Trustnet Magazine / Issue 1

Page 1

Issue 1 / October 2014


Investor checklist IFAs are expensive. Make sure yours justifies his fee.

Fortune favours the brave Asian equities face a bumpy road to recovery.

The next Tesco Where will dividends be slashed next?

We strive to go further. Aberdeen New Dawn Investment Trust ISA and Share Plan In a region as fast-moving as Asia Pacific, compelling opportunities can be found in surprising places. Aberdeen New Dawn Investment Trust is managed to provide broad exposure right across the Asia Pacific region, excluding Japan. It has the freedom to invest in both small and large companies, rigorously selected by Aberdeen’s on-the-ground teams. So wherever high-quality opportunities arise in Asia Pacific, we aim to be there too. Please remember, the value of shares and the income from them can go down as well as up and you may get back less than the amount invested. Asian funds invest in emerging markets which may carry more risk than developed markets. No recommendation is made, positive or otherwise, regarding the ISA and Share Plan. The value of tax benefits depends on individual circumstances and the favourable tax treatment for ISAs may not be maintained. We recommend you seek financial advice prior to making an investment decision.

Request a brochure: 0500 00 40 00

Issued by Aberdeen Asset Managers Limited, 10 Queen’s Terrace, Aberdeen AB10 1YG, which is authorised and regulated by the Financial Conduct Authority in the UK. Telephone calls may be recorded.

Please quote ANDIT TNITM 01


Fidelity Asian Values A strong performer on a wide discount. P31 Pacific Assets Trust The analyst’s choice for the medium term. P33


Fortune favours the brave 24 HOW TO AVOID THE NEXT TESCO Where will dividends be slashed next? P4-5


Funds to outperform if Asia rebounds. P7-8

HOW TO ELECTION-PROOF YOUR PORTFOLIO No matter who wins next year, there’s trouble ahead. P10-11

INVESTOR CHECKLIST How to make sure your adviser is earning his fee. P12-13

IN FOCUS Lindsell Train UK Equity, Aberdeen Asian Income and Scottish Life are all in the spotlight this month. P14-16

THE ANNUITY ALTERNATIVE AIC director general Ian Sayers explains why investment trusts could fill the pensions gap. P22

Aberdeen New Dawn Fund manager James Thom thinks improved governance in China could be the key to future growth. P34-35 Pacific Horizon Investment Trust Ewan Markson Brown, manager of the Pacific Horizon Investment Trust, explains the impact of technological change on stock selection. P36-37 BlackRock World Mining BlackRock World Mining Trust manager Catherine Raw asks if now is the time to get back into the outof-favour sector. P38-39 J.P. Morgan European Investment Trust JP Morgan’s James Saunders-Watson asks if investors can profit from the recovery of eurozone economies. P40-41 Schroder Oriental Income Matthew Dobbs explains why rising valuations and a weak outlook for Asian equities put the emphasis on stockpicking. P42-43

KNOW WHEN TO HOLD 'EM Trustnet Direct’s John Blowers says private investors should think carefully before buying into the next big IPO. 44-45

AIM TO PLEASE Hargreave Hale manager Guy Field highlights three AIM stocks he thinks have big things in store. P46

WHAT I BOUGHT LAST Schroders’ Joe Le Jehan explains why the multimanager team thinks Invesco Perpetual European Equity is worth a punt. P48


Fortune favours the brave The sector has rebounded this year, but a volatile outlook may deter all but the hardiest of investors. P24-27 Scottish Oriental Investment Trust The go-to trust for exposure to Asia’s emerging middle class. P29




TRUSTNET magazine Issue 1 / October 2014


Riding the tiger

Investor checklist

The next Tesco

Asian equities face a bumpy road to recovery.

IFAs are expensive. Make sure yours justifies his fee.

Where will dividends be slashed next?


CREDITS TRUSTNET MAGAZINE (FORMERLY INVESTAZINE) IS PUBLISHED BY THE TEAM BEHIND FE TRUSTNET IN SOHO, LONDON. WEBSITE: WWW.TRUSTNET.COM EMAIL: EDITORIAL@TRUSTNET.COM CONTACTS: General Pascal Dowling, Head of publishing content T: 0207 534 7661 Art Direction & Design Javier Otero W: Editorial Acting editor: Pascal Dowling T: 0207 534 7661 Joshua Ausden Editor (FE Trustnet) T: 0207 534 7680 Alex Paget Senior reporter T: 0207 0207 534 7697 Daniel Lanyon Reporter T: 0207 534 7640 Sales Richard Fletcher Head of publishing sales T: 0207 0207 534 7662 Richard Casemore Account manager T: 0207 534 7669 Jack Elia Account manager T: 0207 534 7698


nvestors today face a dwindling choice when it comes to drawing a solid income from their investments. First, the high street banks turned out to be glorified casinos in need of ethical and financial support from the taxpayer, then BP spilled so much oil into the Gulf of Mexico you could see it from space, and now it seems that here, in this nation of grocers, even the supermarkets aren’t a safe bet. As shareholders in Tesco (P4) lick their wounds and the FCA investigates its accounts, Sainsburys has warned that it, too, has its dividend under review during what it calls a “perfect storm” for the industry. Income is harder to find than ever in this environment, so in this - the first edition of our newly rebranded magazine - we examine one vehicle which has paid dividends for decades; investment trusts. With valuations stretched to “nose-bleed” levels (p19) – dividends could be slashed across many sectors, forcing open ended funds to reduce their payout. This makes the case for investment trusts, with their unique ability to hold back dividends for harder times, stronger than ever. This edition isn’t just about investment trusts, though. Previous readers of Investazine, this magazine’s predecessor, will recognise the same mix of stories from some of the UK’s leading financial journalists, on broader financial issues of the day. Elsewhere we ask whether your IFA is earning the fees he charges, find out whether IPOs are all they’re cracked up to be, and get some tips on the next big thing in the AIM market straight from the horse’s mouth. I hope that you enjoy reading Trustnet Magazine, and I’m sure that you will profit from it too. Pascal Dowling Head of publishing content

In association with:

Photos supplied by Thinkstock and Photoshot Cover Illustration: Javier Otero




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For more information call us on 0800 917 2112 or visit Baillie Gifford – long-term investment partners *For a limited period and new eligible Children’s Savings Plan customers only. Terms & Conditions and minimum investment amounts apply. Please refer to our website or the application pack that we will send you for full details. Your call may be recorded for training or monitoring purposes. Baillie Gifford Savings Management Limited (BGSM) is the manager of the Baillie Gifford Children’s Saving Plan. BGSM is an affiliate of Baillie Gifford & Co Limited, which is the manager and secretary of the investment trusts offered within the Plan. Your personal data is held and used by BGSM in accordance with data protection legislation. We may use your information to send you information about Baillie Gifford products, funds or special offers and to contact you for business research purposes. We will only disclose your information to other companies within the Baillie Gifford group and to agents appointed by us for these purposes. You can withdraw your consent to receiving further marketing communications from us and to being contacted for business research purposes at any time. You also have the right to review and amend your data at any time.


HOW TO AVOID THE NEXT TESCO As the crisis surrounding the once unshakeable Tesco grows, Cherry Reynard asks the experts where else apparently solid dividends could be castles built on sand


few short years ago, Tesco’s dividend looked unassailable. Today the group has already issued two profit warnings this year and finds itself under investigation by the FCA for financial irregularities. Shareholders have had to endure the unhappy combination of a slumping share price and a 75 per cent cut in the interim dividend. Opinion is divided as to whether this is a potential buying opportunity – and whether the retailer may yet claw its way back – but for income investors keen to avoid this type of problem in the future, what are the lessons to be learned?

Experts highlight two key issues. One is over-ambition and the other is underestimating structural change, each equal contributors to Tesco’s downfall. Helal Miah, investment research analyst at The Share Centre, says: “It put too much focus on expansion rather than keeping an eye on its core markets. It planned an aggressive expansion in the US, believing it could export its UK model around the world – it didn’t work out.” The second problem was its slow adaption to the internet. “The last time there was this kind of infrastructure change was a

hundred years ago with telecoms,” adds Miah. Although Tesco was quicker to respond than some of its competitors, notably Morrisons, it failed to spot the extent to which consumer spending habits were changing. Colin Morton, manager of the Franklin UK Blue Chip fund, points out that Tesco’s strategy had been to create more and more space, building superstores to sell televisions and clothing: “Amazon changed the economies of that,” he says.


He adds that a similar phenomenon has been seen with bookmakers: “Until recently the only way to compete in the gambling industry was to build a shop next to that of the incumbents. It was difficult to get in. But we’ve all seen what has happened to bookmakers. They don’t need a high street presence anymore.” Michael Clark, portfolio manager of the Fidelity MoneyBuilder Dividend fund, believes investors need to be careful about stocks



The final question is perhaps whether Tesco is the new Tesco. With its share price down 44.5 per cent, trading on a P/E of 9.7, it is difficult to see how things could get any worse for the former giant. Clark says: “While the profit reduction and the dividend cut are painful in the short-term, we are confident that Tesco will, over time, be able to restore its standing with customers and create value for shareholders. With 28 per cent market share in bricks and mortar grocery and an even larger share of the online grocery market, Tesco remains a very strong business.” The problem is that it will take time to restore its dividend credentials, so for the time being, investors will have to look elsewhere for income. Tesco may be a growth story again, but stable dividends are unlikely to reemerge until the supertanker has turned.


B - Tesco PLC Ord 5p

5% -0% -05% -10% -15% -20% -25% -30%

Source: FE Analytics






03 Sep







05 Aug


-35% 28

“It is difficult to determine what constitutes stable” says Message, “The Government is under pressure to cut costs, so sectors such as utilities – which looked stable – suddenly don’t seem stable at all. There are always external influences. Companies with low debt, strong cashflows and lower fixed costs are in a better position to weather this.” He likes companies that have good dividend cover, enabling them to cope with short-term fluctuations in their business fortunes. In each case he believes investors need to look at the competitive environment, how it has evolved and how it is likely to evolve in the future. He highlights telecoms – an overweight position in his portfolio: “The sharing of data on

in increasing quantities: Unilever, Reckitt & Benckiser, Diageo and Smith & Nephew. He adds: “None of them looks cheap in share price terms, but they produce something people need to have that is hard to replicate. They should be the beneficiaries of the growth in the global middle class.”

handsets could encourage people to pay more and therefore should be positive.” Elsewhere, most fund managers believe the healthcare sector will continue to deliver reliable dividends – if unexciting growth – in the longer term. Fidelity’s Clark says: “Healthcare stocks are well placed to deliver investors a sustainable and growing income stream and above-inflation capital growth across the market cycle. At the stock level, GlaxoSmithKline (GSK) is a key holding for the fund – sluggish growth has weighed on investor sentiment towards the stock, but it currently offers a yield of 5.6 per cent and an attractive projected total return over the next five years.” AstraZeneca is the largest position in his fund. Morton believes that the most stable companies make something that people are likely to consume




18 Jul

with a superficially high yield. “Many equity income funds rely heavily on finding the highestyielding stocks. However, history has shown us that high yield can be a sign of stress in an underlying business. When I assess candidates for my portfolios, I look beyond the headline yield and focus on the sustainability of the dividend and the company’s ability to grow earnings and dividends in the future.” Douglas McNeill, Charles Stanley Direct’s investment director, says there are some options in the retail sector. He says M&S may be a stronger contender for an income portfolio, pointing to its 3.9 per cent yield (at 22 Sept) which is not too high to be unattractive: “Its supermarket business is doing well and clothing is now holding its own,” he adds. Most experts do not see similar vulnerability in the other large dividend-paying stocks, saying the consumer staples sector is subject to a unique set of circumstances. Nevertheless, Stephen Message, manager of the Old Mutual Equity Income fund, cautions against seeing any sector as necessarily safe.

A LEAP INTO THE UNKNOWN OR UNTAPPED POTENTIAL? BlackRock Investment Trusts See things differently DO YOU SEE an uncertain new world, or the opportunity to profit from it? At BlackRock, we see the latter. Our 10 distinctive Investment Trusts provide you with access to an expert global team that go further, exploring areas that others overlook. But this is only achievable with the insight and knowledge that comes from having some of the best tools, systems and risk controls in place that enable us to see things differently. It’s only then that it’s possible to confidently push the boundaries and challenge conventional thinking. The value of your investment and the income from it will vary and your initial investment is not guaranteed. As the BlackRock Investment Trusts are highly specialised, they should be regarded as high risk and are suitable only for use as part of a diversified portfolio of investments. If you are looking for an investment that goes beyond the norm – speak to your financial adviser and search BlackRock Investment Trusts.


