Investing in Metals| IFA 70 | July 2018

The Rise of Rare Ear th July/August 2018

ANALYSIS

REVIEWS

ISSUE 70

COMMENT

NEWS

GOVERNMENT BACKED - GREAT BRITISH INVESTMENTS - EIS - SEIS - BR - SITR - VCT

Time is short.

Invest it wisely.

Comprehensive and in-depth analysis of the alternative M AGAZINE

investments market, specifically designed to help busy IFAs navigate this crucial area for their HNW clients.

www.gbinvestments.co.uk

CONTE NTS July/August 2018

CONTRIBUTORS

5

Ed's Welcome

6

News

Brian Tora an Associate with investment managers JM Finn & Co.

10 Richard Harvey

Ed's Rant - Pedal to the metal

a distinguished independent PR and media consultant.

Mike Wilson attempts to explain what’s been going on in the market for metals and what might lie ahead

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

Brett Davidson FP Advance

14

Blackrock - Charting new waters Michael Gruener, Head of BlackRock EMEA Retail, discusses what clients have been telling him and what BlackRock can do to help

16 Better business Brett Davidson considers the differences between employed and self-employed advisers

20

Investment opportunities in disruptive technologies

Michael Wilson Editor-in-Chief editor ifamagazine.com

L&G ETF highlights some of the threats and opportunities which exist as well as some effective solutions

24 Brian Tora - Back to Black?

Sue Whitbread Editor sue.whitbread ifamagazine.com

Brian Tora assesses whether now is the time to increase exposure to energy stocks

26

Employing embedded currency hedging in ETFs

Alex Sullivan Publishing Director alex.sullivan ifamagazine.com

A transparent hedging strategy can reduce currency risk and optimize portfolio return. That’s the view of Andrew Walsh, UBS

30 How to capitalise on the Blockchain revolution Analysis from Peter Schwabach of Shield Investment Management

IFA Magazine is published by IFA Magazine Publications Ltd, Arcade Chambers, 8 Kings Road, Bristol BS8 4AB Tel: +44 (0) 1173 258328 © 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.

The value of investments and the income from them can go down as well as up and you may not get back the amount originally invested.

32

Richard Harvey - Silver Machine Richard Harvey with an alternative view about the UK government’s financial prudence

34

Career Opportunities From Heat Recruitment

IFA Magazine is for professional advisers only.

Full details and eligibility at: www.ifamagazine.com

IFAmagazine.com

3

This advertisement is for investment professionals only

In a changing world, we aim to keep you ahead of the pack.

LET’S TALK HOW.

FIDELITY GLOBAL SPECIAL SITUATIONS FUND To make the most of global growth opportunities, it pays to keep ahead of the pack. Jeremy Podger seeks to identify corporate change, unique businesses and stocks offering exceptional value. It’s an approach that led him to be named Morningstar’s Global Equities Fund Manager of the Year in 2017.

The value of investments can go down as well as up and clients may get back less than they invest. The fund may invest in overseas markets and so the value of investments can be affected by changes in currency exchange rates. The fund may also use financial derivative instruments for investment purposes, which may expose the fund to a higher degree of risk and can cause investments to experience larger-than-average price fluctuations.

PAST PERFORMANCE (%)

JEREMYPODGER

Apr 13 – Apr 14 – Apr 15 – Apr 16 – Apr 17 – Apr 14 Apr 15 Apr 16 Apr 17 Apr 18 Fidelity Global Special Situations Fund

7.0%

25.5%

0.5%

35.2%

10.5%

MSCI AC World

5.4%

18.1%

-1.0%

30.4%

7.3%

Peer Group Average

6.2%

15.2%

-2.3%

27.4%

8.1%

8

Go to professionals.fidelity.co.uk

Past performance is not a reliable indicator of future returns.

Source: Morningstar as at 30.04.2018. Basis: bid-bid, income reinvested. Peer group: IA Global Sector. © 2018 Morningstar, Inc. All rights reserved.

Copyright – © 2018 Morningstar, Inc. All Rights Reserved. Morningstar RatingTM as of 31.03.2018, in the Global Large-Cap Blend Equity Morningstar CategoryTM. Investments should be made on the basis of the current prospectus, which is available along with the Key Investor Information Document and annual and semi-annual reports, free of charge on request by calling 0800 368 1732. Issued

by Financial Administration Services Limited, authorised and regulated by the Financial Conduct Authority. Fidelity, Fidelity International, the Fidelity International logo and F symbols are trademarks of FIL Limited. UKM0518/22036/SS0/0818

E D'S WE LCOM E July/August 2018

Open Wallet Surger y No wonder Theresa May’s looking a bit grim and careworn these days As if the current trade rumpus with the United States weren’t enough, and as if the multilevel parliamentary revolts against Brexit policy and enactment weren’t the very stuff of leadership nightmares, the Prime Minister has chosen this of all moments to pour lighter fuel over the troubled fiscal waters instead of the recommended balm. Did she really need to do that?

At any other time, the Premier’s announcement of a £20 billion boost to annual NHS spending (staged over five years) would have been welcomed as a sign of commitment to what they’re calling Britain’s favourite religion. And Health Secretary Jeremy Hunt’s tacit acceptance that the bulk of the £20 billion would need to be funded either by taxation or by borrowing should not have surprised anybody. Oh dear, if only his boss hadn’t been trying to insist that the glorious Brexit dividend would pay for it instead……

Coming in a week when the Bank of England’s own people had rubbished the likelihood of any Brexit dividend, and when national productivity statistics had left the economy looking like a family expecting bad news from the hospital, Mrs May’s principled insistence on the rightness of Gove and Johnson’s

I FAmagazine.com

side-of-a-bus argument looked like an act of Jungian denial.

Small wonder, then, that the leopard-print kitten heels and the lightly wavering fringe have given way these days to the steely grey helmet-hair and the next best thing to a pair of kicking boots.

The PM is going to need them.

Take a deep breath….

But back to my point. (At last...)

Last month we discussed the thorny issue of millennials’ resentment of the way that the boomers have (allegedly) grabbed all of the property market before dragging the whole nation out of our panEuropean paradise. And then having the cheek to get old, and expensively ill, just as they were retiring from tax-paying as well!

Yes, there is good reason for the younger generations to feel beached and marooned by their elders, and there was also something inevitable about this spring’s Resolution Foundation’s recommendation that ways should be found to make the oldies pay their share. Yet, as we also noted last month, doing it with hefty property taxes based on house valuations would be fraught with problems.

Would home owners, for instance, be allowed to deduct the values of their enormous mortgages from any value

assessments? How would a flat property tax distinguish between personal ownership and company ownership – surely the PM wouldn’t want to hammer the rental market too? And if the property taxes hit house values as steeply as intended, wouldn’t that leave five million in negative equity, and wouldn’t that bust the banks and stop the economy?

Could we, perhaps, pay for the NHS by taxing pensioners who are currently paying no National Insurance contributions? Yes, we certainly could, but it won’t produce £20 billion a year.

We couldn’t easily charge the oldies punitive rates of income tax, because ageism is illegal in the UK. We could means-test the State Pension altogether, of course, but that would be breaking a 110 year contract with every employee in the land, and it would be political suicide for any government that tried it.

But even so, it’s a problem. An extra £20 billion a year for the NHS would necessitate a 3% increase in the total national tax take (or 4% if we excluded VAT from the calculations). How are we going to achieve that? And how are you going to prepare and position your clients in readiness?

It’s not a flippant question.

Michael Wilson Editor-in-Chief

5

N EWS July/August 2018

Cashflow provider i4C announces key partnership with Intelliflo

Cashflow modelling fintech start-up i4C (the i4C team is pictured) has entered into a landmark strategic partnership with Intelliflo, a supplier of specialist online software for financial planners and mortgage advisers.

The new partnership will see i4C join a growing network of specialist channel partners available through Intelliflo’s iOStore, enabling clients to adapt or build functionality which exactly matches their business requirements.

Financial planners using Intelliflo will be able to rollout cashflow modelling for all their clients across one platform, safe in the knowledge the data inputted is consistent across applications.

Existing Intelliflo users will also benefit from a smooth integration with i4C as part of the partnership, with only a single sign-on required.

The announcement coincides with the official launch of i4C’s new product version which provides financial planners with a feature-rich, but easy to use web-based application, enabling the creation of simple or complex cashflow modelling to provide clear and compliant guidance to clients.

Intelliflo, which is newly backed by investment business Invesco, helps the financial services community thrive in an ever-changing market by making their operations more professional and profitable.

Through continually developing its best-in-class, web-based business management system, Intelliflo strives to help its clients become industry leaders.

Mark Harman, CEO at i4C said: “We are delighted to announce this landmark partnership with Intelliflo.

