we launched was RM Secured Direct Lending. This is an investment trust, listed on the London Stock Exchange and is a product which aims to give a steady, secure and consistent income stream along with the preservation of capital. Currently, the market cap is just under £90m and our target is to pay a 6.5% dividend. We feel it’s a product of interest to all investors as, let’s face it, everyone at this stage of the economic cycle is looking for income whether they are private clients, wealth managers or institutional investors. Looking at our shareholder register, we have a huge number of investors. Our largest investor in the investment trust is the Church Commissioners (CCLA) as well as other institutional investors, plus there are around 4,000 retail investors. Being a closed end fund investors can buy or sell shares through their stockbroker as well as some platforms, as it is listed on the LSE. During March, we’re undertaking a “C” share issue to raise additional capital which should take the capitalisation of the trust to over £100m.”

SW: Given that a key investment objective for RMDL is to deliver income, is that 6.5% level of income sustainable for investors in the trust? Can they expect to receive it consistently over the longer term? What about the value of capital? Pietro Nicholls explains. “We have a simple objective that this is a yield product with preservation of capital. In the first year we targeted a 4% yield (we exceeded it at 4.2p) with 6.5% being the target yield thereafter. This is the yield net of running costs, managers’ fees etc. and so the shareholder should expect to receive a consistent income return of 6.5% per annum.


RM FU N DS April 2018

We believe a key differentiator for RMDL is that it has a fixed income portfolio positioned for growth in a rising interest rate environment. This is quite unusual as bond prices usually fall in a rising rate environment, however a significant number of our investments have a floating or index-linked coupon rates. At present, as interest rates start to rise, this should mean that this increased coupon should flow through to the bottom line and dividends could then increase. Of the remainder of the portfolio holdings which have fixed rate coupons, we tend to keep the maturity dates relatively short on these investments so that we do not have significant exposure to any interest rate movements. “The investment trust has traded well since inception in 2015. We see the main reason behind this is that we provide a lot of transparency about the investments themselves



– including the names of the businesses we lend to and invest in - something which isn’t always the case within our peer group. Also our management fees are fairly low – we don’t levy any performance fee – in addition we take 50% of our management fee and invest this into shares in the trust every quarter. As well as the fact that we invested into the fund ourselves on day one, this provides real alignment of interest as we have “skin in the game” and demonstrates that we back ourselves.”

SW: Pietro, advisers and paraplanners will be keen to hear where you think the main risks lie for investors in this sector and how do you and the team work to minimize them? PN: “The main risks lie in a borrower defaulting on a Loan. This is a clear risk and mitigated by RM in several ways:

Invest in sectors with stable and visible assets and income stream such as student accommodation, healthcare and energy projects.

Focus on non-cyclical sectors – these areas are less likely to suffer in a prolonged downturn

All investments are secure Loans which give downside protection via robust covenant packages to ensure if things go wrong there is a good chance of recovering the investment

Ensure rigorous due diligence is done on all investments and there is robust monitoring and control,

“As an example, one of the largest investments in the portfolio provides debt to an asset finance business that has a portfolio of nearly 1,000 physical assets such as diggers and tractors.



This investment is secured over the whole portfolio and has a very granular structure with lots of security. Another investment is to a large healthcare business with a senior secured charge over their business cashflows and their real estate portfolio. As I previously mentioned, these are the types of businesses we favour with stable and visible earnings and tangible security.”

SW: Pietro, where does the business go from here? Do you have plans to expand? “Yes, indeed we do. Our next fund going through the FCA process at the moment is the RM Alternative Income fund. It’s a fascinating product and one which we are very keen to tell advisers and paraplanners about as we think it is well positioned for their needs. We have constructed the portfolio to offer maximum diversification across the alternative credit space within one UCITS product. When we consider where it will invest, there is a broad range of sectors in areas like infrastructure, specialist real estate which would encompass distribution centers and GP surgeries, private credit, aircraft leasing, asset based lending, P2P lending, structured credit etc. This new fund looks to make the right kind of investment across these areas in one investment, offering true diversification against traditional investments like equities and bonds. The concept that it will invest across such a broad area really plays to our team’s strengths. We’ve got direct experience of operating in these areas which need the specialist knowledge that we have within the team. Through this new fund, we can offer investors and their advisers this diversification strategy in one place at a competitive rate – our intention is to cap all fund charges at 0.85%. “The income target for the fund will be 5% net to investors after costs, but with these costs capped. We’ll be paying the income quarterly too. We don’t see another product on the market like it. It will be an open-ended fund with daily liquidity and