INVESTMENT TRUSTS BlackRock has not considered the suitability of this investment against your individual needs and risk tolerance. To ensure you understand whether our product is suitable, please read the Key Features document which provides more information about the risk profile of the investment, the current Shareholder circular and the Annual and Half Yearly Reports prior to investing. We strongly recommend you seek financial advice prior to investing. The BlackRock Investment Trusts ISA and BlackRock Investment Trusts Savings Plan are managed by BlackRock Investment Management (UK) Limited. The investment trusts currently conduct their affairs so that their securities can be recommended by IFAs to ordinary retail investors in accordance with the FCA’s rules in relation to non-mainstream investment products and intend to continue to do so for the foreseeable future. The securities are excluded from the FCA’s restrictions which apply to non-mainstream investment products because they are securities issued by investment trusts. Issued by BlackRock Investment Management (UK) Limited (authorised and regulated by the Financial Conduct Authority). Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Registered in England No. 2020394. Tel: 020 7743 3000. For your protection, telephone calls are usually recorded. BlackRock is a trading name of BlackRock Investment Management (UK) Limited. © 2014 BlackRock, Inc. All Rights reserved. BLACKROCK and INVESTING FOR A NEW WORLD are registered and unregistered trademarks of BlackRock, Inc. or its subsidiaries in the United States and elsewhere. All other trademarks are those of their respective owners. Ref: 14635.




fter a difficult year last year, 2014 has seen emerging markets return to a more steady upward trajectory. Richard Titherington, chief investment officer of emerging market equities at JP Morgan Asset Management (JPMAM), thinks there could be more to come. “Given the myriad sources of geopolitical uncertainty, it would seem only prudent to proceed with caution. Nevertheless, the path ahead appears compelling.” In July the MSCI Emerging Markets index posted its best monthly performance since December 2012: “Investors rewarded the asset class with £8bn in inflows into emerging market

equities in just that month, the fourth consecutive month of positive flows.” Titherington says investors should be watching out for three key indicators, which show more good news ahead. “First, look for stabilisation across emerging market currencies. This is a signal of trade balance improvement as emerging market earnings catch up with the developed world.” The second is for emerging markets to “recouple” with developed markets. He feels there is evidence this is starting to happen, with manufacturing-intensive export-led countries in the region taking the

Experts think that the time has come for investors to take a punt on the Asia Pacific sector, even though the emerging markets may have further to fall in the short-term. By Neal Underwood

lead. Some are already undergoing “selective recoupling” as they benefit from recovering demand. The third, Titherington believes, is a continued improvement in earnings expectations.


“As emerging market companies return to greater profitability, this should boost margins. As the forecasts for these companies grow more rosy, that should have a tangible positive impact on prices. 7



That final catalyst in our view should be considered alongside valuations.”


Andrew Herberts, head of private investment management at Thomas Miller Investment, says that in the long-term, growth from emerging markets will outstrip that of developed markets. “You should want to play it. We’re seeing quite a gap between developed and emerging markets, with emerging markets as a whole sitting at quite a significant valuation discount. We’ve been taking our weighting up from early this summer.” Richard Philbin, chief investment officer at Harwood Multi-Manager, rates a number of funds in the region. He recommends First State China Focus, which is a concentrated, 20-stock portfolio. He also holds the broader First State Global Emerging Markets Leaders fund, as well as the closed-ended JP Morgan Indian Investment Trust. “The Global Emerging Markets Leaders fund is a core holding,” says Philbin. “First State has a great team with Angus Tulloch and Jonathan Asante. It’s a large cap fund where the team knows what it is doing. It has a big value bias and low turnover.”



30% 25%


IMA Global Emerging Markets

Tim Cockerill thinks the fund is a core holding

20% 15%

First State Global Emerging Markets Leaders

10% 5% 0% -5%

Source: FE Analytics


Mar 14




Mar 13




Mar 12


Sep 11



These funds represent long-term holdings for Philbin: “We’re buying the long-term story of them moving from emerging to developed markets.” Tim Cockerill, investment director at Rowan Dartington, believes investors should favour a general global emerging markets fund, and recommends First State. One problem though is that some of the firm’s funds have become so successful they have been softclosed to new investors. Cockerill is looking for a new emerging markets fund with similar characteristics to the First State vehicles. He has high regard for Aberdeen’s expertise in emerging markets and says he has been investigating McInroy & Wood Emerging Markets, which is perhaps off many people’s radar due to its small size and weekly dealing. Titherington says investors should consider the risks, as well as the potential returns, before they invest - but think long term. “Admittedly there is still no proverbial green light. Can valuations go lower? Yes. Can currencies fall below fair value? Yes, they can, but a cyclical asset class with high volatility is a ‘buy’ in these circumstances for investors with a one-to-three-year horizon.”

Benchmark: MSCI Emerging Markets Managers: Jonathan Asante & Tom Phrew Fund size: £3,407m Minimum investment: £1,000 OCF (ongoing charge figure): 1.57pc

JPMorgan European Investment Trust – Income Shares

A departure from the everyday – 150 European income stars. Looking for a core European investment opportunity that offers high income and capital growth? The JPMorgan European Investment Trust (Income Shares) goes further than many of its peers, by seeking out at least 150 of what we believe to be the best of Continental Europe’s highest yielding stocks. Our disciplined investment process rigorously analyses the 1,200 strong universe of dividend paying stocks, avoiding companies that don’t have a high and sustainable yield. It’s an approach that works, with the trust delivering a consistent yield premium to the benchmark over the last five financial years as shown in the table below. The current prospective dividend yield as at 31 August 2014 is 4.0%.* Past performance is not a guide to the future. Please remember that the value of your investments and the income from them may fall as well as rise and you may not get back the original amount invested. Please see trust specific risks below.

Financial Year End – Trust Yield v Benchmark Yield 12 month period ending 31/03/10 31/03/11 31/03/12 31/03/13 31/03/14

Trust Yield (%) 4.23 4.11 4.86 4.26 3.86

Benchmark Yield (%) 3.21 3.30 3.99 3.60 3.11

Source: J.P. Morgan Asset Management as at 31 March 2014 (JPM European IT annual report, calculated by dividing total net dividend for relevant year by year end share price. Please note 2014 share price figure is as per the NAV announcement made on 1st April.) Benchmark source: 1/4/09 – 31/3/13 MSCI Europe cum UK and 1/4/13 – 31/3/14 MSCI Europe ex UK; calculated in the same manner as JPMorgan European IT yield. *Source: Morningstar as at 31 August 2014. Prospective dividend yield for 31 August 2014 based on mid market prices and the estimated dividend(s) payable in respect of the current financial year. This will include declared and net prospective dividends. The yields quoted are provided as a guide and should not be taken for granted as a guaranteed yield. The affect of charges will reduce the amounts shown. Investment charges are taken from income and capital. This may increase the amount of income available for distribution but will reduce the potential for capital growth. It may also erode capital if investment growth does not compensate the charges. Exchange rate changes may cause the value of underlying overseas investments to be volatile. The trust may invest in smaller company shares, which can be more unpredictable and less liquid than shares of larger companies. Investment trusts may borrow to finance further investment (gearing). The use of gearing will increase the volatility of movements in the Net Asset Value (NAV) per share. This means that a relatively small change, down or up, in the value of a trust’s assets will result in a magnified fall or rise, in the same direction, of the investment trust’s NAV per share.

Make your destination. This material should not be considered as a recommendation relating to the acquisition or disposal of investments. Investment is subject to documentation which is comprised of the Investment Trust Profiles and Key Features and Terms and Conditions, copies of which can be obtained free of charge from J.P. Morgan Asset Management Marketing Limited. Issued by J.P. Morgan Asset Management Marketing Limited which is authorised and regulated in the UK by the Financial Conduct Authority. Registered in England No. 288553. Registered address: 25 Bank St, Canary Wharf, London E14 5JP.


HOW TO ELECTION-PROOF YOUR PORTFOLIO With Ed Miliband promising more of an interventionist approach to government if Labour wins the next election, and David Cameron floundering at the reins, Padraig Floyd looks at how investors can protect their portfolios from burgeoning political risks.


week is a long time in politics, and the last few weeks, with the fate of Scotland in the balance, have been longer than most for UK investors. Yet, even after a “no” vote, the political landscape looks no more certain than it was at the last election. The implications for investors are no clearer, says


James Bateman, head of portfolio management at Fidelity Solutions. “Above all, markets hate uncertainty. A hung parliament after the general election would spook UK equity markets.” He adds that the potential for a prolonged political stalemate could see markets fall further and relatively quickly – by as much as

5 to 15 per cent. “Coalitions take time to form, so, any fall during the negotiation period could mean a buying opportunity for investors.” Matthew Beesley, portfolio manager and head of global equities at Henderson Global Investors, believes the effect the uncertainty has had on the markets makes


this a good time to take stock and consider how to “election-proof” your portfolio. He believes a top priority must be utilities, as Miliband’s pledge that Labour will impose a freeze on energy prices until 2017 has already had consequences. “Since this policy was announced in September of last year, shares in Centrica have fallen by 20 per cent,” he says. Oil and gas companies may also face one-off windfall taxes or even permanent increases.


Intervention is clearly a theme for Labour policy and Miliband has also argued for a break-up of some UK high street banks. “The issue is one of a UK consumer that continues to deleverage – as in Europe and the US,” says Beesley, “and it seems likely under a Labour government that the already beleaguered banking sector could be in for more interference.” “Lloyds Bank and RBS as the two most exposed franchises are most likely in the firing line.” The housing market could also be under threat next year. Politicians often point to a lack of properties as the cause of house price inflation and Beesley wonders whether the hue and cry about the housing shortage may result in legislation to force the building of more homes. This could have an impact on the profit margins of the currently buoyant homebuilding stocks such as Persimmon, Taylor Wimpey and Berkeley Homes. Fidelity’s Bateman believes “recovery of certainty increases the certainty of recovery”. This happened in 2010 once the Coalition was in place and he would anticipate a similar rally if there isn’t


a clear result again next year. “Investors who can hold their nerve through a hung parliament and increase their exposure to UK markets could be rewarded over the longer term,” he says.


The European question is crucial, not because UKIP will win many – or perhaps any – seats, but because it will certainly pull away votes from the mainstream parties. A win by the Conservatives will also guarantee a referendum by 2017, which could result in a weakening of the pound. “Large multinationals will shy away from making big capital commitments to the UK,” says Beesley. “This will leave a hole in our finances that will have such an impact on sterling it will make the Scottish independence-related gyrations of September pale into insignificance.” Uncertainty about a future in Europe will also have an impact on inward investment, says Justin Urquhart-Stewart, co-founder of Seven Investment Management. “I was in Ireland recently, hearing directly from people who won’t be investing in the UK for the next two or three years because in the next two or three years the UK might be outside the tariff wall.”


There is another school of thought that says investors should simply forget about government policy

and rely on the managers they have chosen. Mark Dampier, head of research at Hargreaves Lansdown, says he isn’t interested in policy so much as extremes of markets. His interest is piqued by his own methodology which shows whether something is too cheap or too expensive. “Clients and investors have a view that should be changing all the time,” says Dampier. “But,” he warns, “you’re far better to do very, very little to your portfolio and make as few decisions as possible. “Where I’ve gone wrong in the past is where I have made a partemotional, part-reaction to macro factors and it’s nearly always been wrong.” Dampier’s warning has some resonance, in that generally there are no lasting market shocks that accompany a general election.


Of course, we don’t know how much impact the European question may have upon investments. A weakened pound will certainly be detrimental to a UK-based portfolio, but will also offer opportunities to a more global approach. Making changes based upon the outcome of next year’s general election could be seen as a gamble – a choice of red or black, or indeed blue in this case. That game is too rich for the average buy-and-hold long-term investor. Those with concerns may consider switching, but with so many variables involved in the election outcome, those changes should only be made if you can live with them for the medium-term. If there’s one thing we can predict: chopping out of a market if the anticipated meltdown fails to materialise is going to be expensive. This can only harm your performance in the long-run. 11



HOW TO MAKE SURE YOUR ADVISER IS EARNING THEIR FEE Advice has become an expensive commodity in recent years, so are you getting what you’re paying for, or just paying for what you get? Holly Thomas finds out.


eeking help from an expert means an adviser will do the leg-work for you in constructing the right portfolio to increase the value of your wealth. While many people are joining the army of DIY investors, there are plenty who don’t feel confident enough to go it alone and want guidance from a professional. An adviser can do all the necessary research and tailor a portfolio geared towards decent returns and perhaps generating income too. There are many things to consider on top of simply picking investments, including tax planning and keeping on top of changing financial legislation, which is particularly relevant for retirement planning. Getting the right adviser is crucial to making sure you are on the right path towards your financial goals, whatever they may be. Once you have found one, you need to make sure they are doing the best job possible. Here’s what you need to know about finding and dealing with professional advisers and how to get the most out of yours. 12


There are now two types of adviser – independent and restricted. Independent firms are able to advise on all areas of personal finance and can recommend products from any company. Restricted advisers will only be able to recommend those from a limited number of firms or products. However, a firm may be labelled restricted simply because it doesn’t offer mortgages, for example, so it is worth investigating the detail behind the categorisation if it’s a company you would like to consider. One of the most common ways to find an adviser is to ask for recommendations from family or friends. Alternatively, the website will help you find advisers in your area, listing their qualifications and any areas of expertise. allows consumers to rate advisers based on quality of advice, service and cost. Dennis Hall at Yellowtail Financial Planning in London says: “Before speaking with an adviser, conduct some research into the manner and method in which their firm

“THE BEST IFA BUILDS A LONG-TERM FINANCIAL PLAN TO HELP YOU UNDERSTAND THE INVESTMENT RETURN YOU NEED.” ALISTAIR CUNNINGHAM, WINGATE FINANCIAL PLANNING approaches investing. This allows you to have some understanding of their investment philosophy beforehand and whether you agree with it. For example, some firms prefer low-cost tracker strategies, while others have a tendency to be very active and trade frequently.”


