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Invest ISSUE NO. 2 • SUMMER 2018

2018 Trends

From Emerging Markets to the Ageing World We cover topics across the investing spectrum

Spotlight on an RSMR ‘One to Watch’ winner

Volatility and Opportunity

Thomas Moore of Standard Life highlights his Equity Income fund

Two Fund Managers comment on this trend, the impacts and openings

Global Round-up Is the Goldilocks Effect being replaced by The Princess and the Pea? We look at activity across continents

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Contents Summer 2018

04  JANUS HENDERSON: Going Active 06  BAILLIE GIFFORD: Finding Great Companies in Europe 08  GOLDMAN SACHS: Emerging Markets and the Millennial Effect 10  INVESCO PERPETUAL: Opportunities in the Retail Sector


to issue 2 of Invest, our quarterly magazine from RSMR which has been designed exclusively for investment-focussed advisers and planners operating in the UK personal finance sector. We’ve had some positive feedback to our first issue and I hope you managed to get a copy either at our

12 FIDELITY: Animal Spirits 16  JP MORGAN: An Ageing World and Interest Rates



20 ARTEMIS: Income Fund 22 SCHRODERS: What Type of Investor are You?

London conference back in March or online via the

24  COLUMBIA THREADNEEDLE: Investing? The Football Analogy

RSMR Hub. Either way please do continue to send

28  BNY MELLON: Rising Market Volatility and Opportunity

us your feedback.

32 BLACKROCK: The Return of Fixed Income Volatility

So far this year the reality for many advisers has

34 INVESTEC: A View from the Other Side

been the implementation of MiFID ll plus the new data protection rules with the arrival of GDPR. And it’s not as if the markets have been quiet during this period plus everyone cannot have failed to notice the hike in fuel prices here at the pumps. In the last few weeks the price of a barrel of oil has risen to its highest level for several years. President Trump’s decision to refuse to recertify the Iran nuclear deal with the resulting ban on Iranian oil imports plus the USA’s pressure on EU countries to also boycott Iran and the current crisis in Venezuela have all contributed to a reduction in oil production.

OUR OPINION 11 Open or Closed? Investment Trusts 14 Jon Lycett: RSMR Portfolio Services 26 Stuart Ryan: Gold 30 Ken Rayner: Global Round-up prices increased overnight, the unions ordered

winner of our ‘One to Watch’ award. Tom has also

lorries to blockade the roads resulting in service

spoken several times at our London and Harrogate

stations running out of fuel and general chaos only

conferences so we are particularly proud to be able

resolved after the politicians agreed to reverse the

to highlight his continuing success.

price increase and send in the army and police to

Time will tell what impact this has on inflation and

clear the blockades.

bond yields for example but at the pumps I have

I’m not suggesting that we resort to similar tactics

just paid £1.57 per litre of diesel (at the time of

here but it aptly illustrates how we continue to be

writing in early June) and admittedly at a motorway

dependent on the ‘black stuff’!

service station.

This and other topics are everyday issues that fund

We appreciate you taking time to leaf through this issue of Invest and as previously stated we’d welcome your thoughts and ideas on how to improve the magazine. As a start why not follow us on Twitter: @RSMRTweets and give us your views.

Nevertheless, I must admit this was a shock!

and portfolio managers have to grapple with and

Having just returned from Brazil where their fuel

in this issue you can read how they address these

Finally, please do login to the RSMR Hub where

geo-political and macro-economic issues and how

there are lots of additional information and ideas to

they impact, if at all, on stock selection.

help you in your business. Check it out at

CONTACT DETAILS: Rayner Spencer Mills Research Limited Number 20, Ryefield Business Park, Silsden BD20 0EE. Tel: 01535 656555 or Email: All editorial content enquiries should be directed to Paul Breton, Editor, RSMR Invest and for advertising enquiries

Finally, on the centre pages we spotlight one of our R Award winners. Back in 2014 we voted Thomas Moore of Standard Life Investments as Enjoy the read. n Geoff Mills, RSMR

The Invest magazine is published by Rayner Spencer Mills Research Limited (RSMR). The views expressed do not necessarily reflect the views of RSMR or any other party affiliated to RSMR, and no liability can be assumed for the accuracy or completeness of the content, nor should any of the content be used as the basis of any advice offered. Content is offered on an information only basis and intended only for professional financial advisers and should not be relied upon by private investors or any other persons. Content is published with all rights reserved and any reproduction of content, wholly or in part, must only be made with the written permission of the publishers. © RSMR 2018. RSMR is a registered Trademark.  Summer 2018



WHERE AND WHEN TO GO ACTIVE AN ASSET ALLOCATOR’S VIEW There are many compelling examples of fund managers, who have added alpha over the medium – and long run despite dramatically different investment styles and philosophies.