The demand for a universal software application, tailored to match the differing needs of financial planners and clients alike, has been borne out of the

6

evolving regulatory and commercial environment financial planners are having to operate in.

“It’s never been more important for financial planners to demonstrate the impact of their advice, ensuring clients feel able to make more informed life-changing financial decisions with clarity, confidence and transparency.”

Nick Eatock, Executive Chairman at Intelliflo said: “Our new partnership with i4C represents a valuable and significant addition to our everexpanding network of key channel partners.

“Teaming up with i4C was an obvious choice for Intelliflo, as financial planners using our platform will now be able to make cashflow modelling central to their advice processes with ease, without having to compromise on sophistication.”

The growing need for financial planners to provide more consistent, transparent and streamlined advice processes responds to the changes recently witnessed by the industry, including the introduction of MiFID2 requirements and the adoption of robo-advice by certain parts of the market.

Used as an interactive tool, i4C enables financial planners to adjust clients’ future objectives in realtime, while also providing the opportunity to create, compare and illustrate unlimited scenarios, making it simpler to plan effectively for all clients at every level. Powerful tax calculations are able to be made effortlessly, available to view in graph or table formats. i4C allows users to quickly input all data onto one system, ensuring a greater focus can be placed on growing the number, longevity and value of client relationships.

I FAmagazine.com

N EWS July/August 2018

Advisers reveal biggest pension freedoms concern New research shows that the lack of consumer understanding and awareness of pension freedoms are the biggest concerns for advisers, three years on from the launch of the rules, The findings come from an independent research report for Prudential.

Although the research shows that advisers believe pension freedoms to be a success, the study highlights that consumer education is regarded as one of the biggest challenges to the ongoing success of the regime. Other concerns raised by advisers include the risk of mis-selling, fraud, unexpected tax bills and savers running out of money in retirement.

Over 80% back the reforms and 30% believe the new rules have been very successful.

The potential of savers running out of money in retirement and being unable to support themselves continues to be raised by advisers with just under half of advisers voicing such concerns. Additionally, unexpected tax bills and the risk of mis-selling are the biggest risk to support for pension freedoms according to 45% of advisers. Two out of five warn about the risk of fraud.

I FAmagazine.com

Ideas to increase the take-up of guidance and advice include offering increased subsidies for advice in the workplace, which is backed by 26% of those questioned, while 23% would support employers being enabled to offer guidance and facilitate advice.

Vince Smith-Hughes, a retirement income expert at Prudential, said: “This research highlights just how beneficial it is for people to take high-quality advice as they approach the end of their careers. People approaching retirement like the idea of being able to access their pension funds but there are many pitfalls that advisers can help them avoid.

“Advisers recognise that a lack of understanding can lead to consumers drawing too much money and running out of money too early in retirement, incurring unexpected tax bills or saving their money in inappropriate types of investment.

“The earlier those approaching retirement engage with retirement planning, the better.

Using the Government’s Pension Wise guidance service as well as the ability to seek advice should enable everyone to improve their understanding of the options.”

7

N EWS July/August 2018

The dollar strengthens Worries about an impending trade war meant that the dollar strengthened significantly during early May and late June, with the greenback gaining 8% against the euro and 3.5% against the Chinese renminbi yuan. Although this was inconvenient from America’s point of view (because it was likely to increase the attraction of US imports while making exporting harder for US companies), it was generally in line with the strong-dollar policy adopted in January by President Donald Trump – apparently against the advice of his Treasury Secretary Steven Mnuchin, who had advocated a weaker currency at the January Davos meeting.

The most probable cause for the strengthening dollar was that international investors were being scared off from emerging markets, against which the US President had declared stiff trade sanctions. (The result being that many of them had gravitated toward the ‘safe haven’ US dollar.) But it was also noticeable that the gold price had similarly fallen against the greenback. And so, perhaps not coincidentally, had cryptocurrencies such as bitcoin, which surrendered almost 35% against the dollar between the start of May and the final week of June.

Italian stallions The Euro’s weakness may also have been attributable to the election of a Eurosceptic alliance in Rome, comprising a populist blend of anti-immigration campaigners known as “The League” and the anti-establishment Five Star Movement. Both parties had previously called for a referendum on Italy’s future membership of the single European currency, but both appeared to be back-tracking on a secession by the final week of June.

One reason for this may have been that Italy’s public sector debt has been growing substantially – it is currently estimated at 132% of gross domestic product, the second highest ratio in the euro zone after Greece – and that Italian politicians are

8

becoming increasingly rattled by the thought of having to float future bond issues on a currency that wasn’t the hallowed euro.

All the while, foreign commentators remained fixed on the plight of Italy’s banks, which are believed to be carrying almost US$1 trillion of bad loans. (According to Eurostat, Italy today accounts for 15.4% of eurozone GDP but 23.4% of the bloc's public debt.) Italian bank stocks took a pounding during May, as bond yields on Monte Paschi di Siena, Italy’s oldest bank, soared above 8%. The problem being that the new separatist alliance had pledged to reduce the banks’ ability to recover bad debts from their customers.

I FAmagazine.com

N EWS July/August 2018

UK house prices – mind the gap (again) There was some respite for UK house prices during May, as the 3.1% price downturn of April turned to a 1.5% rebound. The Halifax housing survey showed that 3 month price development during the period to April had hit 1.9%, slower than the 2.2% recorded in March, but it added that sales activity had risen by 4% during the year to April, with about 100,000 monthly sales being recorded with an average value of £224,439 in May. Research by upmarket property specialists Savills showed in June that there was now no part of the UK where single workers on average salaries could afford to buy an averagesized home. In the north-east, where property was cheapest, a buyer with a 25% deposit could afford to buy only 884 square feet of space — slightly short of the 893 sq ft median home size. But in London an average wage earner could afford only 292 square feet, and in Kensington and Chelsea the plot size dropped to 138 square feet.

Yet, accrding to Savills, the affordability gap is still widening: in London, a single worker could afford 32% less space in 2017 than he could in 2007; in the North East, on the other hand, he could buy 38% more real estate for his money.

I FAmagazine.com

9

E D'S RANT July/August 2018

Pedal To The Metal It’s all about the supercycle, stupid. Michael Wilson dons his helmet and gloves to do battle with the elements If you can’t stand the heat, stay out of the kitchen. There’s still a good deal of truth in the old wisecrack about not getting into volatile commodities unless you’re prepared to take the (sometimes very) rough with the smooth. Metals aren’t like other investments, honestly – they work according to their own rules and their own rhythms, and heaven help the investor who ever confuses a bull phase for equities with an automatic win for commodities.

The last few months have also provided a particularly nasty shock for anyone who fools themselves that buying into a copper mine or an aluminium producer is tantamount to a proxy on the global economy (but with added dividends).

Never mind that global growth is barrelling on regardless, with the International Monetary Fund forecasting a 3.9% upturn this year rising to 4.9% in emerging markets) - Donald Trump’s punitive sanctions against America’s most faithful allies have proved that there’s really no such thing as absolute certainty. Commodities are an intensely political subject.

10

I really don’t know. But let’s start this exploration of the metals business with a little historical perspective. Back in the 1970s, if you wanted to set up your grieving widow for life after you’d departed this earth, you’d make sure she had a portfolio full of Lloyds Bank and Rio Tinto and ICI. With rock-steady dividends of inflation plus three per cent, or maybe more, you’d know that she’d need no market knowledge at all to enjoy a lifetime of guaranteed security.

Changing perspectives

But alas, that dream of stability came undone. The late 1970s saw the United Nations pushing aluminium smelters and uranium mines (and soyabeans and bananas and coffee) at dozens of poor countries who could barely afford them, and too often, all that resulted was a global glut of raw materials that pushed down commodity prices and nearly bankrupted them. In chemicals, the traditional lead of companies like ICI was swallowed up by an industrialising third world, and by the time the 2008 financial crisis had crippled the banks there were almost none of the widow’s three safe bets left standing.

Okay, that’s the wealth warning out of the way. But should we be concerned that a few hundred billion dollars of new tariffs will infect the whole global shebang? Or are those tariffs no more than a mosquito bite, as Manulife Asset Management recently argued in the Financial Times?

Suddenly, only the leanest and fittest producers could hope to survive. Long before China ever entered the international metals scene, the bells were already tolling for indolent Western producers who hadn’t bothered to update their manufacturing facilities, and who spent their time lobbying

Congress for protection from the need to innovate. The same was true of US oil refiners, who fought the introduction of low-sulphur diesel for a decade before capitulating. Little by little, the rustbelt industries became outdated and were outpointed by nimbler, betterequipped factories elsewhere.

These days US steel capacity is capable of supplying only 20% of the country’s needs.