Advice comes with a bill – but when it comes to planning for your future, this could be a critical investment in itself to make sure you have everything in place to provide security for you and your family. The cost of advice differs depending on the firm used



and the individual. A report by indicates that the average cost of an initial review and report is £500. Setting up and compiling a £10,000 investment portfolio costs £300, whereas more complex pensions advice is far more expensive. The report says advice on setting up a drawdown scheme on a £300,000 pension fund would cost £3,000. There can be vast differences between firms on charging structures, so make sure you understand what you have to pay for.


During your initial consultation with an adviser, they should spend some time going through your personal circumstances and ascertaining your financial goals.

Adam Price, founder of, says: “Fundamentally, people should expect their IFA to do two things. Firstly, the IFA will get to know your situation and then help you plan for the future. What life events lie ahead for you? What are your financial goals? What risks would it be sensible for you to take along the way? This big picture will most likely be reflected in an initial fact-find meeting and then regular reviews of your situation. An adviser will then help you manage your finances toward that plan, giving you easy access to the investment vehicles you need to

meet your goals.” The adviser should offer an introduction to their services as well as fees. The extent of the questioning can be something of a surprise – it may even seem intrusive. But to give personal financial advice, some personal information is necessary.


Advisers will review your case on a regular basis to check what changes there have been in your personal circumstances since the previous meeting. This could be quarterly, sixmonthly or annually, depending on the terms of the initial agreement. Ben Willis at Bristol-based advice firm Whitechurch Securities says: “Politics, economies, tax and budgets can all impact upon original recommendations and solutions. Lifestyle changes, health, family and work can also affect objectives, goals and requirements, therefore it’s important to ensure portfolios and recommendations continue to meet what may be changing goals and certainly a variable environment. As such, regular client reviews – at least once a year – are crucial.”



Initial financial review and report £500 Advice on a £200 per month pension contribution £500 Advice and setting up of a £10,000 investment ISA £300 Advice on investment strategy for a £50,000 inheritance for a 50-year old seeking medium-term growth £1,500 Advice on converting a £100,000 pension fund into a lump sum and annuity £1,350 Advice on setting up a drawdown scheme on a £300,000 pension fund £3,000 Source:




LINDSELL TRAIN UK EQUITY: A FUND FOR ALL SEASONS FE Research analyst Charles Younes thinks manager Nick Train’s idiosyncratic style and his focus on capital preservation make the fund a strong bet for investors who aren’t sure which way the markets are going.


divided into three main baskets: global consumer brands, leisure and media companies, and retail banks. We expect the portfolio to be able to protect investors’ capital in falling markets, as it did in 2008 and 2011, due to Train’s focus on industry-leading companies. However, the fund is likely to underperform when the market is driven by companies whose revenues depend heavily on economic growth. The fund is aggressive in its approach to portfolio construction, but it is in fact less risky than its peers. Over the last five years, the fund’s annualised volatility has fallen short of that of the IMA UK All Companies sector and the FTSE All Share.


While Train takes a company’s ability to pay a dividend into account, there is no income target for the fund, which has a yield of 2.35 per cent. Lindsell Train UK Equity Income has returned 149.72 per cent since launch, more than double the returns of its peers and the FTSE All Share.



IMA UK All Companies

FTSE All Share

70% 60% 50% 40% 30% 20% 10% 0% Jun

Mar 14




Mar 13




Mar 12


-10% Sep 11


arkets have experienced a large amount of uncertainty in recent weeks. From the Scottish independence referendum to the looming UK general election, there are plenty of macro issues that shed doubt on the future. In times of volatility, investors would do well to choose a manager who has weathered a full market cycle and come out on top. At FE Research, we like FE Alpha Manager Nick Train of CF Lindsell Train UK Equity, which was recently added to the FE Select 100 list of recommended funds. With more than 20 years’ experience in equity investing, Train has found that the market undervalues durable, cashgenerative business franchises – an investment philosophy he shares with Warren Buffett – and he puts this view to use in Lindsell Train UK Equity. The £1.1bn, five crown-rated fund is a pure alpha play for those investors looking for long-term capital appreciation. Train runs a highly concentrated portfolio of just 10 to 15 names and the level of turnover is almost zero. The portfolio is made up of many of the same companies that were there at launch, such as consumer goods giant Unilever, publisher Pearson and two of the main players in the alcoholic drinks space, Diageo and Heineken. Lindsell Train UK Equity can be

Source: FE Analytics: Total return, Bid-bid, 19 September 2011-26 September 2014




ABERDEEN ASIAN INCOME: DIVIDENDS, COVERED Aberdeen Asian Income’s focus on income puts the trust in a strong position for cautious and defensive investors, according to Charles Tan, investment companies analyst at Cantor Fitzgerald. PERFORMANCE OVER FIVE YEARS Aberdeen Asian Income


IT Asia Pacific excluding Japan


120% 100% 80% 60% 40% 20% 0% May

Jan 14



Jan 13



Jan 12



Jan 11



Jan 10

-20% Sep 09


he Aberdeen Asian Income Trust invests in Asia Pacific ex Japan securities with a view to providing a healthy total return and, where possible, an aboveaverage yield. The fully covered dividend has been increased or at least maintained in every year since inception, growing by more than 8 per cent per annum over that period. Led by veteran fund manager Hugh Young, the trust is run with the same team-based investment approach that underpins every one of Aberdeen’s funds. The firm’s impressive track record of long-term outperformance is what has made Aberdeen a household name in Asian/emerging markets investing. Aberdeen Asian Income invests across the market cap spectrum and is constructed without reference to any benchmark or index. The emphasis is simply on making money for investors, which is achieved by owning a high-conviction portfolio (30 to 50 holdings) of quality growth companies at reasonable prices. The trust offers a cheaper way of accessing the Aberdeen Asian equity team’s expertise than the open-ended funds currently available and the policy of defending a 5 per cent discount to NAV with share buybacks has proved credible since its introduction. The real value of the trust lies in the income focus, which has helped it significantly outperform its benchmark and its open-ended sister fund – Aberdeen Global Asia Pacific Equity – over the past five years. With investors increasingly


Source: FE Analytics

cautious about equity valuations and market levels, especially in the US where the S&P 500 index has blown past pre-financial crisis highs, we would point out that Asian and emerging markets still have quite some way to go before they catch up. The gap has arguably begun to close since the “taper tantrum” at the start of last year, as investors have rotated back towards these previously out-of-favour assets. Our sense is that this convergence is likely to continue, especially since average P/E ratios on Asian and

emerging market equities remain about 25 per cent below their 2007 peak, whereas US stocks have already reclaimed theirs. As uncertainty lingers over the likely impact of QE reversals, rising interest rates and a slowing Chinese economy, the trust’s incomeconscious strategy represents an excellent way of gaining exposure to what is still the fastest growing geographic segment of the global economy while maintaining an appropriately cautious/defensive stance. 15




Whitechurch Securities’ Mark Stone tells Trustnet Magazine that the broad range of products available at Scottish Life makes it his preferred choice for pensions.


for example, has delivered returns broadly in line with its benchmark, the IMA Mixed Investment 40% - 85% Shares sector, since it opened for business in May 2012. Scottish Life will be rebranded as Royal London this year





















Scot Life BlackRock Aquila US Equity Index A Pn







Scot Life Invesco Perpetual UK Growth Pn







Scot Life UK Mid Cap Pn

Scot Life American Pn







Scot Life BlackRock Aquila US Equity Index Pn







Scot Life JPMorgan US Pn







Scot Life Inv Perp UK Growth Pn







Scot Life BG UK Equity Pn A







Scot Life BG UK Equity Pn







Source: FE Analytics, Gross Return Bid-Bid month end (30 Sep 2014)

Scot Life 7IM Moderately Adventurous - since launch Scot Life 7IM Moderately Adventurous Pn

35% 30%

ABI Mixed Investment 40-85% Shares

25% 20% 15% 10% 5% 0% Aug



Feb 14






Feb 13




-5% Jun 12


hen it comes to selecting a pension plan, the most important thing to consider is your tolerance for risk, according to Whitechurch Securities’ Mark Stone. Stone, who specialises in pensions research at Whitechurch, says selecting one plan can be difficult because it depends on what the investor needs – whether that be capital appreciation to build a sizeable retirement pot over the longterm or careful capital protection to shield their cash in the twilight years. He highlights pension provider Scottish Life as a “good place to start” because the firm caters for pensions and has a wide range of products to choose from. “They are a pensions company. They don’t do a great deal outside of pensions,” he explains. Stone says investors have the option of choosing from the numerous funds in Scottish Life’s arsenal, of which there are more than 180 from a strong selection of managers, or opting for one of their risk-rated portfolios which manage allocations for you: “They’ve got a governed range of risk-rated portfolios from cautious through to adventurous.” Another reason investors would be well-placed with Scottish Life, Stone says, is that their fees are relatively low in the industry, quite often coming in at around 1 per cent. The performance of Scottish Life’s 7IM AAP risk-rated range of funds since launch has varied depending on the risk level. The Scottish Life 7IM APP Moderately Adventurous fund,

Source: FE Analytics: Total return, Bid-bid, 4 May 2012 -26 September 2014

Deep experience in investment trusts Schroders launched its first investment trust in 1924 and our current range offers nine distinctive strategies. These target growth and income opportunities across UK and Japanese equities, Pan-Asian equities and property. The funds are managed by Rosemary Banyard, Andrew Brough, Matthew Dobbs, King Fuei Lee, Hugo Machin, Nick Montgomery, Sue Noffke, Robin Parbrook, Andrew Rose, Tom Walker and the Business Cycle Team. With an average of 23 years of industry experience, they are among our most experienced fund managers. Please remember, 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. Some trusts invest solely in the companies of, or in property located in, one country or region. This can carry more risk than investments spread over a number of countries or regions. Investors in the emerging markets and the Far East should be aware that this involves a high degree of risk and should be seen as long term in nature. Less developed markets are generally less well regulated than the UK, they may be less liquid and may have less reliable arrangements for trading and settlement of the underlying holdings. Investors should note that exchange rates may cause the value of investments denominated in currencies other than sterling, and the income from them, to rise or fall. Explore the depths of this talent at

Fund manager industry experience: Rosemary Banyard: 35 years, Andrew Brough: 27 years, Matthew Dobbs: 33 years, King Fuei Lee: 15 years Hugo Machin: 14 years, Nick Montgomery: 17 years, Sue Noffke: 25 years, Robin Parbrook: 24 years, Andrew Rose: 33 years, Tom Walker: 15 years and the Business Cycle Team: average of 16 years. The most up to date key features can be viewed on the UK Investor website via Issued in September 2014 by Schroder Unit Trusts Limited, 31 Gresham Street, London EC2V 7QA. Registered No: 4191730 England. Authorised and regulated by the Financial Conduct Authority. UK07695


A high and sustainable dividend is vital for investors in today’s entrenched low-yield environment. Joshua Ausden thinks investment trusts can be a powerful weapon for investors looking for a sustainable dividend.




or those who rely on the income from their investments to pay the bills, stability and predictability are absolutely everything. It’s all well and good getting a huge dividend pay-out one quarter, but if that’s not sustainable, there’s no way you can plan for the future with any certainty. The problem is it’s very difficult to predict when a company might cut its dividend. Just look at what happened to BP – who saw the 2010 oil spill coming? Steep valuations on the back of five years of rallying markets and other major headwinds to the sustainability of income, including a strong sterling and a raft of special dividends, make the outlook even more uncertain. Imagine this – an investment product that has a proven track record of not only maintaining but growing its dividend year after year after year. And I’m not talking five or 10 years, which some commentators seem to think is long-term these days – I’m talking 30, 40 years-plus.


But it doesn’t stop there – these fantastical products have such high dividend reserves in some cases, that they already have enough money to pay next quarter’s payout, and the one after that, and the one after that… Far from being a fantasy, though,




Bankers 47 Alliance




Foreign & Colonial


F&C Global Smaller Companies 43 Brunner 43 JPM Claverhouse 41

this is already reality. It is the income-focused investment trust. The advantage trusts have over funds is centred around their tendency to outperform over the longer-term from a capital growth and total return perspective. Their ability to gear, or borrow money, means managers can make more from their highest conviction bets. This is perhaps the most important reason why they’ve posted much better returns than their open-ended rivals across a number of different investment sectors over the past decade. It’s not only shoot-the-lights out growth that investment trusts offer, however. “Unlike open-ended funds, investment trusts do not have to pay out all of the dividends they receive. They are able to retain a proportion of their income, which means they can pay more consistent dividends that hopefully grow over time,” said Charles Cade, head of investment company research at Numis Securities.