Nick Watson, portfolio manager with Janus Henderson’s UK-based Multi-Asset Team, discusses the roles that both active and passive investing can play. He argues why it is crucial to consider questions of ‘where’ and ‘when’, when making allocation decisions. Allocation considerations As a portfolio manager on the Multi-Asset Team at Janus Henderson, I can find myself occasionally in an awkward position when it comes to the active versus passive debate. As a team, we are responsible for actively managed portfolios so, of course, I see the benefits of this approach. Equally, like all investors, we want to carefully balance the trade-off between fees and potential performance when deciding between active funds and passive instruments within our portfolios. Central to our approach is the belief that active managers do add value – just not in every market environment. Just as an asset allocator aims to add value by navigating between asset classes, regions, and investment styles throughout the course of a market cycle, blending active managers with passive instruments to different ratios at different times also has the ability to enhance client returns.

Regional variations: weighing risks and opportunities There are some areas and asset classes in which active investing comes more to the fore, specifically when the investment opportunity-set provides plenty of scope for active stock pickers to add value in a range of market environments. As a case in point, data indicates that the average manager in UK or European equities has offered investors improved outcomes in terms of lower risk and enhanced returns over the past five years.



Summer 2018

UK and Europe: active has delivered enhanced returns and lower risk

Source: Morningstar Direct, monthly data net of fees from 1 March 2013 to 28 February 2018, in sterling terms. UK and European Investment Association (IA) sector averages and UK FTSE and European MSCI indices are shown here for illustrative purposes. Their use does not constitute investment advice. Past performance is not a guide to future performance.

There are many compelling examples of fund managers within these sectors, who have added alpha over the medium – and long run despite dramatically different investment styles and philosophies. The asset allocator’s skill is not just about selecting from them, but also blending them together to suit one’s overall top-down view. Areas such as emerging markets (EM) and Asia present a different, but still constructive, dynamic, where active managers generally lag strong markets, but

have been able to smooth volatility and deliver improved risk-adjusted outcomes for their clients. Over long time periods, such an approach has outperformed the wider EM Index on a total returns basis but with considerably lower levels of volatility. Passives can, of course, be used in these instances; however one can argue the opportunity for better risk-adjusted returns is lost.

US: an alpha drought? Active is a complex creature, though, and the benefits from an active approach are not a universal phenomenon. In some markets, notably US equities, active managers have historically struggled to add value over the long run. The arguments for this are well-established, that the US large-cap market is the most researched in the world and markets are so efficient that any new information is immediately priced in. This lack of inefficiencies can limit the scope for an active manager to consistently generate alpha. At this point, you might assume that we would choose to go fully passive for US equities. Not so. In reality, we are moving in the opposite direction by fading out of passive equity exposure in favour of active managers. This is because timing is also a crucial consideration. Interest rates are going up, inflation is rumbling in the background, investors remain exuberant, and the era of extraordinary monetary policy is coming to an end. When the shifts in these macro factors are assessed against a backdrop of elevated valuations and historically high levels of corporate profitability in the US, it is easy to see why we might see lower returns going forward. In periods where the S&P 500 delivered 25% annualised over a three-year period,

active managers underperformed on average by -4% per annum. It is vital to recognise, though, in a more modest return environment (where the S&P 500 Index returned under 10% per annum on a rolling three-year basis) US active managers generated alpha net of fees over the most efficient market in the world. We believe that the changing environment should suit active managers in all asset classes, as fundamentals return to the fore and beta is less of a driver of returns. It is this environment that presents a more fertile hunting ground for active managers to add alpha – alpha that is going to become increasingly valuable. n l For information on our multi-asset core income range contact our sales support on, tel: +44 (0)207 818 2839 or visit our website