April 2018

the investments RM make will typically be in listed equites and bonds. This is important, both in allowing a speedy deployment of capital to minimise cash drag and also to facilitate any investor redemptions. “Of course, we have to wait for FCA decision but we are hoping that the fund might be available early in April 2018 as we enter the new tax year. We believe that it the fund will be highly attractive to advisers who are seeking an investment which can deliver an attractive and consistent level of income for clients. It’s an exciting time for us and we’re really looking forward to engaging with professional advisers and building working relationships with them for the future.”

James Robson is Chief Investment Officer and Principal, RM Funds He is the Co-Manager of RMDL and has C.20 years of experience in the Capital Markets, Credit Products (including CDS, and Structured Products), Risk Management and Corporate Credit. James founded RM Capital Markets in 2010 and currently heads the Alternative Credit Management business. Prior to this, James was a Credit Trader for RBS and Dresdner Bank and was former head of the European corporate credit trading business at HSBC. He is a member of the RM Capital Markets Board, and an Investment Committee member. He is also a shareholder in RM Capital Markets Limited, and RM Secured Direct Lending PLC.

Pietro Nicholls is Principal, RM Funds He is the Co-Manager of RMDL and has C.12 years of experience in Investment Banking, Capital Markets, Corporate Lending and Project Finance. Pietro has extensive experience advising publicly listed, unlisted and government related entities on investment, financing, M&A and liability management solutions. He joined RM in 2013 to setup the Capital Markets & Advisory business, a business which over three years advised on, sourced, structured and or arranged over €2bn of debt finance transactions located within W. Europe. In 2015, alongside James Robson, Pietro set-up the credit management business and subsequently launched RM Secured Direct Lending PLC. He played an active role in the development of the UK Retail Bond market, a now established form of funding for corporates. Like James, Pietro is also a shareholder in RM Capital Markets Limited and RM Secured Direct Lending PLC.



April 2018

“I’m holding out for a hero - a dividend hero!” Annabel Brodie-Smith, Communications Director, Association of Investment Companies

“I need a hero - I’m holding out for a hero ‘till the end of the night”. As a teenager in the mid-80s it’s hard to forget these immortal words being belted out by a fellow Welsh woman, Bonnie Tyler. It turns out that “heroes” is a popular song theme prompting a fierce debate in the office on the best ‘hero’ song. Heroes are also much admired amongst investment trust fans, namely dividend heroes. There are twenty-one dividend hero investment trusts (See Table) which have increased their dividends every year for twenty years and over. Four of these, City of London, Bankers, Alliance and Caledonia have consecutively increased their dividends for over 50 years. This is due to investment trusts’ unique structural advantage, allowing them to squirrel away up to 15% of the income they receive each year into their revenue reserve to distribute in tougher times. Investment trusts also have another benefit when it comes to income as they invest in a wider range of investments that can generate a higher income. Their closed-ended structure allows them to invest in illiquid assets like property, infrastructure, renewable energy and illiquid forms of debt. This is demonstrated by the Property Direct UK sector, which has been one of the most popular sectors for advisers since the Brexit referendum caused many property open-ended funds to be suspended. This sector has an average yield of 4.8% and is up 118% over the last ten years.




Number of consecutive years dividend increased

Dividend yield as at 28/02/18 (%)

City of London Investment Trust

UK Equity Income



Bankers Investment Trust




Alliance Trust




Caledonia Investments




F&C Global Smaller Companies




Foreign & Colonial Investment Trust




Brunner Investment Trust




JPMorgan Claverhouse Investment Trust

UK Equity Income


3.6 4.3

Murray Income

UK Equity Income


Witan Investment Trust




Scottish American

Global Equity Income



Merchants Trust

UK Equity Income



Scottish Mortgage Investment Trust




Scottish Investment Trust




Temple Bar

UK Equity Income



Value & Income

UK Equity Income



F&C Capital & Income

UK Equity Income


3.4 14.7

British & American

UK Equity Income


Schroder Income Growth

UK Equity Income



Northern Investors Company*

Private Equity



Invesco Income Growth

UK Equity Income



*Please note Northern Investors Company is winding up

Finally, investment companies, unlike open-ended funds, have another income advantage – they don’t have to pay dividends just from the income they receive from investments but can pay dividends from capital profits. This flexibility helps meet shareholder demand for income in this low interest rate environment and potentially can lead to investment companies being rerated to trade on lower discounts. Clearly investment trust boards have an important role to play, ensuring any change in dividend policy is in shareholders’ best interests. So if you too are holding out for a hero, investment companies may be for you.