In fact the current crisis in rustbelt America wouldn’t have been lost on Bruce Springsteen, who lamented as far back as 1983 about small-town Main Street’s “whitewashed windows and vacant stores”, or about the “foreman [who] says these jobs are going, boys, and they ain’t coming back.” In England and South Wales, too, the coal and steel industries were inexorably priced out of contention by countries that granny had never even heard of. Mr Trump, you can’t blame all of that on Barack Obama.

Can’t get no correlation But there I go, getting all political again. Maybe we should go back to the basics, to see which bits of the Trump rhetoric stand up and which ones are due to misunderstandings?

I should start by declaring my own long-term holdings in metals producers such as BHP Billiton – not because they might swing my argument, but because they really have turned out to be the longterm portfolio stabilisers that

IFAmagazine.com

E D'S RANT July/August 2018

I always hoped they would be. Even if they do sometimes deliver nasty downward shocks on equity market up-days.

The reason for all this is that minerals such as metals don’t conform to the ups and downs of the traditional bond and equity markets. Metals are, to use the term, poorly correlated, and that makes them worth considering as a storm anchor for a portfolio. Indeed, they don’t even correlate very

IFAmagazine.com

well with national economic growth itself – consider the price surges in the 1970s that coincided with shocking global industrial performance – and that makes them interesting.

One of the popular theories behind this lack of correlation is that there’s such a thing as a mining supercycle, and that it’s been a decade in the doldrums so that it’s currently ready to get back into gear. There are plenty more who say that

Metals are, to use the term, poorly correlated, and that makes them worth considering as a storm anchor for a portfolio

11

E D'S RANT July/August 2018

supercycles don’t exist, or perhaps that they have been thrown off course by the emergence of China as a massive consumer – or perhaps by new technologies which have simply shifted the balance of what people want.

Let’s look at the ‘pure’ logic of the supercycle idea, as far as it goes.

It’s always going to take you five or ten years to sink a new silver mine if the international price of the metal happens to go up far enough to make it viable – and that time-delay gives the world five or ten years’ notice in which to enjoy the high prices before the new mine opens and the global productive capacity expands and suddenly there’s a glut again.

At the other end of the foodchain, a steel producer might be prompted by attractively cheap iron ore to plan an expansion of his factory - only to find on opening day that the metal price has soared and that he won’t turn a profit. In both cases, the time lag is always likely to create distortions of the balance between demand and supply. And all the while, the varying interest rate cycles and business cycles exert their own impact on how much companies are going to invest in new and potentially expensive technologies.

Which, some investors would say, makes metals a perfect place for a natural contrarian to be. But there’s a trap for the unwary, which is that metals will sometimes drop out of demand for reasons that nobody had thought of.

Platinum, as we’ll see shortly, has seen its price dropping in the last few years as governments have clamped down on diesel cars – the vehicles that are most likely to use platinum-based catalytic converters. (Instead, all the action these days is in palladium, which is better suited to petrol-engined cars.)

12

The rise of rare earth Without much doubt, the fastest growth these days is in so-called ‘rare earth’ minerals such as yttrium, europium, terbium and neodymium, all of which are essential to the running of hightech electronic equipment. And there’s a good chance that you won’t even have heard of them.

Neodymium, for instance, is the magic ingredient in the supermagnets that run the hard drives in your computer, or in that wind turbine up there on the hill. Ruthenium, europium and rhenium are what make your OLED television work. And the hell of it is (for President Trump at least) that the overwhelmingly largest producer of all these metals is the People’s Republic of China.

The United States has a few deposits of these ores in California, but it imports well over 90% of its rare earths – 12,600 tonnes in 2016 – from Chinese suppliers.

Not because they’re globally rare (they’re not), but because the task of refining the ores into metals is extraordinarily labour-intensive – and that no other country can produce them affordably. Now that’s what I’d call a national security issue if I were in the White House…

While we’re on the subject, what will happen when we finally exhaust the world’s reserves of lithium, the rare metal which runs the batteries in your laptop, your phone and your brand new Tesla?

And will there ever be enough cobalt – a rare metal that’s essential

for the batteries in an electric car, but which sources two thirds of its global supply from the chaotic (and violent) Democratic Republic of Congo? (Most of it through the troubled Glencore.) And whose price has trebled in three years?

And could that be why China has recently signed up a deal with Glencore to buy half of the world’s annual raw cobalt? And should it bother us that China is already the world’s biggest cobalt refiner, with 80% of global production of the finished metal?

Yes, you can bet that Washington is getting antsy about all that.

The problem being that it can do absolutely nothing about it.

Of course, there’s always the chance that something technologically new will come along to knock some of these metals off their perches, or at least to avoid the price and supply crises that seem to loom.

This time next year, we may find Trumpium or Melanium powering the superfast chips in our iPhones, and then it’ll all be over for the existing components, just as it’s been game over for the ingredients in early solar panels. More probably, though, we’ll find better ways of recycling lithium and rare earths in a way that will assuage the fears being felt in Washington.

Hmmm, maybe you’d be better off backing the Australian miners who supply China with the ultrahigh-quality coal that it needs for specialised steel production?

And which China signally lacks?

IFAmagazine.com

ED'S RANT July/August 2018

Some market trends So who says there’s a politically-inspired price crisis brewing? At the time of writing, copper was back up to the price levels of 2013, at nearly $3.50 per pound – up by almost 75% since the sub-$2.00 low of early 2016. (Source: Kitco.) And warehouse stocks plummeted in the second quarter of 2018 (although that isn’t a particularly unusual development.) No doubt about it, those darned Chinese have left their footprints all over this one – although a series of mine problems in Latin America have also disrupted the supply chain and raised prices.

Aluminium, at around $1.10 per pound, is 70% above the $0.65 level last seen in April 2016. And nickel, at $7.00 per pound, is already 70% above the levels of last August, although still below the $9.30 levels last seen in April 2014. Could that be the same aluminium that President Trump says is being sold

by America’s rivals at unfairly low cost?

But if you’re expecting to see anything similarly impressive happening in traditional precious metals, think again. Platinum, which we’ve discussed, has been stuck in the $950 range (per ounce) since autumn 2016, at a time when equity markets were roaring. And gold hasn’t made it past $1,400 in the last five years – a bitter shock after the $1,900 heights of 2011. Why is that, you ask? More because of rival attractions in the investment markets than because of any special weaknesses, we’d suggest. These have been bullish years, remember.

For an example of a metal that’s really taken off, palladium has seen its price more than double since the lows of late 2015 when it dipped to $467. June’s price level of $1,010 is getting on for 10% below the January price of $1.122, but it’s still an impressive performer overall.

Companies or indices?

Forgive me for spelling out the difference between buying a commodity price index and getting into shares in the mining companies themselves. The former won’t get you any dividends, but it’ll free you from the specifics of dealing with producers whose company fortunes are likely to depend on an untidy mix of politics, labour relations, weather, international trade relations, and sometimes military tensions.

IFAmagazine.com

In addition to plain ordinary luck, of course. Every mining company builds its valuation on its estimated reserves, and on the ease of getting them out of the ground – and, as too many have discovered to their cost, the test drills can always be wrong….

The rapid spread of exchange traded funds (or, in this case, exchange traded commodities) has brought ease and respectability to metals trading for the small man. There was a time when a direct purchase of a futures contract was the only way to lock into a raw material commodity price; nowadays, however, you can do it from your desktop.

You’ll need to accept that (gold and precious metals apart) you’re dealing exclusively in synthetic ETCs – you really wouldn’t want 100 tonnes of iron ore delivered to your vault – and that does mean that you need to have studied the counterparty liabilities of the fund and its underlying indices very carefully before investing. I once had a scare with an MSCI index fund that was ultimately backed by the AIG insurance group, the second biggest reinsurer in the world, and I was not best pleased when AIG became briefly (and technically) insolvent in the 2008 crisis and my ETC was declared untradeable until the Federal Reserve had bailed it out.

But hey, that couldn’t happen nowadays, could it?

Without much doubt, the fastest growth these days is in so-called ‘rare earth’ minerals such as yttrium, europium, terbium and neodymium, all of which are essential to the running of high-tech electronic equipment. And there’s a good chance that you won’t even have heard of them

13

BLACKROCK July/August 2018

Charting new waters Markets have been volatile since the start of 2018, bringing greater focus onto the asset mix in client portfolios. Michael Gruener, Head of BlackRock EMEA Retail, discusses what clients have been telling him and what BlackRock can do to help One thing that’s coming through clearly from my conversations with clients over the past few months is that they are worried about future returns from markets.

Success in the future will involve looking across the investment spectrum to identify where indexing strategies are most appropriate, where factors can help drive additional returns and where an alpha-seeking approach is most apt

14

At a recent investor summit for a major client, the message could not have been clearer: volatility is back and the outlook is less certain than 2017. While investors – and BlackRock – remain relatively constructive over the state of the global economy over the next 12 months, the big question starting to arise is: what after that?