These are the views of the manager at the time of writing on 23 March 2018. They may differ from the views of others at Janus Henderson Investors. Sectors, indices and funds mentioned within this article do not constitute or form part of any offer or solicitation to buy or sell any of them. IMPORTANT INFORMATION: This document is intended solely for the use of professionals, defined as Eligible Counterparties or Professional Clients, and is not for general public distribution. Past performance is not a guide to future performance. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested. Tax assumptions and reliefs depend upon an investor’s particular circumstances and may change if those circumstances or the law change. If you invest through a third party provider you are advised to consult them directly as charges, performance and terms and conditions may differ materially. Nothing in this document is intended to or should be construed as advice. This document is not a recommendation to sell or purchase any investment. It does not form part of any contract for the sale or purchase of any investment. Any investment application will be made solely on the basis of the information contained in the Prospectus (including all relevant covering documents), which will contain investment restrictions. This document is intended as a summary only and potential investors must read the prospectus, and where relevant, the key investor information document before investing. We may record telephone calls for our mutual protection, to improve customer service and for regulatory record keeping purposes. Issued in the UK by Janus Henderson Investors. Janus Henderson Investors is the name under which Janus Capital International Limited (reg no. 3594615), Henderson Global Investors Limited (reg. no. 906355), Henderson Investment Funds Limited (reg. no. 2678531), AlphaGen Capital Limited (reg. no. 962757), Henderson Equity Partners Limited (reg. no.2606646), (each incorporated and registered in England and Wales with registered office at 201 Bishopsgate, London EC2M 3AE) are authorised and regulated by the Financial Conduct Authority to provide investment products and services. © 2018, Janus Henderson Investors. The name Janus Henderson Investors includes HGI Group Limited, Henderson Global Investors (Brand Management) Sarl and Janus International Holding LLC.  Summer 2018



COMPANIES, NOT COUNTRIES FINDING GREAT COMPANIES IN EUROPE Stephen Paice, co-manager on the Baillie Gifford European Fund, argues that any macroeconomic improvement is the least interesting reason to invest in Europe. We are trying to invest in the right kind of business run by the right kind of people


ar more exciting is the potential growth in individual companies. Good companies, with capable entrepreneurs at the helm, can thrive whatever the economic weather, and this is a better way of delivering long-term returns than trying to trade in and out of Europe when the economy looks strong. Baillie Gifford is long-term in its approach, with an average holding period of 5-10 years. We are trying to invest in the right type of business run by the right type of people. We want to invest early and watch as it grows to a multiple of its current size. What is the ‘right type of business’? We are looking for those businesses generating above average returns, on capital that can be reinvested into growth, with a skilled management team and owners. The portfolio has relatively few of the recognisable big European brands. Although it has Ryanair and L’Oreal among its top ten holdings, these are the exceptions. More common are Europe’s niche B2B champions many of which are smaller or mid-sized engineering and industrial companies. These might be companies such as Hexpol, a world-leading polymers group with dominant market positions in a fragmented market, or



Summer 2018

industrial crane-maker Konecranes. These are businesses that can grow very quickly and are often undiscovered by people looking at Europe. There are lots of reasons to be excited about Europe now, but it is not just that the economies are less bad. We are excited about the entrepreneurs we’re talking to and the businesses they’re creating. There is some really interesting innovation coming through. n

IMPORTANT INFORMATION For financial advisors only, not retail investors. As with any investment, your clients’ capital is at risk. Past performance is not a guide to future performance. This article contains information on investments, which does not constitute independent investment research. 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. The views expressed should not be taken as fact and no reliance should be placed upon these when making investment decisions. They should not be considered as advice or a recommendation to buy, sell or hold a particular investment.



RIPE FOR THE PICKING. The Baillie Gifford European Fund invests in a variety of high quality businesses. Its goal is to identify companies with attractive industry backgrounds, strong competitive positions and management teams whose interests are closely aligned with those of their shareholders. Once we find these firms we hold onto them for the long term – like owners not traders. Why not take a glance at the juicy figures in the table below? Performance to 31 March 2018*: 5 years

10 years

European Fund



Average of IA Europe Sector Excluding UK



As with any investment, your clients’ capital is at risk. Past performance is not a guide to future returns. For financial advisers only, not retail investors. Explore the difference, call us on 0800 917 4752 or visit

Long-term investment partners

All data as at 31 March 2018. *Source: FE, B Acc shares, single pricing basis, total return. Your call may be recorded for training or monitoring purposes. Baillie Gifford & Co Limited is the Authorised Corporate Director of the Baillie Gifford ICVCs. Baillie Gifford & Co Limited is wholly owned by Baillie Gifford & Co. Both companies are authorised and regulated by the Financial Conduct Authority.



% of the world’s millennials live in emerging markets.¹ That’s close to two billion people. China and India alone account for over 400 million – more than the combined working population of the United States and Western Europe.² Consumer behaviour and consumption patterns are evolving. New industries and opportunities are emerging. This evolution is being driven by wealth creation and the impact of the millennial consumer. So where can investors find opportunities during this period of change?