To find out more about dividend information for member investment companies visit: https://www.theaic.


How do I stay ahead? Specialist back up for my clients’ tax year end needs

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BRIAN TORA April 2018


Reflections - the changing face of generating investment income Once upon a time, investing for income was a relatively simple matter, says Brian Tora. If only it was quite that simple now

It wasn’t that long ago that the UK Equity Income sector, which contained funds run by a wide range of so-called “star” investment managers, could demonstrate a long history of delivering a rising income together with capital appreciation. Many of these funds were amongst the top performers across a range of sectors on a total return basis. Then, a decade or so ago, it all turned rather sour. The trigger was the banking collapse here and abroad, followed by the global financial crisis and the disaster that hit BP in the Mexican Gulf. You’ll remember that banks and BP were amongst the largest dividend payers in the FTSE 100 Share Index. Not only did this source of income suddenly dry up, but capital values were hit as a consequence. Many hitherto consistently good performing managers were hit hard by this debacle. Cheap money The period of ultra-low interest rates this ushered in created another opportunity for income seekers. Bonds became flavour of the month and new funds run to a range of investment strategies started to spring up. As central banks’ quantitative easing programmes pushed cash into the system, often through buying bonds, capital values were enhanced also and the relationship between equities and government bonds underwent a fundamental change.


Mind the yield gap Until the 1950s, equities yielded more than gilt-edged securities to reflect the perceived additional risk they contained. The difference in the income generated by government bonds and ordinary shares was known as the yield gap. But pension fund managers, led by George RossGoobey, started to back equities on the basis that well-managed companies could increase the dividends they paid to shareholders on a regular basis and thus provide a hedge against inflation.

States, ten year Treasury bond yields have been nudging 3% - not far short of double what they are here. And if inflation continues above the 2% target in the UK, the Bank of England may be forced to raise rates faster than expected as indeed was highlighted in a recent Bank of England statement. Many experts are predicting the next UK base rate rise might happen as early as May.

And the reverse yield gap By the time the 1960s arrived, equities were trailing gilts in the income stakes and the reverse yield gap became firmly entrenched. Until shortly after the financial crisis, that is. With bond values driven higher and the appetite for risk diminished, bond yields fell below those available on equities. Moreover, lower interest rates depressed annuity returns which are used to determine pension fund liabilities. This led to a widening of pension deficits and a generally more cautious approach to investing from pension fund managers. All change Nowadays, of course, it all seems to be changing again. Monetary tightening is back on the agenda for central banks and interest rates are on the up. So, too, is inflation. Bond yields are trending up, with all the consequences this must have for their capital values. In the United



Where might the money flow? All of which makes life particularly tricky for the income-seeking investor. The good news is that the range of income producing assets has widened considerably over the years. Today it is comparatively easy to gain exposure to commercial property, an asset class that was the province of the seriously wealthy alone until relatively recently. Similarly, infrastructure investments are available through professionally managed funds, while more esoteric assets, like private equity and venture capital, may have their place in some incomeaccented portfolios, but only if the investor is prepared to accept the additional risk they can represent. Utilities, which once were viewed as the cornerstone of an income-seeking equity portfolio, are looking more like a potential political


football. This serves as a reminder that conditions can - and do -change in the investment world. What about equity income funds? If interest rates are to continue to rise and inflation remains above target, the argument for equity income funds will receive a boost. No-one is expecting a return to excessively high rises in the cost of living indices or double-digit yields on government bonds, but perhaps cash, which has delivered such poor income returns (well, it has delivered negative real returns in truth) for some time now, may find a place back in income portfolios. As for equity income funds, it is not just the UK where investors and their advisers need to consider these days. Many global markets now offer access to higher yielding equities

April 2018

through professionally managed funds. Bond funds are more difficult to assess, though again the variety of investment styles and underlying assets suggest that there will be something for everyone, depending on needs. Diversification is key In the end, the sensible adviser is likely to assemble a range of different funds covering a myriad of underlying assets to address a mandate of producing a reasonable income for their client. While the short term direction of interest rates and inflation seems set, there are sufficient uncertainties out there to ensure that hedging your bets remains no more than prudent. But I have to confess that I am encouraged by the findings of the Barclays Equity/Gilt Study, which confirms that equities are most likely to produce the best long term total return.