This client and others have told me they want ‘captains’ to steer them through these markets; to react and adapt to rapidly-changing conditions. They do not believe mono-directional, buy-and-hold solutions are as suitable for the next two years as they might have been during the past market rally – and that portfolios will need to be adjusted more often.

I FAmagazine.com

BLACKROCK July/August 2018

Client opinions and statements of intent are extremely useful, but I still like to look at data to identify emerging trends.

Asset flows are painting a clear picture of strong investor momentum towards alpha-seeking strategies – particularly in fixed income. More than half of 2017 flows into alphaseeking strategies went into bonds, while alpha-seeking equity – widely declared deceased – also staged a notable recovery last year.

A fundamental shift?

So, what now? Why do we see BlackRock institutional clients increasing their allocations to active management mandates?

Why are clients using terms such as ‘steer’ and ‘navigate’ when talking about medium-term market conditions? There have been several attempts to call the end of the market rally since 2009. Greece.

Taper tantrums. The oil and commodity sell-off in 2014-15. Election shocks.

Concerns about China’s swelling debt load. Stretched equity valuations. The Federal Reserve normalising policy. Yet none proved to be a trigger. So, is anything different now?

From my perspective, none of the current signals – US 10-year Treasury yields breaking 3%; broad money trends; slowing economic momentum – is a particular cause for alarm. But perhaps we are coming to the end of this long phase characterised by alternated ‘risk-on, risk-off ’ periods. Maybe there will be more reward for bottomup, fundamental stock picking, illiquidity premia and specialist markets.

I FAmagazine.com

How can we adapt to change?

Investments are not binary.

There are always nuances and different ways to tackle an investment challenge.

As much as our clients are telling us they need captains, we reply that they require a toolkit which harnesses the power of data and modern technology and embraces a holistic set of portfolio construction capabilities.

solutions. This helps investors build the core of their portfolios, get more value for money by moving away from benchmark huggers, and control the overall fee budget of their alpha sleeve.

With an ever-growing set of investment strategies available we are extending our portfolio construction capabilities, with dedicated teams and stateof-the-art technology to help clients gain deeper insights on the drivers of risk and returns in their portfolios.

Many investment objectives need a combination of investment strategies, and the conversation will increasingly turn to how best to blend a portfolio. Success in the future will involve looking across the investment spectrum to identify where indexing strategies are most appropriate, where factors can help drive additional returns and where an alphaseeking approach is most apt.

In fixed income, for example, yield curve strategies, duration management and access to markets can be a major differentiator for an alpha-seeking manager.

As investors increasingly focus on the value for money they are receiving, the desired outcome will need tighter definition and monitoring – to continuously align portfolios towards the most cost-effective way to achieve it. This will require more powerful tools and analytics, to enable investors to have a deeper understanding of how the selected products interact with one another. Let’s remember that a portfolio composed of the best managers isn’t necessarily the best possible portfolio.

At BlackRock, we have been building for these times.

We continue to develop innovative strategies across the spectrum of investment

15

SHIELD INVESTMENT MANAGEMENT Global Investors in Technology

INVEST IN THE GLOBAL DATA CENTRES THAT POWER THE BLOCKCHAIN

For more information call us on 0207 451 4592 or email us at ps@shieldim.com or visit www.shieldim.com For Financial Advisers only, not retail investors. As with any investment your capital is at risk

BETTE R BUSI N ESS July/August 2018

Better Business Employed or SelfEmployed Advisers?

Is it more effective for a financial planning business to operate with employed or self-employed advisers? It’s an age-old question which Brett Davidson of FP Advance has strong feelings about.

In this month’s article he outlines some practical tips which all financial planning businesses would do well to consider In my time consulting with businesses across the UK and Ireland I’ve worked with hundreds of different firms. Some made up of employed advisers and some with advisers who are self-employed.

Which works better? My experience has been that firms with selfemployed advisers tend to do worse than those with employed advisers.

Let me explain why.

What’s your vision? What kind of business are you building?

You could just say, ‘a bigger one’, but that doesn’t really cut the mustard.

Most business owners, if pressed a little, do have a vision for what they want their business to look like. And all great businesses I know have a very clear vision, honed over years of constantly asking themselves, “What are we trying to build here?”

Once you know what you’re building, you need to ascertain if everyone on the team is aligned with that vision. In fact, they have to be.

Now, I realise you can influence that to some extent by the way you explain and communicate the vision. However, if someone perceives that they work for themselves, how effective is that likely to be?

Even the name ‘self-employed’ sends all the wrong messages.

Most self-employed advisers truly believe they are self-employed, when in fact the business often provides quite a bit of infrastructure and support to help them function effectively as advisers.

Self-employed status can create a mindset that is at best unhelpful, and in some cases positively destructive, driving a wedge between the business owners and their advisers.

Crunching the numbers The biggest issue with most selfemployed advisers is how much they get paid. Often it’s 55-60% of the revenue they generate or manage, and I’ve seen even higher amounts paid away.

As the business owner you can’t make any money at these levels.

17

Here are the key financial ratios for a financial planning business: •

From 100% of initial revenue you can pay away up to 40% to the advisers. That goes for owner-advisers too.

•

You can then spend up to 35% of total revenue on every other expense of running the business; administrators, paraplanners, offices, telephones, computers, software licenses, paper, printing, coffee and tea, accounting costs, Professional Indemnity insurance, etc.

Anything that is not the cost of an adviser is an overhead and gets lumped in here.

•

That leaves 25% as a genuine net profit, which is your reward as an owner for the effort and capital you have at risk. It’s also an amount over and above what you get paid for your day job.

This net profit margin works well as it allows you to take some extra dividends as a shareholder, it also allows you to reinvest in your business each year using profits.

The other benefit is that in a market correction, when your recurring revenue might drop for 12 months or so, you have a buffer.

I FAmagazine.com

BETTE R BUSI N ESS July/August 2018

performance is like a bell curve, with two or three advisers doing very good annual numbers and two or three being quite poor. The rest will be somewhere in between.

It just creates exceptions in your back office and increases the complexity of your business.

The business can support itself, you don’t need to become the bank and take a pay cut.

There are a couple of points to note: It’s no walk in the park to keep overheads at 35% of total revenue.

Most businesses struggle to do so.

So if you are paying away 60% of gross revenue to the advisers, you are not making any money.

How could you get around this?

You could have the advisers do their own administration, paraplanning and report writing.

Is that productive? No. Is it a major compliance risk? Yes. I wouldn’t do it if I were in your shoes.

Unintended consequences The challenges I’ve highlighted in these two points can show up in your business in two obvious ways: a. Lack of motivation from the

self-employed adviser If one of your self-employed advisers is earning enough to achieve their lifestyle goals, good luck trying to get them being more productive or to increase the annual revenues that they generate and manage. b. Chasing the wrong clients

Most self-employed advisers are catching and killing their own clients. It’s rare that the niche or target market of the larger firm matches with the types of clients they are going after. That’s an absolute no-no in my opinion.

I FAmagazine.com

Which business would you rather own and manage; the smaller tighter firm, or the larger one? It’s a no-brainer.

What is good productivity for an adviser?

Running a great business is about a clear vision from the owners, aligned values across the whole team, and a desire to be more and more productive over time.

£100k-£200k p.a. is pretty bog standard. £300k-£400k p.a. is very good, and £500k-£600k p.a. is what excellent looks like.

If your current batch of selfemployed advisers don’t fit in and don’t want to adjust to fit in, then my advice is let them go.

If you’re not doing those numbers right now, please don’t beat yourself up. Over the next three to five years, if you can get the right support around you, it’s possible to move to those sorts of numbers.

What you’ll find is that you can shrink the business significantly, letting go some self-employed advisers, some office space, and some staff and other overhead expenses.

What are the implications of that?

Imagine your current business with those sorts of numbers. If you’re a one-person business you could be doing £600k p.a. with a small team supporting you. If you’re a twopartner firm you could be doing £1M+. Or if you’re a four-adviser business you could be doing £2M+.

I’ve spoken to some firms where they have ten self-employed advisers generating £2M of annual revenue, plus the support staff that go with that. That’s a tough business to run. You can bet that adviser

However, even on a greatly reduced turnover, you will find you are making a lot more money.

Does this mean there are no good businesses running with a self-employed adviser structure?

No. However, I can only think of one, maybe two who would go against these observations.

Remember, turnover is vanity, profit is sanity. What do you want your business to look like when it’s done? You are the architect of your own business future. You have the power to shape it and make it in an image of your choosing.

Use your power wisely.