2. Leisure and Experience

1. Digitalization

3. Premium Brands

As the chart shows, tech-enabled consumption in EM should continue to outpace the US, setting the stage for e-commerce platforms to thrive. This would also create opportunities across the supply chain including delivery and logistics companies.

With increasing purchasing power, EM millennials are more willing to pay for perceived quality. In China, the premium segment has seen disproportionately strong growth over the past few years across a range of consumer industries.⁴ The investment

Online Retail as a % of Total Consumption 2000 2005 2010

While Generation X was focused on improving basic living standards, the Millennial generation has different priorities. With increased emphasis on experiences, recreation and wellness, millennials are spending more on leisure activities. Think travel, healthy eating, beauty products and apparel.³ These industries remain under-represented in traditional market-cap weighted benchmarks, which means investors must go beyond this generic universe to properly capture these early stage growth opportunities.

South Korea

2015 1.9

US 1.2 3.0









12.9 0.1 0.4

Brazil 1.5 2.6



Source: Euromonitor, GS Global Investment Research, and GSAM, as of Jun-2016. ²Online retail as of a % of total consumption was not measurable for China until post 2005, and for India, post 2010.



Summer 2018

implications go beyond “luxury” western brands. Innovative EM companies are benefiting by leveraging their understanding of local tastes and demands, such as Korean cosmetic companies and food and beverages companies in China.⁵

'Source: Source is: Bank of America Merrill Lynch, “Generation Next – Millennials Primer”. As of May 2015.

At GSAM, we expect Emerging Markets to drive close to 75% of global growth over the coming decade. In the process, this could lift close to 1.2bn people out of poverty and into the middle income, consumer class.⁶ Relative to Developed markets, Emerging Market stocks are significantly cheaper. We believe this provides an attractive entry point into what may be a multi-year recovery in growth and earnings.

⁴Source: Kantar Worldpanel (Bain analysis), Goldman Sachs Global Investment Research, “The Asian Consumer: Chinese Millennials”, as of September 2015. For illustrative purposes only.

²Source: UN Population Division, “World Population Prospects: The 2017 Revision”, data shown for 2015. As of June 2017. ³Source: Bank of America Merrill Lynch, “Generation Next – Millennials Primer”. As of May 2015.

⁵GSAM. As of August 2017. ⁶Source: GSAM, GS Global Investment Research, IMF, rebased to 2015 USD GDP, as of Dec-2016.

Despite these transformations, we believe many investors today are still underexposed to Emerging Markets. Is now the time to change? We think so. n

Disclosures: Views and opinions expressed are for informational purposes only and do not constitute a recommendation by GSAM to buy, sell, or hold any security. Views and opinions are current as of April 2018 and may be subject to change, they should not be construed as investment advice. Emerging markets securities may be less liquid and more volatile and are subject to a number of additional risks, including but not limited to currency fluctuations and political instability. Past performance does not guarantee future results, which may vary. The value of investments and the income derived from investments will fluctuate and can go down as well as up. A loss of principal may occur. This document has been issued by Goldman Sachs International, authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Offering Documents: This material is provided at your request for informational purposes only and does not constitute a solicitation in any jurisdiction in which such a solicitation is unlawful or to any person to whom it is unlawful. It only contains selected information with regards to the fund and does not constitute an offer to buy shares in the fund. Prior to an investment, prospective investors should carefully read the latest Key Investor Information Document (KIID) as well as the offering documentation, including but not limited to the fund’s prospectus which contains inter alia a comprehensive disclosure of applicable risks. The relevant articles of association, prospectus, supplement, KIID and latest annual/semi-annual report are available free of charge from the fund’s paying and information agent and/or from your financial adviser. Distribution of Shares : Shares of the fund may not be registered for public distribution in a number of jurisdictions (including but not limited to any Latin American, African or Asian countries). Therefore, the shares of the fund must not be marketed or offered in or to residents of any such jurisdictions unless such marketing or offering is made in compliance with applicable exemptions for the private placement of collective investment schemes and other applicable jurisdictional rules and regulations. Investment Advice and Potential Loss: Financial advisers generally suggest a diversified portfolio of investments. The fund described herein does not represent a diversified investment by itself. This material must not be construed as investment or tax advice. Prospective investors should consult their financial and tax adviser before investing in order to determine whether an investment would be suitable for them. An investor should only invest if he/she has the necessary financial resources to bear a complete loss of this investment. Swing Pricing: Please note that the fund operates a swing pricing policy. Investors should be aware that from time to time this may result in the fund performing differently compared to the reference benchmark based solely on the effect of swing pricing rather than price developments of underlying instruments. Confidentiality: No part of this material may, without GSAM’s prior written consent, be (i) copied, photocopied or duplicated in any form, by any means, or (ii) distributed to any person that is not an employee, officer, director, or authorized agent of the recipient. © 2018 Goldman Sachs. All rights reserved. 127895-OTU-738603  Summer 2018