Don’t worry, be happy Richard Harvey takes a practical look at generating income, as he argues that it’s not how much we receive but what we do with it that really counts




There's a corny sign hanging on my office wall bearing that sage West Indian advice: "Don't worry, be happy". And there's another in the kitchen: "Life isn't about waiting for the storm to pass. It's about learning to dance in the rain". They are precisely the sort of folksy slogans which irritate or amuse people in equal measure, depending on their mood at the time.

The Timpson way

Back to basics

However, both sayings came to my mind recently when I read a piece about John Timpson, the boss of the shoe-repair business.

And that is - how much money do you really need to make you happy? Well, according to an article in January's Nature magazine, and based on US university research findings, roughly £4,000 a month will make you a happy bunny, fully satisfied with life. And that's per person, not per couple.

Here's a 74-year-old guy who grew a business, initially based on soles, heels and key cutting (which you wouldn't have thought was an easy way to get rich) and has now expanded into a nationwide chain selling everything from dry cleaning to Zippo lighters, house signs to sports trophies. What is particularly interesting about John (now Sir John) is that he has developed an employment philosophy which is regularly highlighted in surveys of the Best Places to Work. His belief is that if you treat people right, then the business will look after itself. He has carried those values through into his private life. Together with his late wife Alex, they fostered 90 children, and he has set up a Trust in her name to train teachers to understand young people with the difficult-to-manage condition of attachment disorder. And then there's the fun stuff. Sir John still has a stable of racehorses, a hobby on which he cheerfully confesses to losing about £15,000 a year, and his advice to people - like me - of a certain vintage is: "Keep busy - every time you get invited to a social function, say yes". It's apparent that despite his business success, Sir John is not over-exercised about money. And while it would be easy to say: "Well, he's sufficiently well off never to have to worry about mortgage payments/ gas and electricity bills/food shopping and all the stuff that worries most people", it would be missing an essential point.

Really? Given that the average UK salary is in the region of £2,200 a month, and the average pension is well south of that, the prognosis would appear to be "Buddy, Can You Spare A Dime?" rather than "We're In The Money". Sure, there are some 900,000 people in the UK who can look forward to amassing a pension pot around the Magic Million mark, and should therefore cheerfully be able to contemplate a wellpadded income in retirement. However, I suspect Sir John would advise that it is not how much income you receive, but what you do with it that truly counts (albeit that he may be rather happier dropping a bundle on the horses than the rest of us). An example to us all By contrast, I recently met up with a lady in her 80s who has endured more of life's vicissitudes than anyone else I know. She lives in a tiny rented cottage with her retired husband, relies entirely on the State Pension - and is as happy as the proverbial Larry. She practices yoga, tai chi and meditation, none of which are a significant drain on her extremely limited income. And, for the past 40 years, has never had a doctor's appointment. Both she and Sir John clearly benefit enormously through adopting a positive attitude to life. And that is the sort of fortune that the biggest pension pot in the world can't buy.

According to research findings, roughly £4,000 a month will make you a happy bunny, fully satisfied with life. And that's per person, not per couple



MATT AN DE RSON April 2018

The three keys to holding an effective 1-2-1 meeting with a potential introducer Are you making the most of working with professional connections? Matt Anderson gives practical tips on how you can develop your skills in this key area

Isn’t it odd that there is endless content available on the systems and processes for building and leveraging client relationships to boost business, but so little is written on the topic of how to generate quality business opportunities from working with professional introducers?

1. Focus on the other person first

Ultimately, about 70% of meetings that advisers have with other potential professional connections are a complete waste of time. Here’s how to avoid this happening to you (most of the time).

Hopefully the person has already come to you as a result of being highly recommended by someone you trust. This gives you a head start.

Do your homework Before you meet with someone, take a few minutes to review their LinkedIn and/or company profile. It helps to paint a broad picture, gives you an overview of their work, their work history, and where they were educated. Often, more importantly, you can look at your mutual connections. Any one of these could be a handy conversation starter or way to establish some common ground. I’ve got off on the right foot with two people recently based on the fact we both spoke German. It can be that particular.