“This is why there are a selection of trusts that have grown their dividend for well over 40 years.” While some open-ended funds have a good record of growing their income-payout, including Francis Brooke’s Trojan Income portfolio which has an unbroken record since its launch back in 2004, none

can come close to matching the longevity of their closed-ended counterparts. Indeed, only a handful of open-ended funds have a track record going beyond 1980 anyway. According to research compiled by the AIC, there are eight investment trusts that have managed to grow their total dividend payout for more than 40 consecutive years. City of London IT and Bankers IT are the leaders, with 47 years. To put it another way, the last time they failed to grow their income was the year England won the World Cup. Many of these have very impressive income reserves as well, giving them a safety net if the rest of 2014 and 2015 prove difficult in the context of dividend growth. AIC figures in July showed that Job Curtis’ City of London IT had more than £30m worth of revenue reserves, meaning that almost three quarters of its dividends over the next 12 months were already covered. Bankers and Alliance have even more impressive numbers, with a dividend that was in the latter’s case more than twice covered. Outside of the 40-year-plus club, other popular income-focused trusts with strong dividend cover include Murray International IT, Temple Bar IT and the Edinburgh Investment Trust.


To go one step further, it’s prudent to find investment trusts that not only have a record of growing their income, but growing their income in excess of inflation. After all, if an investment trust only increases its dividend pay-out by a penny year on year, the real spending power of an investor will radically decrease over the long-term. The AIC publishes five year dividend growth figures, and it’s encouraging to see that many that have increased their dividends consistently also score highly here. Mark Barnett’s Perpetual Income & Growth IT, for example, which has grown its dividend every year since 19


he took over in 1999, has dividend growth of over 6 per cent.


City of London IT also looks good from this perspective, with five year annualised dividend growth of 3.5 per cent. The Merchant’s Trust however, which has grown its dividend for 31 years in a row, only has dividend growth over five years of 1 per cent, according to the figures. Cade says the benefits of dividend smoothing have been finely illustrated in recent years, thanks to a number of significant headwinds to income investors. “During the financial crisis, a lot of the banks were forced to cut their dividend, but very few trusts cut their own dividend because they had the reserves to draw on,” explained Cade. “Finsbury Growth & Income [managed by Nick Train] had to cut because he had a big position in a Lloyds preference share, but they were few and far between.” So what about now? Are there any potential banana skins on the horizon? Cade says that the source of a lot of income in recent years has come from unsustainable sources –


namely special dividends. “If they were to dry up, which is very possible, I think you’ll see some open-ended funds struggle to grow their income. Investment trusts with reserves won’t have that problem,” he says. Vodafone’s huge special dividend in light of the sale of Verizon in September last year is a good example. Cade adds that the strength of sterling relative to the dollar could also work against fund managers who hold internationally facing companies. “Many companies in the FTSE pay out their dividends in dollars. If dollar continues to be weak versus




Alliance Trust 113.2


Bankers 2.26 1.98 Temple Bar 33.54


Edinburgh Investment 61.24


Murray International 68.12



sterling, which it has been, you’ll see a lot of companies affected.” William Meadon, manager of the JPM Claverhouse investment trust, says he is “relieved” to have the luxury of drawing on income reserves, believing that the next months and years will be very difficult from a dividend growth point of view. Recent research from Capital Asset Services found that dividend growth was at its slowest in the second quarter of this year since 2010, with the exception of a “freak quarter” in 2013.


“The dividend environment has become a lot more challenging, and I think those with dividend reserves are in a good position as a result,” adds Meadon. Others are even more cautious, expecting a full on financial crisis akin to 2008. Ultra cautious fund manager Sebastian Lyon, who runs the Personal Assets Trust, said in a recent note to investors that he was seeing “nose-bleed valuations” across the board. “Fear has unquestionably surrendered to greed and stock markets look more expensive than any time since 2007,” he said. “Stock market bubbles are very democratic; they make all investors look foolish either before or after the peak.” Exactly what will prompt a steep sell-off remains to be seen. No matter what it is, dividends are sure to come under pressure, and investment trusts have the means to deal with this threat much effectively than their open-ended rivals.

We strive to explore further. Aberdeen Investment Trusts ISA and Share Plan At Aberdeen, we believe there’s no substitute for getting to know your investments face-to-face. That’s why we make it our goal to visit companies – wherever they are – before we invest in their shares and while we hold them. With a wide range of investment companies investing around the world – that’s an awfully big commitment. But it’s just one of the ways we aim to seek out the best investment opportunities on your behalf. Please remember, the value of shares and the income from them can go down as well as up and you may get back less than the amount invested. No recommendation is made, positive or otherwise, regarding the ISA and Share Plan. The value of tax benefits depends on individual circumstances and the favourable tax treatment for ISAs may not be maintained. We recommend you seek financial advice prior to making an investment decision.

Request a brochure: 0500 00 40 00

Issued by Aberdeen Asset Managers Limited, 10 Queen’s Terrace, Aberdeen AB10 1YG, which is authorised and regulated by the Financial Conduct Authority in the UK. Telephone calls may be recorded.

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Ian Sayers, director general of the Association of Investment Companies, thinks investment trusts’ ability to smooth dividends and maintain them during negative markets will serve them well as investors seek income for their newly liberated pensions.


t is about six months since George Osborne uttered the words “let me be clear: no one will have to buy an annuity” and about six months until these words become a reality. For the investment company sector, this could hardly be better news. These changes have reignited interest in pensions. In a recent AIC survey, 44 per cent of adults said they were more positive about pension schemes as a result of these reforms and 27 per cent said they were inclined to increase their contributions. The AIC published this research as part of its series Freedom in Pensions, which looked at how investment companies can be used to build a long-term pension portfolio, as well as their unique advantages in delivering a higher or growing income in retirement. Pensions, of course, are all about the long-term, which is where investment companies have such a strong story to tell. Recent research from Canaccord Genuity, for example, found that investment companies have outperformed comparable open-ended funds in 12 out of 15 sectors over 10 years. Their closed-ended structure means that managers can take a long-term view and do not have to hold cash or sell investments to meet redemptions. They can invest in less 22

liquid asset classes, such as private equity, which often perform well over the long-term. Trusts have the ability to gear – that is to borrow money to invest in additional assets. While this can help long-term performance, it also increases risks, particularly in the short-term. This long-term performance record is not news to experienced investment company investors. But the chancellor’s decision to allow savers complete freedom over how to take an income in retirement is likely to bring into focus the unique advantages investment companies have in delivering a higher or growing income. Nearly 60 per cent of respondents to our survey said they thought they would need an income in retirement for 20 years or more, and many were concerned about how they could protect this income from the impact of inflation. This is where investment companies really come into their own and why they are sometimes referred to as the “dividend heroes” of the funds world. Thirty-five investment companies have increased their dividend in each of the last 10 years, despite the fact this period covered the impact of the financial crisis, and there are even some investment companies that are approaching 50 years of consecutive dividend increases.

So how have investment companies managed this? Trusts can smooth their dividends over economic cycles while Many open-ended funds are required to pay out all their income each year. If the companies they are invested in suddenly cut their dividend, as some banks had to in the financial crisis and Tesco did recently, then the income they pay to investors will have to fall as a result. Investment companies, by contrast, can hold back some of their income in good times to pay it out in leaner ones. This means that investment companies can maintain or increase their dividend even at times when the companies they invest in are reducing theirs. And just as they can use gearing to boost their capital performance, they can use it to boost income as well. And as if that wasn’t enough, they can use their greater flexibility to invest in assets such as commercial property, infrastructure and renewable energy, which can all offer a higher level of income and, being illiquid, are better suited to being held in a closed-ended fund. Of course, none of this comes without risk, and for those for whom security of income is critical, an annuity may well be the best option. We are very keen to stress that investment companies are not a substitute for annuities and that people who cannot afford to lose their capital should not invest in them. Rather, they offer a different way of looking at income in retirement.


Schroder UK Growth manager Julie Dean quits THE SCHRODER UK GROWTH investment trust has been hit with its second manager departure in 18 months after Julie Dean resigned from Schroders. Dean took over the £302.6m trust in July 2013 following the departure of star UK manager Richard Buxton. Her exit was announced at the start of September. Management of the fund has been handed to Schroders’ business cycle investment team, of which Dean was a member. No individual manager has been named on the portfolio. Numis Securities removed its buy rating for the trust, citing “uncertainty over future management arrangements”.

Electra Private Equity says no, Shareholders have rejected proposals from activist investor Edward Bramson to change its board and lead a strategic review of the busness.

AIC BOARD ELECTS NEW CHAIRMAN THE ASSOCIATION OF INVESTMENT COMPANIES (AIC) has elected Peter Arthur as the next chairman of its board. Arthur, who was elected deputy chairman in 2013, will succeed Andrew Bell in January 2015. He first joined the trade body’s board in 2011.

Killik backs World Mining, Killik & Co has placed a ‘buy’ rating on the BlackRock World Mining Trust, citing stronger sentiment towards miners combined with “improving fundamentals and an attractive yield”.

DI BON EXITS FROM ALLIANCE TRUST ILARIO DI BON HAS STEPPED DOWN as head of equities at Alliance Trust to “pursue other opportunities”. He has been replaced as head of equities by Peter Michaelis while Simon Clements will assume responsibility for Alliance Trust’s equity portfolio. Both joined Alliance Trust Investments in August 2012.



1Y (%) 3Y (%)

5Y(%) -49.41

Blue Planet Investment Trust




British Assets Trust


3.23 3



Scottish American Investment Company





Securities Trust Of Scotland





Henderson International Income Trust







1Y (%) 3Y (%)

5Y(%) 55.49

Fidelity Asian Values




Martin Currie Pacific Trust





JP Morgan Asian IT





Pacific Horizon IT





Schroder Asia Pacific





Source: FE Analytics





FAVOURS THE BRAVE Valuations have plummeted in the Asia Pacific region, once the darling of many a portfolio, but this has created what some professional investors think is a clear buying opportunity for those willing to take the risk.


arring a total collapse in China – which some bears still think could be on the cards – an increasingly wealthy middle class in China, India and the ASEAN countries [Indonesia, the Philippines, Malaysia, Singapore and Thailand] underpins widespread confidence on the outlook for the Asia Pacific. 24

However, despite its longer-term potential, investors in the Far East have suffered recently. The slowdown in economic growth in China, tighter monetary policy in the US and the widespread implications of the end of quantitative easing – which translates to less money sloshing

around to shore up capital values – have all contributed to a period of poor performance. Between 1 March 2013 and 1 March 2014, the FTSE All World Emerging Markets index lost just shy of 20 per cent, underperforming the FTSE 100 by 30 per cent. The worst seems to be over,




Although some experts believe this is purely mean-reversion or even a false rally, Charles Cade, head of research at Numis, thinks the outlook is still positive. He says that now is as good a time as any for investors to buy trusts in the AIC Asia Pacific ex Japan sector. “It is a combination of the fact that the outlook is reasonably positive and valuations are quite attractive,” Cade says . “The sector was hit last year by the prospect of the Fed (US Federal Reserve) tapering QE in the US, but generally the long-term


Aberdeen Asian Smaller Companies has also seemingly disproved the stereotype that small caps are more risky, as the trust has only marginally higher annualised volatility than the sector average over seven years, despite its powerful performance. Scottish Oriental has been slightly more volatile. Like all other Aberdeen-run portfolios, the Asian Smaller Companies trust focuses on quality companies that have reliable earnings and strong balance sheets, which has helped its return profile over the years.


however. Emerging markets have rebounded strongly this year, while developed markets, such as the UK and US, have been relatively flat.

fundamentals look good. The key to it is of course China and whether it will get into trouble, but then you have India which has been buoyed on by the recent election.” He adds: “The market as a whole is still reasonably valued and the trusts themselves are trading on decent discounts. The sector is trading on a 10 per cent discount and there isn’t normally too much downside risk from those levels.” According to the AIC, 13 out of the 15 trusts in the sector are trading on a discount to NAV, though the large majority of those are trading on tighter discounts than their one- and three-year averages. So, what options do investors have in the sector? First and foremost, the AIC Asia Pacific ex Japan sector is littered with renowned fund groups, such as Aberdeen, First State, Invesco Perpetual, Schroders and Henderson. Although they all aim to tap into the region’s growth potential, certain

investment trusts in the sector have very different return profiles over the course of the market cycle – in this case, seven years. Given that smaller companies tend to outperform their larger rivals over the longer-term, it isn’t too surprising to see that the only small cap focused portfolios in the sector – Aberdeen Asian Smaller Companies and First State’s Scottish Oriental Smaller Companies – have topped the performance tables. According to FE Analytics, the Aberdeen trust has returned 242 per cent over this time while the First State vehicle has returned 206.1 per cent. The sector has made 88 per cent.

Aberdeen Asian Smaller Companies First State Scottish Oriental Smaller Companies

180.53 Aberdeen Asian Income

Aberdeen Edinburgh Dragon


Aberdeen New Dawn

60.39 0.32

Frostrow Pacific Assets

Henderson Far East



(Schroders) Asian Total Return Investment Company











While others stick to the indices, we are free to choose. Scottish Mortgage Investment Trust has its own way of doing things. So it’s hardly surprising that the Trust’s portfolio looks nothing like the index, after all, we are active rather than passive investors and we firmly believe that the index is an illustration of ‘past glories’ rather than future prospects. In fact, our abiding principle has always been to invest in tomorrow’s companies today. We give ourselves time to add value by being patient investors in an impatient world. But don’t just take our word for it, over the last five years Scottish Mortgage has delivered a total return of 192.2%* compared to 92.5%* for the index. And Scottish Mortgage is low-cost with an ongoing charges figure of just 0.50%†.