By Thomas Moore, Fund Manager, Invesco Perpetual

Those retailers that navigate this difficult period will end up better placed to grow.


ith many household retail names coming under scrutiny in recent months, are there opportunities to be found by the discerning bond investor? l Consumer habits continue to evolve. Ease of cost comparison and demand from the ‘buy now, wear now’ approach are disrupting retailers l This does not mean we need to say goodbye to household names, some can thrive l We have not written off the retail sector and are actively seeking opportunities. Recent months have seen non-food retailers in the news for all the wrong reasons, particularly in the UK. Whether seeking lower rents and closing stores (New Look and House of Fraser), or even entering liquidation (Maplin and Toys R Us), traditional retailers are under considerable pressure. But the news is not all bad. Some retailers are thriving – particularly at the top and discount ends of the market – and the past year has seen a number of successful operational turnarounds and refinancings.

Underperformance of non-food retailers Retailers face a number of specific challenges at the moment, most notably changing



Summer 2018

consumer habits. Established retailers have struggled to adapt to the structural challenges that online competitors have created. This is particularly the case with branded goods, technology, and toys, all areas where direct price comparisons are easy. In fashion, consumers are more short-term oriented than has historically been the case. Instead of buying in predictable seasonal patterns several months ahead, shoppers are increasingly adopting a “buy now, wear now” approach. This change represents a challenge for supply chain managers and puts upward pressure on costs, but also offers the opportunity to maintain leaner inventories and in theory reduces the impact of fashion missteps. Other retailers find themselves the victims of competition from discount competitors. Most of you will be familiar with Zara’s quick-to-market, low-cost business model, but this group also includes the likes of Poundland, who are expanding beyond their traditional areas of focus into grocery and clothing. Finally, department store operators are finding it hard to stay relevant. Their challenges differ somewhat by geography – for instance, the US has proportionately much more square footage devoted to the category than the UK and Continental

Europe – but every player is working hard to stay relevant. In the UK, John Lewis has probably had the most success, while Debenhams and House of Fraser have struggled. In the UK, these challenges have been exacerbated by the weakness in sterling, which has driven up the price of imported goods, while at the same time rising business rates and increases in the National Living Wage have pushed domestic costs higher.

The opportunity Yields in the sector have risen, both in absolute terms and relative to the broader market. Some companies are effectively manageing through the challenges that they face, and in my view are trading unreasonably cheap because of investors’ discomfort with the sector overall. It is my belief that, while we will see more insolvencies in the sector over the next couple of years, those retailers that navigate this difficult period will end up better placed to grow earnings and cash flow in the new consumer landscape.

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

IMPORTANT INFORMATION This document is for Professional Clients only and is not for consumer use. All data is as at March 2018 and sourced from Invesco Perpetual unless otherwise stated. Where individuals or the business have expressed opinions, they are based on current market conditions, they may differ from those of other investment professionals and are subject to change without notice. This document is marketing material and is not intended as a recommendation to invest in any particular asset class, security or strategy. Regulatory requirements that require impartiality of investment/investment strategy recommendations are therefore not applicable nor are any prohibitions to trade before publication. The information provided is for illustrative purposes only, it should not be relied upon as recommendations to buy or sell securities.



nvestment trusts date back to the reign of Queen Victoria with the first such product launching in 1868, a fund which is still running to this day. They are a form of collective investment that provide investors with a diversified pool of assets. They are commonly referred to as ‘investment companies’, are listed on the stock exchange and raise money by issuing shares, much like the Initial Public Offering (IPO) of a newly-listed public company. Thier sole purpose is to make money for their shareholders by investing in a variety of assets. Shares in investment trusts are typically only issued once, when the company is first launched. This means that the number of shares and the amount of money raised is fixed at the outset, hence they are commonly referred to as closed-ended investments. An investment trust can subsequently buy back shares or issue new shares, but this is not done on a regular basis. Since the implementation of the Retail Distribution Review (RDR) in 2013, for a financial adviser to be truly independent, investment trusts should also be deemed appropriate or not for a client’s risk appetite and investment objective. These types of investment products are still not widely used by retail investors even though they do outdate their open-ended counterparts and offer some advantages. Investment trusts are suitable in many circumstances where it may be prudent to consider a closed ended fund over an open-ended equivalent. The above only touches on some of the advantages of investment trusts but ultimately, as with any investment decision, it has to be appropriate for that particular investor. For more detailed information on investment trusts please refer to our Guide to Investment Trusts plus supporting factsheets which are all on the RSMR Hub. n