Remember: the purpose is not to have a pleasant meeting but to generate business opportunities as soon as you can. Here are the three main areas on which to focus:


Meetings will always go better when you focus on their needs first. In any meeting you have, goal one is to know, like and trust the other person. As soon as you get there, you can move to point 2.

For most people in your network, you need to get a sense of their competence. However, you don’t need them to train you as their replacement! Avoid spending significant time talking about ‘what they do’. Firstly, it’s comfort zone conversation for the other person. They could talk about it for the entire 1-2-1 and you might well never see them again because virtually nothing was accomplished. (They will most likely say to themselves: ‘I got nothing out of that.’) Also, it probably won't help you identify ways you can help them, which is fundamental to actually generating business. The exception would be if you must have industry-related clarity before you can start referring them to anyone in your network. What does your gut tell you about this person? Do they show any signs of being a ‘connector’ based on questions they ask you? You can ‘see’ people doing this kind of thinking. They literally look off to the side.


MATT AN DE RSON April 2018

When you find yourself meeting with someone who is more of a type “A” personality than you and they appear to want to ‘lead’ the conversation, let them ask you a couple of questions and then respond to their next question with: “That’s a great question and I’d love to tell you more, but I’m really curious how you…” and then ask them something. Focus on them first. Because if you can’t do something tangible for them, it’s a fairly remote possibility that they will do something for you first. 2. Do everything you possibly can to help them This is where the relationship can become productive. Most IFAs never get to this place. They meet a nice person who they don't quite know how to deal with and generally nothing happens. Two hours were wasted. This is not for you! Fall in love with helping people and you will start to get some fabulous results for yourself. To be successful in generating new business from introducers, you have to genuinely take pleasure in helping others and seeing them benefit from the relationship usually before you do. It took me 14 years to learn this. A common mistake which some IFAs make in these situations, is merely to give lip service to the “How can I help you?” question, failing to mask that they’re really thinking: “I hope I sell you something.” Do not fool yourself by thinking that you are different and can fool others. People can sense veiled insincerity very easily in these situations. It is crucial to drill down and find out who they want to meet while you are together. Most potential introducers find it difficult to be clear about the business they want. You may need to help them narrow it down to specific people in that meeting otherwise you might not get another chance to meet that person again. Start out by asking them about specific industries they work with, niche markets and specific professions until the person says they want to meet


people in banking, franchising, venture capital, healthcare, or law firms. If they name a huge industry or profession such as “the medical field,” you must dig further to narrow it down to dentists, care home owners, or suppliers to hospitals. Ask for: • A prospect list (although almost no one has one) • Names of companies and/ or people, departments, professions, and industries where they want more business • Titles of people they want to meet • Situations where they can help others (less helpful but a useful reference tool) • The professions of their best referral sources (note: you can ask people in your network if they know such people too - even if you don’t, e.g. ask your accountant: “Who at your firm specialises in working with the abc industry?) • Pain points to listen out for in conversation • Questions you can ask people that might lead to a need

meet. You can use the same format as Point 2 above and literally go over this with them. This makes it easier for people to help you. In addition to your list, either give or email the other person a brief paragraph that introduces you to their contacts. 98% of people have no idea what to say to best position you, so you offer: “would it be helpful if I emailed you a couple of things to share with your clients?” No one will object. It is a huge mistake to leave this up to others. Lastly, if you can’t get through these steps in one meeting, do all you can to set up a second meeting on the spot. Clearly, not all relationships are going to develop at the same pace. Therefore by setting out the next step in this way you do your best to sustain the momentum that is usually otherwise lost. Developing your skills as an effective networker will generate long term business benefits throughout your career. It’s now over to you to put these techniques into practice so that they become second nature and start to produce the results you are looking for. I wish you well.