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: www.facebook.com/FPAdvanceLtd LinkedIn: www.linkedin.com/in/davidsonbrett Website: www.fpadvance.com

18

Invest in growing UK businesses Invest in the growth potential of innovative UK companies through the Government’s Enterprise Investment Schemes and Venture Capital Trusts, both of which have been granted generous tax advantages.

Calculus Capital is an award-winning pioneer in

We invest in what we believe to be the brightest

this field, with 18 years experience and a strong

fledgling UK companies. The Calculus EIS Fund

performance track record.

and Calculus VCT are open for subscription.

Before investing in the Calculus VCT or Calculus EIS Fund, you should read their respective Prospectus and Information Memorandum carefully and take professional advice. EIS and VCT are long term investments, and their value can fall as well as rise. Any person making a subscription to the VCT or EIS Fund must be able to bear the associated risks.

To find out more get in touch with us, quoting ‘IFA 2018’: info@calculuscapital.com or +44 20 7493 4940

DISRU PTIVE TECH NOLOGY July/August 2018

Finding potential investment opportunities in disruptive technology How can advisers and paraplanners capitalise on the continuing developments this exciting sector has to offer for client portfolios?

L&G ETF, part of Legal & General Investment Management (LGIM) highlights some of the threats and opportunities which exist as well as some effective solutions Our world is being transformed as a new wave of innovation, often technology-led, challenges every aspect of how we live and work. From the spinning jenny and the steam engine to the wireless and the Ford Model T, there are countless examples of small innovations that have ushered in profound social and economic change. Driving these technological advancements is the unending quest for productivity improvement. For investors, this enormous trend could be creating new investment opportunities, offering exposure to potential growth strategies rather than traditional equity investments.

20

In some cases, technological advances are creating entirely new industries that would not have been feasible 30 years ago. “We tend to overestimate the effect of a technology in the short run and underestimate the effect in the long run� is the observation of Roy Amara, a researcher and scientist who worked at Stanford.

The growing use of data for technological advances, the drive for efficiency and the quest for sustainability are together shaping our future society. To identify these investment opportunities, it is perhaps helpful to separate these major technological advances into separate groupings.

I FAmagazine.com

DISRU PTIVE TECH NOLOGY July/August 2018

Investors can be blindsided by technology risks, from smaller disruptors or from other industries, and even well-understood technologies can have unexpected impacts

Robotics, automation and AI

Cybersecurity

From Amazon’s Alexa to Google Assistant, automation technologies are becoming increasingly deployed in all aspects of our lives. As a result, the robotics and automation sector is expected to be worth $1.2 trillion by 2025 (Myria Research, 2015). Increasing adoption of sophisticated robots, enhanced by artificial intelligence (AI), is fast becoming an instrument of profound change that is likely to leave a lasting impact on global productivity and future economic sustainability.

Multiple high profile cyberattacks highlighted the significance of this issue last year. Ransomware isn’t going away, nor is it slowing down.

In a connected world, no business or industry should consider themselves immune from attack. As more data, systems and people connect digitally, vulnerability is on the rise. Cyber-attacks pose a growing threat to governments, companies and individuals who are growing ever more concerned about security, financial and reputational damage.

The possibilities yielded by AI apply across every sector. In our view, the real beneficiaries of the growing capability of AI will be the companies that can combine technical capability and large datasets with the crucial ability to deploy AI at scale in their core businesses. However, the scale providers of AI capability – the large-cap technology players such as Amazon, Google, Microsoft, Facebook, Alibaba, Tencent and Baidu – are, once again, front and centre of this profound long-term investment theme.

I FAmagazine.com

Needless to say, the IT security market is currently booming.

Having seen exponential growth in these past few years, this looks set to continue as government regulation, increased corporate focus and the growing complexity of threats fuel demand. Advisory firm Gartner predicts total worldwide spend on security products and services will hit around $100 billion this year and 8% forecasted growth per annum.

21

DISRU PTIVE TECH NOLOGY July/August 2018

Battery technology One of the things that stand out about electricity as a commodity is that it is difficult to store. New developments in battery technology are changing the way we transport and power the world, with innovation happening all along the value chain. Significant progress has been made to improve the energy density, price, lifeline and safety of batteries while mitigating the impact on the environment.

One of the most public examples was the installation last year of the world’s largest lithium-ion battery in South Australia. Designed and built by billionaire Elon Musk’s Tesla company, the 100-megawatt battery will be used to store renewable energy so as to avoid a repeat of the previous year’s state-wide blackout due to storms. Musk had promised on Twitter that if the battery was not built within 100 days, the state would receive it for free.

From applications such as electric vehicles (EVs) and consumer electronics to stationaries like grid storage, battery storage technologies are currently experiencing a growth in investment, research and production.

E-commerce logistics The ease and convenience of online shopping has led to an unprecedented change in the retail business landscape over

the last decade. The growing popularity of ecommerce and greater internet connectivity have driven sales volumes and revenues to an all-time high.

Since Amazon acquired Wholefoods, strategic priorities have shifted. Online penetration continues to grow as technology breaks down old barriers. Whilst grocery has been slower to shift to online relative to other retail categories, the signs are ominous. In conjunction with AmazonFresh, this has inevitably increased competition and customer expectations.

As a result, traditional supplychain models have been challenged and companies have been forced to rethink their logistics operations to meet the growing demand.

This has fuelled increased investment in technology and infrastructure to enable logistics providers to compete in an increasingly digital world.

Pharma breakthrough Growth in the pharmaceutical industry has historically been marked by major breakthroughs in research and development (R&D) of drugs. However, increasing global competition and patent expirations have squeezed margins in generic drugs.

In response, regulatory and commercial incentives have encouraged investments

into ‘orphan’ drugs that are used to treat rare diseases.

With approximately 7,000 rare diseases globally with only 10% having treatments, pharmaceutical companies that are engaged in the R&D of orphan drugs may offer an exciting opportunity for investors who are looking for long-term growth in this sector.

Diversification is the key For investors looking to gain exposure to these trends, there are some important considerations. It is often hard to predict where the next major disruption will come from, as many of these opportunities are still in their infancy. Investors can be blindsided by technology risks, from smaller disruptors or from other industries, and even well-understood technologies can have unexpected impacts.

Understandably, markets sometimes initially misprice these risks and the eventual correction in asset values can be extreme. From an investment perspective, identifying the threats posed by technology change is crucial to properly understanding the risk profiles of portfolios and to preserving shareholder value over the long term.

Investors should therefore be aware that growth may be volatile and is not guaranteed. Furthermore, there is likely to be a need to have broad exposure across your chosen theme.

At LGIM, we are pleased to offer diversified exposure to each of these investment opportunities via our range of Disruptive Technology ETFs. In many instances, these are the first European ETFs of their kind, tracking the growth of these rapidly evolving investment themes.

To learn more about L&G ETFs and our latest thinking to help you make more informed investment decisions, visit www.lgimetf.com

22

I FAmagazine.com

JOIN US TODAY

GrowthInvest: Simplifying tax efficient investments.

Igniting the UK economy.

The tax efficient investment market has changed significantly in recent years.

With tax efficiencies being clearly directed toward growing the UK’s most promising young companies, there has never been a better time to get involved.

products, or perhaps considering them for your clients’ portfolios, contact us at GrowthInvest. We’ll show you how you can consolidate historic investments onto our platform and build a diversified portfolio from a wide range of tax efficient product providers.

However, diversification and transparency has never been more important and with this comes an administrative headache.

Through our intuitive online platform you’ll be able to offer your clients easy access to real portfolio growth, secure in the knowledge that these government-backed schemes offer unique tax efficiencies.

At GrowthInvest we provide advisers a single portal to compare, invest in and manage clients’ tax efficient portfolios, integrating seamlessly with your backoffice solutions. Whether you’re already advising on SEIS, EIS, VCT or BPR

Visit us to learn about the products, the pitfalls and how best to advise on this dynamic and evolving sector.

MAKE IT YOUR BUSINESS growthinvest.com

BRIAN TORA July/August 2018

Back to Black?

The oil price has been rising over the last few months but is now the time to reconsider portfolio exposure to the black stuff? Brian Tora argues that advisers ignore it at their peril Do you include energy as an asset class within your clients’ portfolios? Perhaps it would be more correct to say as a sub-class as most exposure to energy is likely to be gained through investing in energy-related companies.

Once energy was all the rage amongst fund managers.

When I was an investment manager at a small boutique in the 1970s, our flagship fund was the Jersey Energy Trust, originally launched

by Slater Walker, but in the Britannia Arrow stable when I was there.