Invesco Perpetual is a business name of Invesco Asset Managers Limited, Perpetual Park, Perpetual Park Drive, Henley-on-Thames, Oxfordshire RG9 1HH, UK. Authorised and regulated by the Financial Conduct Authority.  Summer 2018



By Eugene Philalithis, Portfolio Manager, Fidelity Multi Asset Income fund range

Markets also need to find a new, positive narrative to latch onto, if only to prevent them from looking over their shoulder at labour costs, oil prices or a stronger dollar

ANIMAL SPIRITS? ONLY IF YOU’RE THINKING OF SLOTHS… ‘Animal spirits’ is the term John Maynard Keynes used in his 1936 book ‘The General Theory of Employment, Interest and Money’ to describe the instincts and emotions that ostensibly influence and guide human behaviour, for example: consumer confidence. Eugene Philalithis looks at why, across risk assets, the ‘animal spirits’ have been somewhat lacking in recent months.


ew investors are unequivocally risk-on, having had their confidence dented at the beginning of February, and set back further by trade tensions. That stands in sharp contrast to typically high-risk

appetite towards the end of the cycle. This is all the more surprising given

the strength of earnings. US earnings are expected to rise by around 23% for the first quarter of 2018, the highest figure since the ‘profits recession’ of 2015 and early 2016. Even adjusting for the one-off boost from Trump’s tax cut, earnings growth should be as strong as the best quarterly results from last year, and markedly higher than expectations from even a month ago. So why have markets been so directionless, and lacking in Keynes’ famous ‘animal spirits’?



Summer 2018

Rising wages One explanation is that markets have simply moved on from the earnings story, and are looking for something else to latch onto. That could centre around the rising costs of doing business. The potential for faster wage growth has long been present in the US, and higher labour costs were the initial trigger for volatility at the end of January. That month saw wages rising by 2.9% year on year, and while it was only one data point from one month, the market reaction was sudden. Subsequent releases have shown weaker wage growth, however, suggesting labour costs might be less of a concern — even with unemployment below 4%. In the short term, however, the biggest difference in the cost of doing business may be the oil price. Tensions over Syria have clearly helped to boost prices, though this ‘geopolitical premium’ could reverse quickly. But the narrative on oil does appear to be


changing. The focus has shifted to how shale producers are maintaining capital discipline, and not overcommitting to new production. Markets seem to be accepting that at least some of the rise in oil prices is fundamentally driven, and that new producers like shale companies are not going to come to the rescue and produce more oil. Investors may have no choice but to live with higher prices.

The impact of oil For the meantime, moves in the oil market are having only a limited impact on bonds. Investors are generally assuming that growth will moderate from here and help inflationary pressures to ease. Short term bonds, repayable anywhere from a matter of months to around ten years, are where most of the upwards pressure on yields is. However, if commodity prices maintain their current levels, and we see inflation reaching 3% as a result, you could see a more significant impact across all parts of the bond market, with yields shifting up on longer dated debt too.

be upwards. But I don’t think we’ll see a dramatic strengthening phase like that from 2014–16. Apart from anything else, the rest of the world is in much better relative shape. EM currencies remain cheap based on their economic fundamentals, while the rise in commodity prices this year should boost many EMs’ terms of trade. The complications come if a strong dollar derails commodity prices, the EM picture weakens, and the dollar rises in response to that. The likelihood of that negative feedback cycle is slight, but it is a risk we remain alert to.

That’s not what we expect for now. Inflation should stay contained, allowing the Federal Reserve — as well as central banks globally — to gradually remove accommodative monetary policy. But the most interesting development over April was that rising US interest rates have finally started to support the US dollar. This is most relevant to our position in local currency emerging market (EM) debt. While it is a negative development, we did anticipate it, and our hedge in several EM currencies performed an important role in protecting client’s capital against a portion of the dollar’s rise.

When will the animal spirits return?