Two tips: • Write down what they want: it’s important for people to see that their needs matter to you. • Follow up within 24-48 hours on what you said you would do. You will really surprise them because hardly anybody does this. Most people only talk a good game. Introductions are not the only currency for helping potential introducers but they are the best. Helping people in other ways that mean more to them can range from A-Z, professional to personal. It is a relationship business! Think hard: How can I most add value to this person? 3. Spell out exactly who you want to meet Once you help the other person – if you’ve done Part 2 well and are making introductions for them - you won’t have to tell most people what you’re looking for because they will ask you first! The best thing to do is to have a pre-prepared list of who you want to

About Matt Anderson Matt Anderson, founder of The Referrals Academy, has grown his business almost exclusively by referrals. He has trained and coached people from over 30 countries and specialises in helping financial advisers to get more and better prospects. He is based in Chicago but was born and raised in Coventry. He is the author of the international bestseller Fearless Referrals, which Brian Tracy, author of The Psychology of Sales, says “teaches you the “Golden Rules” for developing a continuous chain of high quality referrals for any product in any business.” The book is available on Amazon.

Connect with Matt on LinkedIn – www. or email


CAREER OPPORTUNITIES Position: Paraplanner Location: CRAWLEY Salary: £30,000 - £40,000 Per annum The client: This firm focuses on providing a high quality financial planning and investment management service. The opportunity: During a period of key expansion, they seek an experienced paraplanner to support the firm’s successful financial planners. They will provide the perfect opportunity around each person’s specific skillset, so the role can be tailored to exactly what you want. You will have the opportunity to prepare suitability letters, reports and recommendations and provide technical support to complex client queries. You will be working in a strong, team-focused environment where you can develop your career within a prestigious firm. What’s needed for me to be considered? •

Level 4 Diploma qualified or working towards this.

Previous experience within a fast-paced IFA practice.

High level of analytical and communication skills.

Position: Independent Financial Adviser Location: WIGSTON, LEICS Salary: £35,000 - £45,000 Per annum The client: This is a firm of bespoke independent financial planners which is looking to expand. The opportunity: The opportunity here is for a financial adviser with a professional and level-headed approach to come in and help take on a number of the company’s clients moving forward, alongside building and growing this bank further. This opportunity would be suitable for any level 4 diploma qualified professionals, whether you be an existing IFA with a strong client bank or a newly qualified adviser looking to work in a highly professional environment. In this role, as mentioned, you will have the chance to work with a number of the firms existing connections, with all your leads provided via referrals and professional introducers, with a highly rewarding salary and benefits package. What’s needed to be considered: •

Hold previous experience within an IFA / financial planning practice.

Must be qualified to a minimum industry standard of level 4 diploma qualified.

Previous experience dealing with high net worth clients desirable but not essential.

A strong understanding of pensions and investment products advantageous.

Position: Paraplanner Location: PRESTON Salary: £30,000 - £40,000 Per annum The client: This is a fantastic firm which focuses on providing a high quality financial planning and investment management service for its clients. The opportunity: During a period of key expansion, the firm is looking for an experienced paraplanner to support the financial planners within the business. It will mould the perfect opportunity around each person’s specific skillset, so the role can be tailored to exactly what you want. You will have the opportunity to undertake whole of market research and write high quality suitability reports independently. You will also have the opportunity to work in a fast-paced environment where full support and training is provided. What’s needed for me to be considered: In order to be considered for this unique opportunity, candidates need to be Level 4 Diploma qualified or working towards this. You will also need to have a high level of analytical capability and good communication skills.

Position: IFA Location: FARNBOROUGH Salary: £35,000 - £40,000 Per annum The client: A multi-award winning financial planning business is looking for qualified professionals to join their desk based advisory team. The opportunity: Due to the commission of several new corporate contracts and as part of continued growth strategy, the firm is looking for an experienced Diploma qualified adviser, or experienced paraplanner looking to progress their career. Responsibilities and duties: •

To provide profitable, effective and compliant whole of market financial planning advice and ongoing servicing to the company’s present client bank.

To identify and develop new business opportunities from existing clients, introducers and referrals and achieving agreed revenue targets.

To conduct in accordance with the FCA’s Statement of Principles and Code of Practice for Approved Persons.

To promote and provide a comprehensive and compliant service to existing clients within the activities as defined and authorised by the company.

To act and deliver in accordance with the TCF principles at all times.

What’s needed to be considered: •

Level 4 Diploma Qualified or equivalent, as a minimum.

Have proven experience within financial planning.