A few years later I joined Touche Remnant, which was taken over by Henderson shortly after I left to cast my lot in with leading research broker James Capel. Touche Remnant’s principal business was the management of investment trusts and they had launched TR Energy in the early 1980s to deliver exposure to this important sector. Today the emphasis on energy seems altogether lower key, despite the fact that oil has enjoyed something of a resurgence in recent times.

24

Energy may encompass many varied and different sources, but oil remains the dominant provider of our needs, despite the growth of greener alternatives.

And while governments may promote the use of electric cars, for the time being it will be oil that continues to fuel our transport systems. So the behaviour of the oil price will affect both inflationary and economic prospects all around the world. And the price of oil can prove very volatile and is subject to geo-political influences as well as straightforward supply and demand.

That was then Probably the first time I became fully aware of the importance of the oil price on our financial wellbeing was during the bear market of 1973/4. Following the Yom Kippur war of 1973, the oil price quadrupled and petrol rationing coupons were issued in this country, though they were never actually used. Our benchmark index at the time (the Footsie had yet to be created) fell by around 70% - still the most devastating bear market

I FAmagazine.com

BRIAN BRIAN TORA TORA July/August 2018

since the war. True, a banking crisis, political uncertainty and rampant inflation – itself triggered by the rise in the cost of oil products – all contributed, but an oil price rise kicked it off.

Oil returned centre stage in the late 1970s as the Iran/Iraq war created supply disruption and added further uncertainty, leading to a significant hike in the price. The 1980s and 1990s were not without incident, but it was the growth of China as an economic power that drove oil higher, reflecting its rapidly increasing demand for the black stuff. By the summer of 2008 – just a decade ago – the price was nudging $150 a barrel, but the financial crisis that developed in the autumn of that year brought the global economy to a grinding halt, with the result that the oil price collapsed to little more than $30 within six months of its peak.

I FAmagazine.com

Supply and demand factors at work Since then we have had ups and downs. In April 2011 it was back over $100 a barrel, peaking at around $113 in April, but by early 2016 it was back below $30 a barrel – the price at which it is considered uneconomic to even extract it. Last summer it was hovering around $40, but the past year has seen a steady rise, with $80 a barrel being breached twice in May this year.

The reason for the resurgence in the price has been complex. Supply has been restricted, with Venezuelan production in decline and a supply cap imposed by OPEC countries.

Rumours that this cap was to be lifted removed some of the upward pressure as we moved into summer, but with the IMF concluding that global economic growth should hover around 4% for the current year, demand should remain robust.

Make no mistake, while demand for so-called black gold has declined in relative terms as we become more energy and fuel efficient, it is still in positive territory. The United States leads the consumption tables, using

around 19 million of barrels each day, with China second at around 10.5 million barrels. Given that China’s population is around four times that of the US, you can see that its demand is likely to grow as its wealth increases. Similarly, many populous developing nations could well see their consumption of oil grow faster as they improve their economic status.

This is now So despite attempts to phase out petrol and diesel fuelled cars in the West, it is difficult to see demand for oil doing anything other than grow. Moreover, new sources of oil have, and presumably will, come on stream. Shale oil and gas have been very much in the news in recent years, though I well recall shale oil deposits being cited as important sources back in the 1970s. And the higher the oil price goes, the more likely these deposits are to be developed.

Where do we go from here?

Bear in mind, for every barrel of oil bought for consumption, it is reckoned about ten are traded.

Much of the trading will, of course, be oil users hedging their likely needs in order to introduce some certainty into their pricing structures. Airlines are particularly active in this field, but there are plenty of others, as well as those purely interested in playing the market. But short of a global recession, we may not see the oil price back below $50 for the foreseeable future, while concerns over Iran can only maintain upward pressure. Investors ignore oil at their peril.

25

U BS July/August 2018

The case for employing embedded currency hedging in ETFs A transparent hedging strategy can reduce currency risk and optimize portfolio return. That’s the view of Andrew Walsh, Head of Passive & ETF Specialist Sales - UK and Ireland at UBS Asset Management

Investors in international equity ETFs are exposed to two main risks: the direction of the equity market in which they have chosen to invest; and the foreign currency exposure that is often a byproduct of an equity bet, but which has the potential to derail returns. Without any currency hedging in place at all, investors are taking an implicit bet on the foreign currency strengthening, which may or may not be consistent with their macroeconomic view.

through that same period would have experienced considerably less impressive returns of 29.3% due to the steep depreciation of the Yen through that period.

(Source: Bloomberg)

It is a generally accepted view that currency risks exist primarily in the short to medium term, but less so in the longer term. That is to say, over the long term currency movements do not tend to add or subtract from investment returns as they usually average themselves out. In the short run, currency movements can be quite dramatic and can have a major impact on the returns of the underlying investment.

The use of hedging

The impact of currency movements on returns To illustrate the extent to which currency movements can impact returns, one can go back five years to the Japanese market. A local Japanese investor holding the Nikkei 225 from 1st January 2012 to 30th June 2013 would have achieved a 66.9% return in Yen terms, while a US investor

26

Of course predicting currency movements is notoriously difficult and with concerns about currency volatility increasingly on investors' minds, many want to neutralise this uncertainty on investment returns so as to access the underlying investment as cleanly as possible.

Currency hedging could be compared to buying insurance.

Simply, when an investor buys a fund with a currency hedge embedded in the product, they are trying to protect themselves from potential losses which would occur if the underlying currency of that foreign exposed fund (e.g., JPY, CAD, USD) were to decline against the GBP while the UKbased investor held the fund.

Large institutions have little difficulty in accessing the foreign exchange market and thus can chose to implement currency hedging overlays across their entire portfolio. Unfortunately, this is not often possible for some mid-sized and the great majority of smaller investors in part due to a lack of solutions on offer to them. Thus, there has been an increasing demand from UK and foreign investors alike to access key international equity markets with currency hedging built into funds such as ETFs. An important aspect to consider when looking at currency hedged products is whether they follow daily or monthly hedging.

From a conceptual point of view, monthly hedging features a less 'perfect' currency hedge compared to daily hedging.

Implicit in monthly hedging is a higher risk of under- and/ or over-hedging because of the longer time period between the nominal adjustments of the hedge.

However, in practice, a higher

Predicting currency movements is notoriously difficult, and with concerns about currency volatility increasingly on investors' minds, many want to neutralise this uncertainty on investment returns so as to access the underlying investment as cleanly as possible

I FAmagazine.com

U BS July/August 2018

frequency of hedge adjustments results in higher trading costs due to more transactions i) for adjustments of the hedging derivatives and ii) for investments and divestments of hedging profits and/or losses, respectively.

In brief, while daily hedged products on plain vanilla benchmarks tend to track their respective index more accurately (when not considering trading costs of the underlyings).

However, in practice, when taking the trading costs into account, products using monthly currencyhedging benchmarks can more accurately track the index due to significantly lower trading costs. This is the reason why the ETF industry leaders tend to set up their physically-replicated UCITS ETFs on monthly hedged benchmarks. Furthermore, as currency hedging has also become an important feature for passively-managed portfolios, a key criterion for index providers is to establish a methodology which allows replication of hedged benchmarks as closely as possible.

Hence, it is not only relevant at which point in time a profit is reinvested, but also the timing of putting in place a new currency forward agreement. We expect index providers to continue to improve their currency hedged methodologies to account for these points. This will ensure excellent tracking quality of the products, while minimizing tracking error compared to the underlying benchmark.

Another good example of a case for currency hedging slightly closer to home is that of the Eurozone equities market over the 2yr period between May 2013 – May 2015 (see chart 1).

Through this period, the MSCI European Monetary Union (EMU) index delivered +19.6% annualized returns for a EUR investor. However, a UK-based investor buying the same index (without any GBP-hedging) would have experienced an annualized return of just +11.7% due to the negative impact of the decreasing value of the Euro against Sterling during this period. If the UK-based investor

I FAmagazine.com

had instead opted for the MSCI EMU GBP-hedged index through that period, their returns would have been almost identical to the Eurozone investor at +19.9% per annum (in this case, slightly better performance than the unhedged local currency returns due to the way the monthly hedging panned out through this period).

Currency hedging in fixed income While there is far more prevalence for using embedded currency hedging in equity ETFs, it is in fact arguably, an even more important consideration when investing in foreign fixed income. This is due to the fact that currency movements can, in many cases, easily outweigh returns from both a bond's coupon and price returns. This means that an investor's returns in foreign fixed income are sometimes totally at the mercy of these currency fluctuations.

Chart 2 shows the example of the Bloomberg Barclays US Liquid Corporates index return makeup in USD (see chart 2 – simply price return and coupon) for a local US investor. Chart 3 shows this index for a UK-based investor who must bear the currency swings of sterling vs the dollar while investing in this index. As is clear from the red bars, the UK investor's returns overall are more often than not dictated by fluctuations in the GBP/USD rate, not the price return and coupon. An investor choosing this index (and an ETF tracking that index) with embedded GBP-hedging would be able to neutralise that impact and participate in this exposure just like a domestic US investor.