If we continue to see global growth outside the US moderating, the direction for the dollar will probably

Whether we see a return to animal spirits then, depends on two things. The first is a continuation of the strong growth backdrop. We can afford to see economic growth slow a bit from here, but too much might mean investors getting nervous. Markets also need to find a new, positive narrative to latch onto, if only to prevent them from looking over their shoulder at labour costs, oil prices or a stronger dollar. Across the rest of the year, we will likely maintain our defensive positioning, adding to safe haven assets like US Treasuries. Where we are taking risk, we will attempt to think of efficient ways to protect our positions, without giving up a disproportionate amount of upside. n

IMPORTANT INFORMATION This information is for investment professionals only and should not be relied upon by private investors. Past performance is not a reliable indicator of future returns. Investors should note that the views expressed may no longer be current and may have already been acted upon. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. The value of investments and the income from them can go down as well as up and investors may not get back the amount invested. Investments in overseas markets, changes in currency exchange rates may affect the value of an investment. The value of bonds is influenced by movements in interest rates and bond yields. If interest rates and so bond yields rise, bond prices tend to fall, and vice versa. The price of bonds with a longer lifetime until maturity is generally more sensitive to interest rate movements than those with a shorter lifetime to maturity. The risk of default is based on the issuer’s ability to make interest payments and to repay the loan at maturity. Default risk may therefore vary between different government issuers as well as between different corporate issuers. Sub-investment grade bonds are considered riskier bonds. They have an increased risk of default which could affect both income and the capital value of the fund investing in them. Investments in small and emerging markets can be more volatile than other more developed markets. The Fidelity Multi Asset funds use financial derivative instruments for investment purposes, which may expose the fund to a higher degree of risk and can cause investments to experience larger than average price fluctuations. Issued by Financial Administration Services Limited, authorised and regulated by the Financial Conduct Authority. Fidelity, Fidelity International, the Fidelity International logo and F symbol are trademarks of FIL Limited.  Summer 2018



OUR BEST IDEAS FOR YOUR CLIENTS Business Development Manager, Jon Lycett talks about how RSMR can bridge the gap between research and portfolios.


reating a robust Centralised Investment Proposition can be a complex task to do on your own; but don’t worry: help is at hand. Here at RSMR we have been working with financial advisers since 2004, assisting them in delivering investment goals for their clients. We have an exceptional team of experienced people who apply a rigorous process to analyse funds and build portfolios with clearly defined objectives. We are a trusted partner and we can add value to your client service proposition.

Clear benefits for all The benefits of a structured investment process mean that you have: l More time to spend with clients l A consistent and repeatable approach l A more cost-efficient and successful business l A business which espouses ‘best practice’ and manages regulatory risk.

Building an Investment Process Having a structured advice process that is underpinned by a robust methodology will set your firm apart from the competition. Building such a process enables you to differentiate your business, which helps you to focus on your chosen target market. Your clients have varying needs, and it is important that you develop an investment proposition with features to suit all different requirements. So whatever the shape of your proposition, the fund research and



Summer 2018

analysis process you adopt will help define the advice you provide to clients; without applying proper due diligence and ongoing monitoring, your business could be exposed to unnecessary risks.

RSMR Discretionary Portfolios Our experience over the last few years has shown that a set of model portfolios will help you have more meaningful conversations with your clients. For this reason we created RSMR Portfolio Services Limited which has full FCA Discretionary permissions.

90% of any portfolio’s performance depends on its composition, and ten per cent on how it is managed. We focus on allocating the correct balance of assets, delivering fully diversified portfolios. This route avoids additional administrative work and portfolio drift through not being able to perform fund switches or rebalancing swiftly. Fund switches and portfolio rebalancing will take place automatically through the investment platform of your choice.

90% of any portfolio’s performance depends on its composition, and ten per cent on how it is managed. We focus on allocating the correct balance of assets, delivering fully diversified portfolios. Offering a choice of income and growth and SRI options with active and passive strategies all the portfolios are backed by RSMR’s unrivalled experience and track record in supporting UK advisory firms.

Our rigorous process l Asset Allocation approach Our asset allocation has been put together with a number of aims in mind. Importantly, we want to create balanced portfolios which will be best placed to meet your clients’ expectations. l Attitude to Risk As we have many years of experience in building portfolios for a variety of advisory clients, all using different ATR tools, we recognise that it is necessary that investment advice is matched to the suggested asset allocation of the ATR tool that they are using. l Benchmarks To help you and your clients understand and compare performance, we will construct composite benchmarks that mirror the strategic asset allocation for each portfolio. We will use these benchmarks in our reporting of the portfolios and in the back-testing data that we provide.

l Performance reporting, reviews and ongoing support We will provide ongoing reviews and we will let you know if we think you need to make any change so this in turn can be communicated to your clients. We will also formally review and report on the portfolios on a quarterly basis.