Position: Financial Adviser Location: NOTTINGHAM Salary: £50,000 - £55,000 Per annum The client: This is a multi-award winning financial planning practice with offices nationwide. They specialise in providing tailored financial advice to private clients across the UK as well as some of its largest businesses. The opportunity: An opportunity has arisen for an experienced adviser to join this growing business. You will receive a client bank and be tasked with generating leads through a Private Bank with which the business has a professional relationship, within the following locations – Nottingham, Derby, Leicester and Northampton plus at least 6 retail branches in the Midlands. There is an attractive remuneration structure in place - and a £4000 car allowance will be provided. Responsibilities: •

Ideally Chartered or working towards.

Ideally you will have banking and IFA experience.

Proven experience of writing good levels of business.

Position: Senior Paraplanner Location: PENARTH Salary: £30,000 - £35,000 Per annum The client: Ever wanted to escape your mundane office surroundings? How about working in a converted cinema with a minimalistic and modern feel? This is a small but highly reputable advisory practice based just south of Cardiff. In the past year they have taken on number of clients through word of mouth, due to the highly valued service they provide to their clients, of whom they have lost just 1 in the past 10 years. The opportunity: Due to organic growth within the business, the firm has identified the need for an experienced paraplanner to work alongside one of the directors of the business. This is a fantastic opportunity for an experienced paraplanner to join a client-focused, tight knit team, currently in the stages of major development. What’s needed to be considered: •

Proven experience in a paraplanning position.

Level 4 Diploma qualified.

R08 qualification is preferable.

Willingness to develop your technical knowledge.

Position: Senior Paraplanner Location: LONDON Salary: £37,000 - £45,000 Per annum The client: A bespoke and well-respected IFA practice seeks to build a long term, trusting relationship with their clients by providing their financial planning services to as an ongoing service. They embrace the use of new technology and have a well-qualified support team assisting the advisers to make the best decisions for their clients. They provide tailored financial planning advice and really go the extra mile to provide a personalised service. The opportunity: This is a fantastic position for an experienced paraplanner to join a growing firm that can offer genuine career development by allowing you to be a key part in the firm’s ongoing successes. You will part of their technical team and be actively involved in the back-office process as a key member. The ideal candidate will want to have autonomy within the role and work closely with a team of experienced financial advisers. This opportunity gives you a chance to lead a team from the front, whilst working closely alongside the firm’s MD. What’s needed for me to be considered: •

Qualified or working towards level 4 diploma is an advantage.

Previous experience within the IFA practices and paraplanning is essential.

FCA understanding of regulations and products, and their practical application.

Position: Client-Facing Paraplanner Location: NEWCASTLE UPON TYNE Salary: £38,000 - £42,000 Per annum The client: This is a fantastic firm which focuses on providing a high quality financial planning and investment management service to its clients. The opportunity: During a period of key expansion, the firm is looking for an experienced paraplanner to support the Managing Director in a very technical role, required to look after the MD's most important clients and provide everything up to the point of advice. The firm has the flexibility to mould the opportunity around your specific skill set, so there is scope for the role can be tailored to your requirements. There will be opportunities to progress into management if desired and you will be working in a strong team-focused environment. You will also receive a performance-related bonus on top of your salary. What’s needed to be considered: •

Level 4 Diploma qualified or working towards this.

Previous experience within a fast-paced IFA Practice.

High level of analytical capability and good communication skills.

Position: Compliance Manager Location: NOTTINGHAM Salary: £40,000 - £50,000 Per annum The client: This is a highly reputable financial planning practice where they pride themselves on the personal touch that they provide their clients. As IFAs, they provide tailored financial advice on a range of areas for both private and corporate clients. The firm have an excellent staff retention rate and have a comprehensive benefits package to go along with the salary on offer. The opportunity: This is a fantastic chance to build a career in a well-established IFA firm. You will be given the chance to work closely with the firms IFAs as well as overseeing and improving the firm’s approach to compliance. A clear and defined career plan will be put in place that will enable you to progress within the firm. You will also be offered the chance to study towards gaining further financial services qualifications should you want to. What’s needed to be considered? It would suit an individual with paraplanning experience who can quickly take to the role. •

Strong experience in an IFA firm.

Level 4 diploma qualified as a minimum.

Existing experience in Financial Services compliance or risk control.

Experience of working with bespoke software packages used for financial planning and support.

And also… If these specific vacancies are not exactly what you are looking for, please contact us to discuss other opportunities we may be recruiting for that aren’t necessarily advertised. Additionally, refer a friend or colleague to us and receive £200 in vouchers if we assist them in securing a new career.

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Investing for Income | IFA 67 | April 2018