Ultimately, investors will have an increasing choice of funds which offer currency hedging – particularly with ETFs. Where investors want exposure to a particular country or region's equity or bond market without the risk of having to take any specific conviction on the direction of the currency, a currency hedged ETF offers very easy and cost-efficient access to international market indices.

27

U BS July/August 2018

Finally, investors should be aware that if a fund has a GBP listing, that does not make it GBP-hedged.

Only a product which is actually currency-hedged can protect an investor from a declining foreign investment currency. An important caveat for investors to be aware of is that currencyhedging is a double-edged sword.

That is to say, if a foreign currency appreciates against Sterling whilst you are invested in a GBP-hedged product, you will forego the gains that that appreciation would have delivered. Thus, for investors who feel that that the currency of a specific country (Japan) or region (Eurozone) is likely to rise in future would typically want to avoid buying a fund exposed to them with embedded GBP-hedging.

UBS Asset Management is Europe's 4th largest ETF provider with GBP 39.8bn in AUMs and is a one of the leading providers of currencyhedged ETFs in the region. UBS has a wide range of ETFs available for UK investors with 95 LSE listings across key asset classes.

Chart 1 - Local Currency Fixed Income (Valuation Change + Accrued Interest)*

Chart 2 - Barclays US Liquid Corporates (USD, local currency) *

Chart 3 - Foreign Fixed Income (Valuation Change + Accrued Interest + Currency P&L)*

Andrew Walsh is Head of UBS Passive & ETFs Specialist sales for UK & Ireland and is responsible for developing and implementing the UBS ETF business in the UK. Andrew joined UBS Asset Management in November 2012 and has 24 years of investment experience having worked at Societe Generale and HSBC prior to joining UBS. Andrew holds the Investment Management Certificate (IMC).

andrew.walsh@ubs.com

28

*Source: Barclays POINT, UBS Global Asset Management. Data as of 31 August 2017.

I FAmagazine.com

Variety Exchange Traded Funds, from currency hedging to factor investing. UBS ETF. / ubs.com 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.

BLOCKCHAI N July/August 2018

How can you capitalise on the Blockchain revolution within your clients’ portfolios?

In today’s changing world, it’s important for advisers and paraplanners to understand the developments in global transactions and how Blockchain underpins the processes. Peter Schwabach of Shield Investment Management shares its thinking behind the launch of a new fund which has been designed to capture the benefits of this powerful driving force One thing all of us can finally agree on (governments, banks, industry, commerce and investors alike) is that Blockchain is here to stay and will play an increasingly important part in the structuring, recording and validation of global transactions– whether goods, services, land titles or even votes.

An indelible, incorruptible, permanent and de-centralised register of historical transactions held on hundreds of thousands of computers globally is a key development in making the world a more transparent place, whilst at the same time reducing the fraud and tampering of records that has eroded trust and value in almost every industry, government and institution.

The investment question The challenge for investors now is how best to capitalise on this seismic technological change.

Much of the world’s attention has focused on the units of value (the crypto-currencies and tokens) that are transferred daily

30

between counter-parties across the Blockchain (currently over 2 million transactions per day).

By analogy, these units are the equivalent of the rolling stock of the railways in the 19th century, each delivering a different product or service from A to B and C to D – depending on its payload. Think passenger carriages for people, tanker carriages for liquids, cattle carriages for live-stock etc, etc. In Blockchain, each coin is similarly designed to deliver a different product or service for the end user, the current range of 1,700 coins reflecting the rapid growth and specialisation of the market.

For investors this explosion in coin issuance is bewildering.

Whilst many are purchased and used for their intended purpose and then converted back to hard currency (post transaction), many more are held speculatively as an alternative store of wealth in the expectation that they will rise in value as they do not deliver interest or dividends

Routes to market Another investor route to market is through ownership of shares in the companies that manufacture the hardware and software supporting Blockchain (ie the powerful engines pulling the railway carriages across the railway network). Nvidia, for example, the world’s largest manufacturer of the Graphic Processing Units that power much of the Blockchain, has seen its share price rise 80% in the last 12 months to a heady valuation of $160bn at the time of writing in June 2018 At the same time, the race is on for other CPU and GPU manufacturers to develop more powerful, lower cost and lower energy intensive processing units.

Pure play Blockchain Chinese CPU manufacturer Bitmain recently received a $400m venture capital investment giving the company a pre-IPO valuation of $12bn, but others are in the wings rapidly developing products to meet rising demand.

Who will dominate this market is still an open question.

I FAmagazine.com

BLOCKCHAI N July/August 2018

One other route to market is ownership of the shares in the software engineering companies that are designing ever more powerful commercial and industrial applications for Blockchain. Included in this race are not only big names such as Microsoft and IBM, the big 4 global accounting firms, but also thousands of start ups each with a product that may or may not transform the market.

Like the market for new coins – which of the individual software companies to back is a very difficult judgement call for investors.

An alternative approach What then is the pure-play Blockchain investment that captures the rising value and growth of the market but without the risk and volatility of ownership of a specific currency, or shares in a single hardware or software developer?

At Shield Investment Management, Global investors in technology, our considered assessment is that it is the ownership of the Blockchain infrastructure itself, the millions of super-computers that record and validate transactions globally 24/7, and which generate daily fees for the services provided that offers the most attractive approach for investors.

Using the railway analogy, ownership of the Blockchain infrastructure is ownership of the railway tracks themselves, investors receiving a transactional fee for each payload that passes across their tracks in the very denomination of that pay load. Rather than receiving barrels of pork, bales of cotton, or heads of cattle as 19th century railway owners would have done, the infrastructure providers receives a small percentage of each currency transacted.

These are then re-converted by Shield to ÂŁ on a daily basis,

I FAmagazine.com

Operating 24/7, these supercomputers generate consistent and attractive returns for investors who benefit from the growth in the entire market.

Investing in blockchain infrastructure Shield Investment Management’s strategy is therefore to invest directly in the global data centres that generate daily revenues from Blockchain transactions.

To facilitate this Shield is launching a fund with a target size of $50m

In Blockchain, each coin is similarly designed to deliver a different product or service for the end user, the current range of 1,700 coins reflecting the rapid growth and specialisation of the market

At Shield, our experienced investment managers are not only specialists in Blockchain technology but have a particularly strong track record in technology infrastructure, logistics and renewable energy infrastructure.

This is particularly relevant as renewable energy (particularly Hydro) is the most cost efficient and responsible source of energy for data centres which we always locate near the energy source and in temperatures that are optimal for data processing.

For more information please email ps@shieldim.com, or visit www. Shieldim.com

31

RICHARD HARVEY July/August 2018

Silver Machine Does the government really have its finger on the pulse when it comes to effective management of the public finances?

Richard Harvey isn’t convinced as he considers the latest idea to impose NICs on Silver Strivers

32

I FAmagazine.com

RICHARD HARVEY July/August 2018

Precisely one day after writing my last column for IFA Magazine on the joys of working beyond State retirement age, the government leaked details of a proposal to impose National Insurance payments on the aptly-named Silver Strivers.

It's an obvious route to filling the cavernous gap between tax revenues and the soaring cost of social care. After all, it could be argued that as it's those over 65 who are most likely to require some State support in their sunset years, why shouldn't they contribute a little more?

But while some comfortably-off pensioners might accept, albeit grudgingly, a 12 percent NI deduction from their earnings, what about the poor geezer shifting pallets of baked beans in a supermarket warehouse who is still working because he, or she, can't live on the State pension?

It's reckoned that the 'Soak the Silver Strivers' wheeze would raise £2 billion in tax revenues, which the government could even ring-fence for welfare spending on the elderly.

But why sting just working pensioners? It would be a great deal fairer if NI was also imposed on all retirees with a minimum monthly income of, say, £2,000, which would certainly include battalions of public sector retirees, living it large on index-linked pensions.

Looking a gift horse in the mouth Not that any of this would be necessary if, over the past century, our glorious leaders had looked after the public purse, instead of stacking even more lolly atop the mountainous pile of banknotes which represents our national debt.

Patrick Hosking, a business commentator for The Times, recently uncovered an absolute gem about the national debt which will have even a modestly-competent IFA gasping at the sheer ineptitude of the State's investment performance.

Apparently, back in 1928 a spectacularly wealthy, but anonymous, benefactor bequeathed the British State £500,000, with the sole proviso it should be carefully looked-after and invested until it was big enough to pay off the national debt (you can just imagine the crestfallen look on the faces of his family gathered round the solicitor reading the will).

That year, the national debt was £7.5 billion, mostly racked up by borrowings to fund the First World War effort. Today the figure stands at £1.8 trillion.