Standardised past performance to 30 June each year**: 2009-2010 2010-2011 2011-2012 2012-2013 2013-2014 Scottish Mortgage






FTSE All-World Index






Past performance is not a guide to future performance. Scottish Mortgage Investment Trust is managed by Baillie Gifford and is available through our Share Plan and ISA. Please remember that changing stock market conditions and currency exchange rates will affect the value of your investment in the fund and any income from it. You may not get back the amount invested.

GLOBAL GROWTH Scottish Mortgage Investment Trust

For a free-thinking investment approach call 0800 917 2112 or visit

Baillie Gifford – long-term investment partners *Source: Morningstar, share price, total return as at 30.06.14. †Ongoing charges as at 31.03.14. **Source: Morningstar, share price, total return. Your call may be recorded for training or monitoring purposes. Baillie Gifford Savings Management Limited (BGSM) is the manager of the Baillie Gifford Investment Trust Share Plan and the Investment Trust ISA. BGSM is an affiliate of Baillie Gifford & Co Limited, which is the manager and secretary of Scottish Mortgage Investment Trust PLC. Your personal data is held and used by BGSM in accordance with data protection legislation. We may use your information to send you information about Baillie Gifford products, funds or special offers and to contact you for business research purposes. We will only disclose your information to other companies within the Baillie Gifford group and to agents appointed by us for these purposes. You can withdraw your consent to receiving further marketing communications from us and to being contacted for business research purposes at any time. You also have the right to review and amend your data at any time.



Both currently yield more than the Aberdeen trust, with the Schroders trust at 4 per cent and the Henderson trust at north of 5 per cent. Matthew Dobbs’ Schroder Oriental Income fund has been the pick of the two from a performance point of view. It has been one of the four best-performing portfolios in the sector over three, five and seven years and has beaten the wider market over each of those timeframes.


Although the Aberdeen team has proved it can make money for investors over the longer-term – the group’s four Asia trusts have been among the top-seven performers in the sector over seven years – there can be periods when this focus on quality can be a hindrance. The best example of this was in 2013, when Aberdeen New Dawn, Aberdeen Asian Income, Aberdeen Asian Smaller Companies and the Edinburgh Dragon Trust all lost money and underperformed the peer group average.


Hugh Young, head of Aberdeen’s Asia Pacific team, says that last year’s underperformance was partly due to individual stock-specific issues, but mainly because it was more cyclical and lower quality names that led the market. First State, which is seen as the other major powerhouse in the region, runs the Scottish Oriental Smaller Companies trust as well as the large cap focused Pacific Assets Trust. Pacific Assets had a much better 2013 than the Aberdeen funds, but this was largely due to its discount to NAV narrowing, following First State’s announcement that it would close its popular open-ended Asia Pacific funds. The difference between the Aberdeen funds is that Edinburgh Dragon invests in Asian markets only, New Dawn invests in Asian and Australasian equities, while

INVESTORS SHOULD BEAR IN MIND THAT SCHRODER ORIENTAL INCOME HAS A LARGE WEIGHTING TO AUSTRALIAN EQUITIES Asian Income focuses on dividendpaying companies. Taking an income approach has been a fruitful strategy over recent years, because while the outlook has been uncertain, investors have preferred to be paid dividends and wait until capital growth has reappeared. Apart from Aberdeen Asian Income, there are two other yieldfocused portfolios – Henderson Far East Income and Schroder Oriental Income.

It has also been significantly less volatile than the sector and index over the longer-term, in part due to its ability to protect investors from market falls. Investors should bear in mind, however, that it has a large weighting to Australian equities, so isn’t as much of an emerging It is also trading on a slight premium to NAV, which can be a turn-off for a lot of investors. Dobbs also runs the Schroder Asia Pacific trust, which hasn’t performed as well as his income offering over the market cycle and has also been more volatile. However, the two portfolios are run with a similar strategy and therefore the difference in performance could be down to the popularity of income stocks and the fact that Dobbs’ growthorientated product only invests in the Asia Pacific region and not Australasia. It is also trading on a 10 per cent discount.



Aberdeen Asian Smaller Companies Investment Trust

3.59 8.78 23.55 6.17 73.82 218.08

Scottish Oriental Smaller Companies 2.22






19.26 12.41 77.5



Schroder Oriental Income

-4.92 1.28 7.36 4.61 47.44 100.6

Pacific Assets Trust

3.01 10.85 25.43 22.95 73.56 92.25

Aberdeen Asian Income

-3.73 0.39 10.08 -0.92 41.46 88.88

Source: FE Analytics, Bid-to-bod, Total return, to 3 October 2014





THE GO-TO TRUST FOR EXPOSURE TO ASIA’S EMERGING MIDDLE CLASS Angus Tulloch’s Scottish Oriental Smaller Companies Investment Trust has a strong bias toward the consumer, but it could face difficulty maintaining its stellar performance if markets continue to falter. By Daniel Lanyon.


manner to Tulloch’s £6.5bn First State Asia Pacific Leaders openended fund but is a lot nimbler, at just over £300m of assets under management [AUM]. Tulloch has a strong reputation in Asian equities and has demonstrated a more defensive style of late which helped in the sell-off across emerging market and Asian equities in 2013, but the trust has still fallen to second quartile over this period.

The trust mainly invests in companies with a market capitalisation under $1bn, with current top holdings including CMC, XX and TATA Beverages. The holdings reflect the consumer theme in the trust as well as Tulloch’s venture into Indian stocks, which have seen a significant re-rating over the past 12 months as the market anticipates an improving business environment following the election of Narendra Modi. The trust is currently on a discount of 2.6 per cent and has no gearing. It has an ongoing charges figure of 1.04 per cent and also has a performance fee of up to 5 per cent on top of that.

Performance over ten years 600%

Scottish Oriental Smaller Companies IT



IT Asia Pacific ex Japan Equities

400% 300% 200% 100% 0%

Oct 13

Oct 12

Oct 11

Oct 10

Oct 09

Oct 08

Oct 07

-100% Oct 06

“In a nutshell it is a great fund but my concern is that it has done incredibly well, and if we ever move to another risk-off period it will be case of a double whammy due to its exposure to smaller companies,” he said. The trust has underperformed both the sector average and index since sentiment turned ferociously against Asia and other emerging markets last year. The trust is run in a similar


Oct 05


LAUNCHED: 1 January 1995 FUND SIZE: £262.6m MANAGER: Angus Tulloch OCF: 1.01%

Oct 04


espite a wobble in recent years, the Asian consumer story, driven by a rapid growth of wealth among the middle classes, continues to be a strong draw for investors’ attention. Scottish Oriental Smaller Companies Investment Trust, which has more than a third of its portfolio in consumer products, demonstrates the lure of this story well. The trust is top quartile over three, five and 10 years and has returned 519.61 per cent compared to an average return in the sector of 219.15 per cent over the latter period. Annual returns have also beaten the sector average and the index in seven out of the last 10 years, putting it in the top 20 most consistent outperformers overall. The trust tends to do well when markets are rising says Alan Brierley, director of investment companies at Canaccord Genuity.

Source: FE Analytics


JPMorgan Claverhouse Investment Trust

Growth and income in natural balance The JPMorgan Claverhouse Investment Trust invests in large UK companies for their potential capital growth as well as their dividend income. This balanced approach has enabled the Trust to increase its dividend every year for the last 41 years (London Stock Exchange as at 29 January 2014) and to achieve attractive levels of growth in the last five years. Past performance is not a guide to the future. The value of investments and the income from them may fall as well as rise and you may not get back the original amount invested. Rolling 12 month performance to 30 June 2014 % Share Price Benchmark Net asset value

30/06/201330/06/2014 17.2 13.1 16.2

30/06/201230/06/2013 33.3 17.9 26.8

30/06/201130/06/2012 -8.9 -3.1 -7.3

30/06/201030/06/2011 26.1 25.6 28.9

30/06/200930/06/2010 21.0 21.1 20.6

Benchmark: FTSE All-Share Index (£) Source: J.P. Morgan/Morningstar as at 30/06/14. Net of charges and any applicable fees, using capital only Net Asset Values (NAVs) with net dividend (if any) reinvested, in sterling. For details, see the Trust’s latest Report & Accounts. Past performance is not a guide to the future. Investment trusts may borrow to finance further investment (gearing). The use of gearing will increase the volatility of movements in the Net Asset Value (NAV) per share. This means that a relatively small change, down or up, in the value of a trust’s assets will result in a magnified fall or rise, in the same direction, of the investment trust’s NAV per share.

Find out more at This material should not be considered as a recommendation relating to the acquisition or disposal of investments. Investment is subject to documentation which is comprised of the Investment Trust Profiles and Key Features and Terms and Conditions, copies of which can be obtained free of charge from J.P. Morgan Asset Management Marketing Limited. Issued by J.P. Morgan Asset Management Marketing Limited which is authorised and regulated in the UK by the Financial Conduct Authority. Registered in England No. 288553. Registered address: 25 Bank St, Canary Wharf, London E14 5JP.




A STRONG PERFORMER ON A WIDE DISCOUNT Fidelity Asian Values has a history of performing well during a recovery phase for Asian markets, and is langushing on a discount of 8 per cent after a year in the wilderness. Jenna Voigt wonders if it’s in an attractive position.

7.72 per cent over the period. The trust’s performance relative to its peers has lagged over three and five years, though it continued to outpace its MSCI benchmark. “I focus on companies with entrenched market positions where solid management of the company is exhibited in the ability to grow market share while maintaining pricing power,” Lo says. “Typically, these companies are likely to emerge strongly after any downturn.” This is shown by the trust’s performance on the back of the 2008 financial crisis. While the trust fell in line with the sector and index


Performance over ten years 300%

AIC Asia Pacific ex Japan Equities

Fidelity Asian Values


250% 200% 150% 100% 50% 0% Oct 13

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wide discount puts the Fidelity Asian Values trust in an “interesting” position for long term investors, according to Whitechurch Securities’ Gavin Haynes. Haynes, managing director atWhitechurch Securities, says the current 8.6 per cent discount of the Fidelity Asian Values trust marks it out against more popular trusts like Aberdeen Asian Income and Schroder Oriental Income are trading on narrow discounts of 1.03 per cent and 0.91 per cent, respectively. Over the last 12 months, the Fidelity Asian Values trust has been trading on an average discount of 11.01 per cent. “Double digit discounts are few and far between,” Haynes says. The trust, headed up by FE Alpha Manager John Lo, is a large-cap focused portfolio. “It’s a core holding within Asia,” says Haynes, “Performance has been solid and fairly consistent. It’s done pretty well over the years. This tends to be a more core Asian growth, large-cap biased trust.” The trust has performed particularly well as Asian markets have dipped in the last year, picking up 14.1 per cent, more than doubling the returns of the MSCI Far East ex Japan index, which made 5 per cent. The IT Asia Pacific ex Japan equities sector gained just

in 2008, it bounced back strongly in 2009 and again in 2013. So far this year it has delivered returns ahead of the sector and index. The trust favours stocks in the consumer products and telecommunication, media and technology sectors. Among its top holdings are Samsung Electronics, Taiwan Semiconductor Manufacturing which is almost solely responsible for key components in mobile phones and Chinese mobile behemoth China Mobile. The bulk of the portfolio is invested in the Pacific Basin, with a small percentage allocated to Europe ex UK and North America. With ongoing charges of 1.57 per cent, it’s one of the more expensive trusts in the sector, however, which may deter some investors. 

Source: FE Analytics: Total return, Bid-bid, End Sept 2004-End September 2014


Deep experience in investment trusts Schroders launched its first investment trust in 1924 and our current range offers nine distinctive strategies. These target growth and income opportunities across UK and Japanese equities, Pan-Asian equities and property. The funds are managed by Rosemary Banyard, Andrew Brough, Matthew Dobbs, King Fuei Lee, Hugo Machin, Nick Montgomery, Sue Noffke, Robin Parbrook, Andrew Rose, Tom Walker and the Business Cycle Team. With an average of 23 years of industry experience, they are among our most experienced fund managers. Please remember, 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. Some trusts invest solely in the companies of, or in property located in, one country or region. This can carry more risk than investments spread over a number of countries or regions. Investors in the emerging markets and the Far East should be aware that this involves a high degree of risk and should be seen as long term in nature. Less developed markets are generally less well regulated than the UK, they may be less liquid and may have less reliable arrangements for trading and settlement of the underlying holdings. Investors should note that exchange rates may cause the value of investments denominated in currencies other than sterling, and the income from them, to rise or fall. Explore the depths of this talent at

Fund manager industry experience: Rosemary Banyard: 35 years, Andrew Brough: 27 years, Matthew Dobbs: 33 years, King Fuei Lee: 15 years Hugo Machin: 14 years, Nick Montgomery: 17 years, Sue Noffke: 25 years, Robin Parbrook: 24 years, Andrew Rose: 33 years, Tom Walker: 15 years and the Business Cycle Team: average of 16 years. The most up to date key features can be viewed on the UK Investor website via Issued in September 2014 by Schroder Unit Trusts Limited, 31 Gresham Street, London EC2V 7QA. Registered No: 4191730 England. Authorised and regulated by the Financial Conduct Authority. UK07695




Cade does not believe it is a bargain on the current discount, which at 6 per cent at the time of writing was “pretty much in line with where it’s tended to trade” historically.