Meanwhile, that £500,000 bequest, called The National Fund, has grown to £475 million. Cushty?

No, not really - Patrick Hosking reckons if the original sum had been invested in a broad range of UK equities, and the dividends ploughed back, it would have grown to £3.7 billion today.

Invested in US equities, it would have ballooned to £13.5 billion.

And had a world-beating investor like Warren Buffett been looking after the pot since 1928, he might have actually achieved the apparently impossible, by paying off our national debt, even leaving a few million in the kitty.

Regardless of the original benefactor's wishes that his gift should only be used to wipe out the entirety of Britain's arrears, our sticky-fingered politicians are planning to snaffle it to pay off just a smidge of the debt.

At least, that's what they tell us. But while they continue to exceed income by expenditure at a horrific rate, it seems a puny gesture. Frankly, what's the point?

It's reckoned that the 'Soak the Silver Strivers' wheeze would raise £2 billion in tax revenues, which the government could even ringfence for welfare spending on the elderly

I FAmagazine.com

33

CAREER OPPORTUNITIES Position: Compliance Manager Location: CRAWLEY Salary: £30,000 - £40,000 Per annum The client: The opportunity for a Compliance and Team Manager to join a friendly and lively Wealth Management practice. You will manage the day to day running of their exceptionally talented and diverse client support teams.

The opportunity: The role involves working closely with the Client Support Director to provide outstanding organisational skill, great attention to detail, thoroughness and accuracy and the ability to plan workloads, manage conflicting demands and deadlines, with a keen and flexible attitude. You will also be responsible for assisting in the development and implementation of ongoing compliance program to meet regulatory requirements. This will involve policy development, training, monitoring, risk assessment, advising the business on compliance matters and issue remediation.

What’s needed for me to be considered?

•

Level 4 Diploma qualified.

•

Good technical experience.

•

Experience in the review of code of ethics related compliance matters (i.e. personal account dealing, outside business interests, and gifts, benefits and entertainment).

•

Clear confident and enthusiastic communicator.

Position: Technical Analyst Location: CHELTENHAM Salary: £45,000 - £80,000 Per annum The client: This is a well-established financial planning firm with 5 offices based nationally. They seek an experienced Technical Analyst with paraplanning experience too, who can hit the ground running and get into the role in an efficient manner.

The opportunity: The chosen candidate will report directly to the Regional Administration Manager to ensure a smooth client experience from start to finish. This role is unique in that the successful candidate will conduct much of the research and analysis in assisting the consultants however will not be expected to complete entire suitability reports. This is a chance for someone who is particularly driven to work as part of a client-facing team serving HNW clients preparing complex research.

What’s needed to be considered?

•

You will have attained the Diploma in Financial Planning as a minimum.

•

Excellent IT and communication skills and the ability to deal with individuals at all levels.

Position: Training & Compliance Supervisor Location: HORSHAM Salary: £40,000 - £45,000 Per annum The client: This is a growing practice with a great industry name, focus on providing a highly personalised financial planning and investment management service.

The responsibilities include: •

Maintain a specified span of control of up to 40 registered individuals, managing and scheduling all aspects of oversight competently and within desired timescales.

•

Monitor AR firms, coaching and mentoring approved persons both remotely and on-site, to ensure compliance with both regulatory rules and network procedures.

•

Liaise effectively with senior management in respect of regulatory and network issues.

•

Assist the compliance director in providing a timely response to requests for information from the FCA.

•

Apply a risk-based and common-sense approach to the compliance monitoring process.

•

Undertake appropriate file reviews and KPI reviews.

•

Test approved persons according to scheme requirements.

•

Test and supervise new joiners to AR firms.

What’s needed for me to be considered: •

Detailed knowledge of FCA rules and their interpretation/application.

•

Ability to train and motivate others whilst remaining flexible/adaptable.

•

Highly developed analytical, observational and communication skills.

•

Significant compliance experience within the financial services, preferably in an investment or insurance environment.

•

Experience working within a network of financial advisers.

•

L6 advanced diploma working towards chartered status (non essential).

•

J07 supervision in a regulated environment (non essential).

Position: IFA Location: LONDON Salary: £40,000 - £50,000 Per annum The client: This is a holistic, well-respected and chartered IFA practice that seeks to build a long term, trusting relationship with their clients.

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, where their ethos is much more about quality over quantity.

The opportunity: This is a fantastic position for an experienced adviser or senior paraplanner to join a growing firm that can offer genuine career development. Due to succession planning, you will be given a significant client bank from day one and will be given full autonomy in the role. In addition, over the next 5 years the director will be slowly exiting the business, which will allow an amazing opportunity for staff to enter in to an internal buyout of the business.

What’s needed to be considered: •

Qualified or working towards level 4 diploma is an advantage.

•

Previous experience within an IFA practice and paraplanning is essential.

•

Understanding of FCA regulations and also products and their practical application.

•

Effective communication skills, both written and verbal.

•

Have a professional, proactive and positive attitude.

Position: Financial Adviser Location: CANARY WHARF, LONDON Salary: £40,000 - £60,000 Per annum The client: This highly reputable financial planning practice works with several UHNW clients.

The opportunity: The two directors of the business now require an additional adviser to join their team to help service their clients’ needs. Many of these new clients are UHNW individuals with complex and technical ongoing needs.

What’s needed to be considered: •

Level 4 Diploma qualified as a minimum.

•

Chartered status is desired.

•

Proven track record of writing significant levels of business year on year.

Position: Independent Financial Adviser Location: MANSFIELD Salary: £40,000 - £80,000 Per annum The client: The business has multiple offices, is very well-established and expanding quickly. They pride themselves on their professionalism and the quality of the service that they provide.

The opportunity: Due to the ongoing expansion, the successful adviser will be given a strong client bank that is generating north of £150k in recurring income and tasked with servicing this and building on this.

You will have a qualified and experienced paraplanning team to assist you and will be provided with a competitive employed salary and strong benefits package.

What’s needed for me to be considered: •

You will be diploma qualified (Ideally holding an AF exam).

•

Currently an established adviser with CAS status.

•

Excellent sales and presentation skills.

•

Excellent telephone manner and client facing skills.

•

Driven and motivated to achieve targets.

•

Track record or producing good levels of business within an IFA environment.

Position: Employed Financial Adviser Location: ESSEX Salary: £37,000 - £40,000 Per annum The client: This business has fantastic offices, is very well-established and expanding quickly. They pride themselves on their professionalism and the quality of the service that they provide. It’s a growing firm that can offer genuine career development by offering such a broad proposition of technical advice as well as offering exam and study support for candidates looking to further their technical knowledge and qualifications.

The opportunity: The business seeks a Junior Financial Adviser. As a chartered practice, they look to develop the successful candidate to Chartered status as soon as possible. Due to ongoing expansion, the successful adviser will have the chance to inherit clients and get new leads from the firm.

What’s needed to be considered: •

Diploma qualified.

•

Currently an adviser with CAS status.

•

Excellent telephone manner and client facing skills.

•

Driven and motivated to achieve targets.

•

Track record or producing good levels of business within an IFA environment.

Position: Financial Adviser Location: PRESTON Salary: £40,000 - £60,000 Per annum The client: Our client is a bespoke independent Financial Planners, based in Preston. They will provide the chance you 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.

The opportunity: This opportunity would be suitable for any Level 4 Diploma qualified professionals, whether you be an existing IFA with a strong book of business, or a newly qualified adviser looking to work in a highly professional environment. In this role benefits include: •

Study support.

•

Childcare vouchers.

•

3% pension contribution after 1 year service.

•

28 days holiday (incl. Bank Holidays), increasing with service.

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.

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.

Powered by

BRISTOL OFFICE

LONDON OFFICE

+44 117 922 1771

+44 203 207 9075

Visit the Heat Recruitment website for more details of these and hundreds of other jobs too www.heatrecruitment.co.uk

ACQUISITION AND SALES

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.

WE AR E A S P E C I AL I ST F I N A N C I A L S AL ES, CON SULTAN CY AN D BR OKER AG E B U S I N E 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.

louise.jeffreys@gunnerandco.com

gunnerandco.com

THE GROWTHINVEST PORTFOLIO SERVICE.

OPEN FOR BUSINESS.

The GrowthInvest Portfolio Service allows Advisers to introduce their clients to the best of our SEIS and EIS qualifying investment opportunities in a single discretionary managed fund.

If you or your clients are interested in a diversified portfolio of tax-efficient investments,

then contact us to find out more. We are helping UK small businesses to realise their full potential, whilst giving Advisers the tools to introduce their clients to this exciting investment category.

For more information contact us now at growthinvest.com

MAKE IT YOUR BUSINESS