The analyst also admits there are plenty of unknowns in the region so investors need to be willing to sit through some volatility. “It’s one to hold over the medium term,” he says. The US Federal Reserve (Fed) is likely to raise interest rates soon, and slowing growth in China continues to unsettle markets. “Last year was a difficult year for

Asia and it led to money flowing out of emerging markets,” Cade says. “The big issue to watch for is rising interest rates in the US and what the impact will be. If China does slow down dramatically that will also have an impact on Asia.” The trust has a total expense ratio (TER) of 1.30 per cent. LAUNCHED: 1 February 1985 FUND SIZE: £185.8m MANAGER: Asian Equities Team TER: 1.3% ALPHA MANAGER: no CROWN RATING:

PACIFIC ASSETS - PERFORMANCE OVER FIVE YEARS Frostrow Capital LLP Pacific Assets Trust plc


IT Asia Pacific ex Japan Equities TR


80% 60% 40% 20% 0%


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-20% May

The trust has a stellar track record, consistently beating the average trust in the IT Asia Pacific ex Japan sector and its benchmark – the MSCI Asia ex Japan index – over one, three, five and 10 years. Since FE Alpha Manager David Gait took over the portfolio in July 2010, the trust made 82.04 per cent, more than doubling the returns of the index and trouncing its peers in the IT Asia Pacific ex Japan Equities sector. However Pacific Assets has a nominal yield of 1.41 per cent, so it’s not one to turn to for investors who are looking to diversify their income exposure away from the UK. The managers are bottom-up stockpickers who focus on company fundamentals, according to Cade, though they have shifted the fund’s macro position towards China and away from India recently. The trust is fairly concentrated, typically holding around 50 to 60 stocks, and no single holding can be larger than 7.5 per cent. The largest holding is currently Indian consumer goods company Marico, which specialises in health and beauty products, at 5.8 per cent. Despite the trust’s glowing report,

Pacific Assets Trust has a strong track record and a skilled regional team at First State behind it, making it a favourite among the experts. Jenna Voigt investigates.

Jan 10



Sep 09


nvestors looking for long-term growth through pure Asian Pacific and Indian subcontinent equities should look closely at the four FE Crown-rated Pacific Assets Trust, according to Numis Securities’ head of research Charles Cade. The trust, which was handed to First State in 2010, is one of his favoured vehicles in the sector. “It’s performed very well and has broad exposure to Asia,” Cade said. “The managers are focused on quality, but also value as well. It’s one of the best-managed of the Asian equity trusts.”

Source: FE Analytics




HOLDS THE KEY FOR ASIAN RECOVERY A tentative recovery led by southern Asia has given heart to investors in the region, but improved corporate governance in China could mean more significant growth according to James Thom, manager of Aberdeen New Dawn Investment Trust PLC.


sian equities were out of vogue last year. Developed markets were the darlings of investor sentiment. Partly this was attributable to the infamous ‘taper tantrum’*. However, it also reflected a deeper and longer trend: a growing recognition of the complacency that had seeped into corporate Asia. After all, with capital flowing freely and consistently into the region, where was the incentive to make tough, but necessary business decisions. Things have turned around somewhat this year though. Despite a difficult start, as the hangover from concerns around US monetary policy stimulus withdrawal caused outflows from emerging market equities, markets across Asia have enjoyed a small comeback in the first half of this year. Returns have been led by the Association of Southeast Asian Nations (ASEAN) markets and India.


The ASEAN story has been an interesting one so far this year. Thailand’s stock market has been among the outperformers for the region, which is remarkable considering the military coup. Investor confidence has been 34

James Thom is an Investment Manager on the Asian Equities Team. James joined Aberdeen Asset Management in 2010 from Actis, an Emerging Markets Private Equity firm, based in Singapore and covering Southeast Asia. James graduated with an MBA from INSEAD, an MA from Johns Hopkins University and a BSc from University College London.



inflation. It is the hope of investors EQUITY MARKETS that government consensus to ACROSS ASIA HAVE change legislation will be struck. ENJOYED A SMALL COMEBACK IN THE FIRST THE CHINA QUESTION Of course, China is a focal point HALF OF THIS YEAR and a legitimate concern. The

surprisingly robust. This is likely owed to the army takeover as the nationwide curfew was lifted and the interim military rulers began approving stalled investment and infrastructure projects. This should help reinvigorate growth. However, tourism is still down and household debt is high. The man in the street is still suffering. Naturally, there are still issues in much of ASEAN, and these will exist for a long time, but much can be said for the rebound of this subregion. We have been pleasantly surprised to see additional political developments throughout ASEAN, producing favourable conditions. Victory for investor favourite Joko Widodo in Indonesia has been positive, sending stocks higher. However, investors should keep their eye on the situation as a likely challenge by opponent, Prabowo

Subianto, could lead to some uncertainty. Elsewhere, the new pro-business prime minister of India, Narendra Modi, has brought a more transparent, leaner government with faster decision-making capabilities. The hope is that Modi’s rule translates to business confidence and the resumption of capital expenditure; yet, we remain cautious of Modi euphoria. It is too early to say he will succeed in the face of deeply entrenched vested interests and the country is still experiencing slowing growth and



140% 120% 100% 80% 60% 40%

country continues to be a credit risk for the region. Furthermore, with growth further decreasing to approximately 7 per cent recently, the fear is that as the economy slows, the greater region’s growth will mirror this. China is a market with which we are uncomfortable. As investors with a focus on corporate governance, our view is that the Chinese stock market is a minefield and the opportunity for corruption is rife. There is hope however that corporate governance in China will improve through its new, ambitious reform agenda. Xi Jinping’s anticorruption campaign is set to be one of the largest in contemporary China and has the potential to expand significantly over the year. However, the property bubble in China persists. Despite these uncertainties, we remain upbeat about Asia’s prospects. Asia remains healthy and value can be found within the region – so long as investors take a long-term view and undertake the appropriate research.


Jan 14





Jan 13




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Jan 11



Jan 10


Jul 09


Past performance is not a guide to future results. Source: FE Analytics

PERFORMANCE CHART 31/07/11 31/07/10




Share price












MSCI AC Asia Pacific ex Japan







Share price may trade at a premium or discount to the underlying NAV depending on market conditions. Therefore, share price return can differ from benchmark and NAV returns. Past performance is not a guide to future results. Source: Aberdeen Asset Managers *The ‘taper tantrum’ refers to the volatility witnessed across financial markets, which was a direct consequence of the investors reaction to the potential reduction in the size of the US Federal Reserve bond buying programme.

ABOUT ABERDEEN NEW DAWN INVESTMENT TRUST PLC: James Thom manages Aberdeen New Dawn Investment Trust PLC whose investment objective is to provide shareholders with a high level of capital growth through equity investment in the Asia Pacific countries excluding Japan. Disclaimer:

Please remember that the value of investments, and the income from them, can go down as well as up andyou may get back less than the amount invested. We recommend you seek financial advice prior to making an investment decision.

Find out more at

This article is issued by Aberdeen Asset Managers Limited (company registration no. 108419), 10 Queen’s Terrace, Aberdeen AB10 1YG. Aberdeen Asset Managers Limited is authorised and regulated by the Financial Conduct Authority in the UK


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BRAVE NEW WORLD Ewan Markson-Brown, investment manager of the Pacific Horizon Investment Trust, explains the impact of technological change on stock selection in the Asia ex Japan region.


he processing speed and memory of computers has increased 40 billion times since the first cryptographic computers in the 1940s. Within two years, assuming Moore’s law continues, this will be 80 billion times. Within the next few decades it has been suggested that artificial intelligence could equal human intelligence; two years later it could be twice as intelligent. The pace of technological change is accelerating almost faster than we can adapt and even comprehend; the way we communicate and probably even live is undergoing fundamental evolution. Pacific Horizon Investment Trust PLC looks for companies based in Asia ex Japan that can deliver above-average revenue and earnings growth over a longer-term timeframe. We like companies that have a large degree of earnings 36

uncertainty in the short-term but which we believe can deliver longer-term outperformance; the technology sector currently makes up over 40 per cent of the portfolio. We see innovation as the key to predicting economic and stockspecific success over the next decade; it is innovation-led productivity growth that will drive economic returns. Today, Asia is in very good shape to manage this transition, 30 per cent of global research and development now originates in the Asian ex Japan region – boding well for future productivity led growth. With McKinsey Global Institute estimating that over 50 per cent of the world’s economy could be automated and/or traded online by 2025, this tide of innovation and disruption is going to continue and is accelerating. The rise of internet penetration is changing the way people shop.

China is embracing this change, with e-commerce sales there having grown rapidly for the last three years. Yet internet penetration is just over half of US levels. The impact of the rise of internet penetration is more disruptive in countries like China, because the burden from legacy bricks and mortar assets is less, so there is little existing sunk cost in the system. Meanwhile the large population gives significant potential for economies of scale for new technologies. We own shares in large Chinese e-commerce companies such as, the largest B2C retailer in China. As Asia goes online, businesses will have to adjust their models for this new reality and spend more on capital expenditure across the entire business chain. The internet is revolutionising the retail industry,


the mobile phone industry, the banking industry, even the way people hail a taxicab. With this accelerating disruptive change, avoiding the losers is key to investment performance. For example, as more and more goods and services are traded online, prices will likely drop and offline retailers will suffer. The harvesting and analysis of information will be the key driver for earnings growth and stock returns over the next decade and in our view the large internet and social media companies are best placed to benefit from this growth. Companies like Line, a Korean firm, that has captured the majority of the instant messaging market in Japan and has a dominant and growing position in other Asian

PACIFIC HORIZON INVESTMENT TRUST TOP TEN EQUITY HOLDINGS AT 31 JULY 2014 HOLDING % OF TOTAL ASSETS Tencent Holdings 6.2 Samsung Electronics 5.6 Taiwan Semiconductor Manufacturing 4.6 Baidu 3.1 Tech Mahindra 3.1 Hon Hai Precn Ind 2.8 Mediatek 2.6 Naver Corp 2.5 Hyundai Glovis 2.5 China Petroleum & Chemical Corp 2.5 Total 35.5 Source: Baillie Gifford & Co Limited

countries, with 480 million users worldwide, and Tencent in China with close to 850 million users. The more data and information they have, the better these companies can target products, adverts and content to the user and so further boost revenue and profit. We see significant potential upside for many companies within Asia ex Japan, as disruptive change alters the exciting landscape and creates new winners and losers. We believe Pacific Horizon is well placed to meet these challenges.

DISCLAIMER The investment trusts managed by Baillie Gifford & Co Limited are listed UK companies. As a result, the value of their shares, and any income from them, can fall as well as rise and investors may not get back the amount invested. You should view your investment as long-term. Investments with exposure to overseas securities can be affected by changing stock market conditions and currency exchange rates. The Trust invests in emerging markets where difficulties in dealing, settlement and custody could arise, resulting in a negative impact on the value of your investment. Investment trusts are listed on the London Stock Exchange and are not authorised or regulated by the Financial Conduct Authority. The information and opinions expressed within this article are subject to change without notice. This article contains information on investments which does not constitute independent investment research and should not be considered as advice or a recommendation to buy, sell or hold a particular investment. Accordingly, it is not subject to the protections afforded to independent research and Baillie Gifford and its staff may have dealt in the investments concerned. Investment markets and conditions can change rapidly and as such the views expressed should not be taken as statements of fact nor should reliance be placed on these views when making investment decisions. This article is issued and approved by Baillie Gifford & Co Limited (company registration no. SCO69524), which is the manager and secretary of seven investment trusts and based in Scotland at Calton Square, 1 Greenside Row, Edinburgh EH1 3AN. Baillie Gifford & Co Limited is authorised and regulated by the Financial Conduct Authority whose address is 25 The North Colonnade, Canary Wharf, London EH14 5HS.


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Ewan MarksonBrown joined Baillie Gifford in 2013 where he manages the Pacific Horizon Investment Trust. He is an investment manager in Baillie Gifford’s emerging markets equity team.



BACK IN DEMAND? Is now the perfect time to buy into the out-of-favour natural resources sector? BlackRock’s Catherine Raw says there’s more to it than just cheap prices.


he progress of equity markets has been good news for investors, but for those looking to make new investments there may be concerns because some sectors now look pricey. The natural resources sector has underperformed the wider market and we believe contains many attractively valued companies. Cheapness is not in itself a reason to buy, but there are other changes that could prove supportive for the sector, argues Catherine Raw, co-manager of the BlackRock World Mining Trust. The natural resources sector has not been quite the disaster that many have suggested over the past 38

few years. For example, agriculture enjoyed relatively good performance in 2013. However, mining and gold companies have been the public face of the sector, and here, performance has been weak. But changes are afoot, says Raw. “There has been a notable improvement in the performance of gold and the large mining companies since the start of the year, with many outperforming the market. Partly this is because commodity prices have stabilised, but it is also because many of these same mining companies have restructured, bringing in new management who have imposed greater capital discipline”.

Catherine Raw is co-manager of the BlackRock World Mining Trust plc, responsible for covering the gold and mining sectors. Catherine joined BlackRock in 2003, having previously worked at Anglo American in London and Johannesburg, and at Boliden’s Laisvall mine in Sweden as a geological field assistant. Catherine has degrees in natural sciences and mineral project appraisal.


Other key risks you should consider before investing: Investment strategies, such as borrowing, used by the Trust can result in even larger losses suffered when the value of the underlying investments fall. Net Asset Value (NAV) performance is not the same as share price performance, and shareholders may realise returns that are lower or

Euromoney Global Gold Index

30% 25%


20% 15% 10% 5% 0%

Source: FE Analytics

This article is issued by BlackRock Investment Management (UK) Limited (authorised and regulated by the Financial Conduct Authority). Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Registered in England No. 2020394. Tel: 020 7743 3000. For your protection, telephone calls are usually recorded. BlackRock is a trading name of BlackRock Investment Management (UK) Limited. © 2014 BlackRock, Inc. All Rights reserved. The BlackRock Investment Trusts ISA is managed by BlackRock Investment Management (UK) Limited. The BlackRock Investment Trusts Savings Plan is operated by BlackRock Investment Management (UK) Limited. BlackRock have not considered the suitability of this investment against your individual needs and risk tolerance. To ensure you understand whether our product is suitable, please read the Key Features document, current Shareholder circular and the Annual and Half Yearly Reports which are available from the manager and provide more information about the risk profile of the investment. We strongly recommend you seek financial advice prior to investing.


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-5% Apr

Commodities are a natural inflation hedge because prices tend to rise at times of economic expansion. The trust’s income

Source: BlackRock at 30/6/2014. The current yield is 4.5 per cent this is based on the 21p of dividend distributed per share in respect of the financial year ended 31/12/13 divided by the share price of £4.63 at the 30/6/14.




not being asked to overpay for this protection. The underperformance of the natural resources sector compared with the main index has been significant and we believe many companies look cheap relative to the rest of the market. The tide now appears to be turning.

focus means that it could provide a measure of inflation protection via growth in dividends as well. The cost of inflation protection within a portfolio tends to increase with inflation fears, which is why we believe it is worth maintaining a structural weighting in inflationprotecting assets. It is important to remember that mining shares typically experience above-average volatility when compared to other investments. Trends which occur within the general equity market may not be mirrored within mining securities. For the time being, investors are


One of the key reasons for the decline in natural resources companies has been overspending. As Chinese growth slowed, many companies failed to adjust their spending accordingly. This left many with spare capacity, which hurt cash flow and profits and, ultimately, share prices. However, as a result of restructuring, margins have stabilised and cash flow improved. A number of flagship stocks, such as BHP Billiton, have started to grow their dividends and investor confidence has started to return. You should remember that emerging market investments are usually associated with higher investment risk (than developed market investments) and that overseas investments will be affected by movements in relevant exchange rates. The growth in dividends has allowed the trust to maintain a growing income. The yield on the trust now stands at 4.5per cent*, half of which comes from ordinary dividends and the remainder comes from royalties. Please remember that past performance is not a guide to future performance and the value of an investment and the income from it can fall as well as rise. While we believe there are short-term reasons to hold natural resources, we believe there are more structural long-term reasons to maintain exposure to this part of the market. For most of the world inflation has been low (sub 3 per cent) over recent years, but pressures are starting to emerge.


Jan 14



EUROPE BITES BACK Can investors profit from the recovery of eurozone economies?


uropean Central Bank (ECB) president Mario Draghi said last year that he would do ‘whatever it took’ to save the eurozone. In June, he proved as good as his word, launching another round of monetary easing to shore up the eurozone’s anaemic economic growth. This included the unprecedented step of dropping the rate at which banks deposit money with the ECB to below zero, penalising those banks that hoard cash rather than lend. It was always likely that Draghi would come up with a compelling package of measures. Sceptics about the eurozone have been proved very wrong in the last few years, because they underestimated the strength of individual countries’ commitment to the single currency. Because devaluation within the eurozone is not an option, the focus for policymakers has been on adjusting the relative productivity 40 TRUSTNETMAGAZINE

of countries within the eurozone. This is now starting to bear fruit and is an important consideration when deciding where to invest among eurozone economies and sectors. Spain and Ireland have led the pack in terms of productivity gains, enacting real structural reform, but Portugal and Greece have also made progress. The trade-off is that the core must become less productive. For Germany, this has been a trade it has been willing to accept. The Germans have acquiesced in a monetary policy stance that is inappropriate to the current state of their economy, after some initial resistance. This has been seen most notably in Germany’s trade surplus with the rest of the eurozone1. It has dwindled to near zero, while growing with the rest of the world. But for the time being, German inflation is well-contained2 and the shift in the productivity balance of power is welcome and even

necessary for the long-term health of the eurozone. The difficulty for investors, many of whom have re-embraced Europe this year, is that this shift is not yet translating into strong economic growth for the region overall. The ECB downgraded its economic growth forecast for the region from 1.2% to 1.1%3. The ‘escape velocity’ so desired by governments continues to prove elusive. Domestic growth, however, is not as important for European earnings as some people think. Only half of quoted European company revenues go to Europe, and this proportion continues to diminish as European exports grow, so quoted Europe is as much a play on global growth as it is on domestic growth4. In this environment, what are the options for investors? This is pertinent given that valuations in European stock markets no longer look compelling compared to their developed market peers. The difference is the scope that individual companies have to grow their revenues and profits. In many developed markets, companies have seen profits recover to pre-crisis levels, but in Europe, corporate


James Saunders Watson, executive

director, is a Client Director in the Investment Trusts Business. An

THIS STRENGTHENING OF THE BANKS IS PARTICULARLY IMPORTANT FOR DIVIDEND INVESTORS. HISTORICALLY BANKS WERE STRONG DIVIDEND PAYERS AND AS THEY START TO GENERATE CASH ONCE AGAIN, DISTRIBUTIONS ARE LIKELY TO RESUME environment. For example, those companies with emerging markets exposure, such as Nestle, had done well, but as emerging market economic growth has weakened, and domestic European growth has improved, market leadership has shifted towards more domesticallyfocused companies8. Companies such as Azimut9, an Italian asset manager, and Drillisch10, a German mobile internet group are typical of the shift. Please note that these companies are shown for illustrative purposes only. Their inclusion should not be interpreted as a recommendation to buy or sell. To select stocks, the managers of the JPMorgan European Investment Trust – income shares look at the entire universe of 1,200 companies. They then use stock screens to eliminate the 70% of companies that do not have the requisite yield criteria to create a short-list of stocks for closer scrutiny. After focusing on those stocks where the dividend is high and sustainable, the managers are ultimately left with a final portfolio of around 200300 holdings. All stocks are given an equal active weighting in the portfolio, to ensure that investors have maximum exposure to style

employee since 1991, James was previously Co-Head UK Institutional Business and Head of the Charities Team. Between 1998 and 2000 he was the investment director of the Charities Team responsible for asset allocation and UK equity portfolios. Before this he specialised in UK equity stock selection and portfolio management. Prior to joining the firm James served 10 years with the Royal Navy. He obtained a B.Sc. from the City University in systems and management and earned an MBA from Warwick Business School. He is a Fellow of the Securities Institute.

characteristics, such as higher yield, or earnings momentum, and stock specific risk is limited. The income bias means that it will look very different from the benchmark, and very different from the growth portfolio. The trust also makes productive use of gearing. The managers can employ gearing of up to 15% at the moment, based on their view of the prevailing opportunities in the European market. They tend to use gearing on a contra-cyclical basis, aiming to raise gearing when markets are cheap and lower gearing when markets are highly valued. Gearing has historically been a positive contributor to returns.11 Please remember that the use of gearing will increase the volatility of movements in the Net Asset Value (NAV) per share. This means that a relatively small change, down or up, in the value of a trust’s assets will result in a greater fall or rise, in the same direction, of the investment trust’s NAV per share. Investing in Europe requires a deft hand in the current environment and an awareness of the influence of ECB policy and eurozone-wide regulation on markets. As long as interest rates on cash and bonds remain low, appetite for higher yielding equity is likely to remain high. The value of investments and any income from them may fall as well as rise and you may not get back the original amount invested. Past performance is not a guide to the future. 

SOURCES USED IN THIS ARTICLE Source: Redburn Partners LLP as at 11th June 2014 Source: Independent as at 3rd June 2014 ( news/german-inflation-plunge-paves-way-for-ecb-rate-cut-9475547.html) 3 Source: Market Watch as at 5th November 2013 ( 4 Source: Morgan Stanley Research, European Strategy, Global Exposure Guide 2011, 3rd October 2011 5 Source: Morgan Stanley/IBES, 20th June 2014 6 Source: Redburn Partners LLP as at 11th June 2014 7 Source: J.P. Morgan Asset Management European Behavioural Finance 8 Source: as at 13.06.14 ( Summary?s=NESN:VTX) 9 Source: Yahoo Finance as at 13th June 2014 ( 10 Source: Yahoo Finance as at 13th June 2014 ( DE&t=1y) 11 Source: JPMorgan European Investment Trust Report & Accounts (www.jpmeuropean. 1 2

DISCLAIMER Please be aware that this material provides general information only and has been produced for information purposes only. It is based on information believed to be reliable at the time of writing but is subject to change without notice and we do not guarantee its accuracy. The opinions and views expressed here are those held by the author at the time of publication, which are subject to change and are not to be taken as or construed as investment advice. If you are unsure about which investment options are right for your circumstances please speak to a financial adviser. JPMorgan Asset Management Marketing Limited accepts no legal responsibility or liability for any matter or opinion expressed in this material. Issued by JPMorgan Asset Management Marketing Limited which is authorised and regulated in the UK by the Financial Conduct Authority Registered in England No: 288553. Registered address: 25 Bank St, Canary Wharf, London E14 5JP.


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earnings have remained at the same level they were in 20085. The key is selectivity in both countries and companies. Earnings have been hit particularly hard in certain sectors of the economy, most notably in the banking sector. At the start of the crisis, aggregate profits of the banking sector were 7x the size of the Auto sector6. They are now the same size. This is the equivalent of an 84% fall in relative size7. Some realignment of earnings is probable: The Comprehensive Assessment by European regulators, which includes the Asset Quality Review, is likely to allow banks to start rebuilding their earnings. There are also other benefits to the ECB’s new status as regulator of eurozone banking, such as a harmonisation of the definition of problem loans across Europe. This strengthening of the banks is particularly important for dividend investors. Historically banks were strong dividend payers and as they start to generate cash once again, dividend distributions are likely to resume. As a result, financials are one area where we expect dividends to grow substantially in future. In general, the JPMorgan European Investment Trust – income shares have a portfolio that is skewed to domestic rather than international growth as that is where we can find more attractive valuations to be found. The same stocks that have driven markets higher over the past five years are unlikely to be those that benefit most from the current



Schroders’ Matthew Dobbs explains why rising valuations and a weak outlook for Asian equities means it’s more important than ever to focus on bottom-up stockpicking.


he Schroder Oriental Income trust was launched with the objective of providing a total return for investors primarily through investments in equities and equity-related investments, of companies that are based in, or that derive a significant proportion of their revenues from, the Asia Pacific region and that offer attractive yields. Matthew Dobbs has managed the fund since launch in July 2005, but his experience of running specialist Asian portfolios stretches back a further 20 years to 1985. Based in London where he is Schroders’ head of global small cap equities and manages Asian specialist portfolios, he has spent his entire career with the company including stints working in New York and Singapore. Matthew Dobbs remains enthusiastic on the long term case for investing in Asia. “The region provides an attractive environment for businesses to grow and continues to make a major contribution to growth in the global economy, albeit at a lower level than in the past commensurate with the challenged outlook for global growth,” he says. He believes the structural argument in favour of investing in Asian dividend stocks also continues to hold strong, with dividend returns making up 42

around 60 per cent of total longterm equity returns in Asia.


Dobbs sits firmly in the stockpicking camp, aiming to build portfolios of “good quality businesses that are able to consistently provide better returns than their cost of capital at the right market price”. When analysing stocks, he looks beyond the current yield and focuses on future earnings prospects. The objective is to identify companies which can maintain or grow their dividends and provide potential for capital growth. The current net yield of Schroder Oriental Income fund is 4 per cent (as at 31 July 2014) and Dobbs believes that dividend yields in excess of 3 per cent from Asian equities in general remain relatively attractive against the current recordlow risk-free rate. “Prudent payout ratios and earnings growth in the region suggest that income opportunities are sustainable,” he says. Asian markets have performed well this year against a backdrop of seemingly quite negative news flow. During the first half of the year, there were concerns over imbalances in the Chinese economy and Thailand’s political stalemate, which ended in an army coup. However, this bad news was balanced by

Narendra Modi’s crushing victory in the Indian elections. Dobbs believes the buoyancy of the overall Asian market has largely resulted from the improving outlook for the US economy and the unveiling of “mini stimulus” measures by China which have helped boost investor sentiment in the region, along with inexpensive valuations at the turn of the year.


Looking forward Dobbs is hesitant in predicting more of the same steady upward progress. His current caution derives primarily from his view of bond markets, which look like an unnerving mirror image of where they were in 2008. “Then, everyone was paying 20 per cent for money. Now no-one is paying anything for money as Spain’s borrowing costs converge towards those of Germany and the US,” he says. Furthermore, even as equities approach or exceed all-time highs, he does not think the rise in geopolitical risks and continued signs of deflationary factors, in particular a slower growth trajectory in China, can be readily discounted. More specific to Asia, Dobbs notes that increased expectations of government-led reforms have been a key driver of market performance in China, India, Indonesia and Korea.




IT Asia Pacific ex Japan Equities

MSCI AC Asia Pacific ex Japan

100% 80% 60% 40% 20% 0%

Source: FE Analytics, bid to bid, total return, end September 2009-end September 2014

IMPORTANT INFORMATION Past performance is not a guide to future performance and may not be repeated. 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. Investors in the emerging markets and the Far East should be aware that this involves a high degree of risk and should be seen as long term in nature. Less developed markets are generally less well regulated than the UK, they may be less liquid and may have less reliable arrangements for trading and settlement of the underlying holdings. The company invests in smaller companies that may be less liquid than in larger companies and price swings may therefore be greater than investment trusts, companies and funds that invest in larger companies. The company holds investments denominated in currencies other than sterling, investors should note that exchange rates may cause the value of these investments, and the income from them, to rise or fall. The company may borrow money to invest in further investments, this is known as gearing. Gearing will increase returns if the value of the investments purchased increase in value by more than the cost of borrowing, or reduce returns if they fail to do so. Investment in warrants, participation certificates, guaranteed bonds, etc will expose the fund to the risk of the issuer of these instruments defaulting. Deducting charges from capital can result in the income paid by the company being higher than would otherwise be the case and the growth in the capital sum being eroded. As a result of the annual management fee being charged partially to capital, the distributable income of the company may be higher, but the capital value of the company may be eroded.


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Oct 13

Oct 12

-20% Oct 11

“To resolve the bad debt problems requires a sustained period of tighter monetary and fiscal policy, not more loosening,” he says. “There is significant value in China that can be unlocked by reforms and a shift in economic direction. However, this can only happen once some of the past excesses have been recognised.” On the valuation front, Matthew Dobbs notes that Asian markets are less attractive than they were earlier in the year. “This is exacerbated by the fact that ‘cheap’ ideas are predominantly found in China, which I continue to have reservations about.” For the Schroder Oriental Income fund, he favours high quality companies that should remain attractive on a long-term basis. He continues to find opportunities in sectors which are less favoured by consensus, including well-run cash-generating industrial exporters and property in Hong Kong, where he believes fear of rising rates is not all bad news as higher rents should follow.

Matthew Dobbs joined Schroders in 1981 as an equity analyst, with secondments to both New York and Singapore. He has managed Asian equity portfolios since 1985, and the Schroder AsiaPacific Fund since its launch in 1995. He is currently based in Schroders’ London office.

Returning to the outlook Matthew Dobbs says: “Earnings delivery will remain a key factor. Although we have seen earnings revisions turn positive in markets such as Taiwan a broader improvement across the region would be supportive. Activity in the portfolio remains fairly muted, reflecting that what we like is broadly still what we like, and we are certainly not inclined to chase momentum in China and elsewhere.”

Oct 10



Oct 09

“Reform is likely to prove very slow going, and euphoria is likely to fade pretty quickly,” he says. In China, the more stimulatory environment has stabilised growth. The currency has started to appreciate mildly again and property prices have stabilised. However, he cautions that while this may appear good news, there is already too much credit in the Chinese economy.



HOLD ‘EM Trustnet Direct’s John Blowers thinks private investors should be wary of piling into new offerings, which are often weighted heavily against private investors in favour of the issuer.


ith a raft of initial public offerings – or IPOs looming into view, is it a good idea to invest in a company when it comes to market? And with increasing numbers of these IPOs now being made available to private investors, we’ll be looking at the rationale of why this is happening and how to assess the prospects of these companies.


In 1979 just 3 million people owned shares, 7pc of the adult population. By the end of the ‘80s one in four people, or 12 million adults, owned shares. Since then, IPOs have become rarer and more difficult to access by private investors, primarily because companies found that attracting and servicing tens of thousands of individual investors was extremely

expensive pre-internet. It proved much more efficient for companies to raise the money from a handful of institutional investors.


However, one drawback for companies was a lack of liquidity from having a few large investors, and company share prices suffered negatively if a large investor divested itself. Companies realised that share prices did better with large numbers of small investors, so when the internet allowed companies to attract and service private shareholders at low cost, we saw increasing access to new issues and IPOs. Whereas most of those original privatisations saw investors make some stellar gains, the more recent history of companies coming to




1 Stamp Duty Unlike other share transactions, IPOs are exempt from stamp duty, so buying at this stage means you save an effective 0.5 per cent as opposed to buying after public trading has commenced. 2 Dealing fees There are no dealing fees when you apply directly and typically a stockbroker won’t charge you if you apply for an IPO through them, either. Depending on how much your broker charges you to trade, the savings here will fluctuate. Note that the broker receives a commission of around 0.75 per cent from the issuer for shares it successfully places with investors. 3 Discipline Engaging in an IPO gives the discipline to get involved in the market and assuming that this is being seen as a long-term investment, mistiming the purchase shouldn’t be a major concern.

market has been less convincing. We have analysed the share price performance of several high profile retail IPOs over the last four years and, as can be seen in the table below, four of the seven flotations are trading below their offer prices, meaning that investors are staring at losses.

4 Opportunity cost Investing in an IPO involves committing money to the application on the assumption that you will be awarded the shares you apply for. In the current era of low interest rates there’s little cost incurred if you’re using cash for offers like this. However, liquidating other equity holdings to participate in an IPO comes with the risk that your application is unsuccessful, leaving you with uninvested cash for a period of several weeks. 5 It’s rarely free money At an IPO, the listing company wants to achieve the very best price it can and in the majority of instances this does happen. However, privatisation of state assets tends to be high profile and can buck this trend, as the government wouldn’t want the political embarrassment of a sale being unsuccessful. The quick profits made in the Royal Mail IPO shouldn’t be taken as the natural course of events for any listing.


Only two of these IPOs bear any resemblance to the original privatisations of the 80s, which are the recent floats of state-owned TSB and the Royal Mail. So it seems that Government sponsored IPOs are the most appealing to investors as these seem to be “priced to go”. The Direct Line flotation has been the stand-out IPO, with growth of 71 per cent in the two years since it came to market. Conversely, Esure, a similar insurance business, has fared much worse, falling 20 per cent in the last 18 months. So, in terms of spotting patterns or trends, there seems to be only one. Government-sponsored privatisations seem to consistently offer investors better value than the more “naturally derived” IPOs such as Saga or Glencore. So, what have we got to look forward to? There are a couple of interesting Government-sponsored IPOs rumoured to be happening soon: RBS and Lloyds Banking Group are still majority-held by the State and they will be keen to offload

6 It may be a flop The shares issued in an IPO are underwritten – for what is essentially an insurance premium - by a group of banks. That is, if they can’t be sold in the market, then this panel of institutions will pick up the slack. They may then decide to sell the stock quickly, driving the price immediately lower and leaving investors out of pocket.

these into private hands as soon as possible. There is also talk of some other IPOs heading our way, including the mobile phone network EE, Travelex and furniture retailer DFS.

As you would with any investment, do your research thoroughly and judge the company on its own merits, not on the hype generated by bankers who always make money on a flotation.







June ‘14





May ‘14




Royal Mail

Oct ‘13





Mar ‘13




Direct Line

Oct ’12





Sept ‘13





Apr ’11




Prices as at 26th September 2014




AIM TO PLEASE Hargreave Hale fund manager Guy Field highlights three AIM stocks he holds in his own portfolio that could shoot the lights out over the long-term.


IM is our bread and butter as far as hunting for opportunities in smaller quoted companies goes. Around three-quarters of the Marlborough UK Micro Cap Growth and Marlborough Nano Cap Growth funds, which I co-manage with Giles Hargreave, comprise stocks trading on the LSE’s junior market, and never have they enjoyed so many powerful tax incentives for private investors. From my perspective as a fund manager, this is welcome in two particular ways. Firstly, the entry of more market participants improves liquidity. Secondly, I believe a large proportion of the private client constituency can regularly be driven by near-term pain and gain, which can generate volatility in small cap names, enabling our funds to exploit under- or over-valuation. The rewards for getting this right in the long-term can be substantial. iSpatial is a relatively old Cambridge software company with world class intellectual property in geospatial data management. Its customers use the technology in mission-critical applications and include the US government. The technology can analyse and manage vast quantities of locationbased data at high speed in a way that much larger competitors 46

“I BELIEVE A LARGE PROPORTION OF THE PRIVATE CLIENT CONSTITUENCY CAN REGULARLY BE DRIVEN BY NEAR-TERM PAIN AND GAIN” cannot – this is so-called “big data”. The previous management was unable to commercially exploit the intellectual property, but the current team has made the company profitable, with a widened and revamped product set and new sales strategy. We have bought stock at various levels, as low as 1.6p, and it recently halved off its 10p high, when hype around big data subsided and both private and institutional investors threw the company out of their portfolios. We believe this is a world-class technology that is still poorly understood by the market and could be a strategic acquisition target over the longer term. K3 Business Technologies, which has a market cap of £70m, has been seen as a pedestrian company and was given a rating to match – with around 11-times forecast earnings for next June. What has piqued

my interest is the fact that K3 has quietly been making a transition to building and selling its own software for fashion retailers, which has won strong approbation from Microsoft. We think the company underpromotes itself and see an opportunity for K3 to garner a good re-rating over time as the market sees enhanced profitability and more recurring revenues from its own software, not to mention stronger cash generation to pay down existing debt. Brady, which has a market cap of £64m, is Europe’s number-one provider of energy and commodities trading and risk management software. It is highly regarded and has world-class clients, including Glencore, Rio Tinto, Xstrata and HSBC. At around 14-times next year’s earnings and with a strong £6m cash position, we think the stock is at a depressed level. A large overhang from old holders who lost patience has recently been cleared out and we are encouraged by recent double-digit organic growth. These three technology companies illustrate the type of situation where we see boredom, disenchantment and perhaps a lack of wider understanding as the doors to real value long-term.



Out of favour during the eurozone’s wobble, a talented manager and a value-driven style put this fund in the sights for Joe Le Jehan and his colleagues on the Schroders multi-manager team.



hen we first contemplated returning to invest in European equities in late 2011, the common consensus was that Europe and the eurozone was a busted flush, a failed experiment where returns could not be made for the foreseeable future. Music to our ears! Putting aside our views on the longer term efficacy of the eurozone, the depths to which European markets plummeted made them worth investigating. Digging deeper, it was also apparent that there was significant divergence within that broader decline. What had outperformed markets was anything global facing – those companies selling goods and materials to the still-growing and increasingly affluent emerging markets. What had lagged was anything domestic, troubled by the woes of the European periphery through the crisis. If you could accept that much of the bad news regarding Europe was priced in to markets, these ideas looked increasingly interesting. Looking across the peer group, Jeff Taylor’s Invesco Perpetual European Equity fund fitted the bill: a quality fund manager and team with a value-driven style. While out of favour during the post-crisis wobbles, the portfolio looked ideally positioned to benefit from any rebound in both conditions and sentiment regarding domestic Europe.


However, every idea needs a catalyst. Things, after all, can stay undervalued for a long time. In Europe, this appeared to be ECB chairman Mario Draghi’s “we’ll do whatever it takes” speech in June 2012, that short-term backstop allowing investors to look through credit strains and sluggish economic indicators and concentrate on the relatively attractive valuations. As sentiment turned, the Invesco Perpetual European Equity fund showed its worth, outperforming a strongly rising market

by some 28 per cent over the next two years. So, if the idea has worked since 2012, why return to the fund now? First and foremost, valuation. In a world where many asset classes have been driven to all-time highs by waves of monetary stimulus, European equities remain attractively valued. A look at US equity valuations sees them touching all-time highs, basking in the afterglow of five years of loose monetary policy. Europe remains some way off those peaks. The more cyclical, domestic-facing areas found in the Invesco Perpetual European Equity fund (selective stocks in peripheral Europe, financials et al) remain both absolutely and relatively cheap. At a point where our concerns over China’s financial system grow ever stronger, the global-facing names appear more vulnerable.


The impact of global monetary policy should not be underestimated. The US started its recovery earlier. The Fed loosened policy and equity market valuations adjusted as confidence grew. But as the US climbs out of its funk, Europe lags some way behind. Later in its recovery, Europe continues to see additional stimulus packages that should benefit markets in the near-term. In our eyes, this is potentially an ideal time for the likes of Invesco Perpetual European Equity. An improving backdrop and a financial system that is stress-tested and ready to move forward. Domestic-facing equities at a discount to their global-facing peers and risks that appear priced in to markets. And, importantly, a fund manager with a track record of strong stock-selection in these types of environments. In terms of that classic risk-reward trade-off, which should be at the heart of every investment decision, an interesting opportunity. 

TRUSTNET magazine W IE V E R P R E B M E V O N GETTING READY FOR A DIFFERENT (ISA) SEASON As the end of the year draws ever closer we examine the funds and investment strategies you will need to make a profit next year, in what looks likely to be a nerve-wracking time for investors facing a triple whammy of rising interest rates, inept politicians, and a cloud still hanging over Europe.