Want to get started? As we stated at the outset, creating a robust investment process can be a complex task, but we hope that we have provided you with sufficient detail to be confident that RSMR can help you. Remember… l We have been supporting advisers since 2004 l We have created sustainable investment strategies over this time and our team of experienced investment analysts are there to support your business l We have an enviable track record of out-performance l By focusing on medium- to long-term goals we believe we can offset the risks over time. Markets are susceptible to volatility, so risk management is a central theme in our approach l Our team adhere to internal processes and our Investment Committee continuously monitors asset allocation, market changes and performance. n l Contact us for more details:

This is intended for investment professionals and should not be relied upon by private investors or any other persons. Past performance is not a guide to future performance. The value of investments and any income from them can fall as well as rise, is not guaranteed and your clients may get back less that they invest. RSMR Portfolio Services Limited is a limited company registered in England and Wales under Company number 07137872. Registered office at Number 20, Ryefield Business Park, Belton Road, Silsden BD20 0EE. RSMR Portfolio Services Limited is authorised and regulated by the Financial Conduct Authority under number 788854. © RSMR 2018. RSMR is a registered Trademark.  Summer 2018



WILL AN AGEING WORLD TRIGGER RISING INTEREST RATES? For Professional Clients only – not for Retail use or distribution. This is a marketing communication and as such the views contained herein are not to be taken as an advice or recommendation to buy or sell any investment or interest thereto. Reliance upon information in this material is at the sole discretion of the reader. Any research in this document has been obtained and may have been acted upon by J.P. Morgan Asset Management for its own purpose. The results of such research are being made available as additional information and do not necessarily reflect the views of J.P. Morgan Asset Management. Any forecasts, figures, opinions, statements of financial market trends or investment techniques and strategies expressed are, unless otherwise stated, J.P. Morgan Asset Management’s own at the date of this document. They are considered to be reliable at the time of writing, may not necessarily be all inclusive and are not guaranteed as to accuracy. They may be subject to change without reference or notification to you. It should be noted that the value of investments and the income from them may fluctuate in accordance with market conditions and investors may not get back the full amount invested. Past performance are not a reliable indicator of current and future results. There is no guarantee that any forecast made will come to pass. This communication is issued in the UK by JPMorgan Asset Management (UK) Limited, which is authorised and regulated by the Financial Conduct Authority. Registered in England No. 01161446. Registered address: 25 Bank Street, Canary Wharf, London E14 5JP. 0903c02a81f86cb6




s the world ages faster and more in synch than ever before, the global economy stands at the edge of a demographic cliff. Whether peering over the brink reveals higher or lower interest rates depends on which forces prevail and how the broader economy responds.?

Opposing forces buffet interest rates

According to United Nations population forecasts, the global dependency ratio of retirees to the rest of the population is set to rise by 10 percentage points per decade for the next 30 years. As the proportion of retirees grows, labour force growth will slow, and levels of consumption will drop. Lower consumption drags on trend growth, exerting downward pressure on interest rates, an effect we believe will drive a 50 basis points decline in both trend growth and interest rates over the next 10-15 years. In contrast, as retirees earn less, save less and use existing savings for income, global household savings will fall, which could exert an opposing upward pressure on real interest rates. Our analysis of the U.S., Germany, Japan and China suggests this process is well underway in developed economies and will hasten in coming years as U.S. retirement rates continue to rise and, eventually, as China’s huge population ages and lowers its savings rates. We see an ageingdriven decline in household savings of 2.6% of GDP over the next 30 years, translating into real

Summer 2018

interest rates that are 25-50 basis points higher than they would otherwise have been over the same period.

Cross currents may tip the balance How other parts of the global economy respond to an ageing population could shift the balance in favour of either force. As households lower their saving rates, ageing populations may well boost savings in the rest of the economy, limiting both the decline in savings and the resulting upward pressure on interest rates. Governments may be required to shore up savings to meet future entitlement obligations, and businesses may take on less debt as they prepare for slower growth. Major global economies could also soften the fall in global savings and limit rising rates. If foreign savings in the U.S. fall further than domestic savings, the U.S. current account deficit would likely shrink. China’s relatively fast economic growth and high household savings could mean its contribution to global savings flows might actually grow rather than shrink, pulling global savings closer to its own high levels. Finally, while lower trend growth will depress investment, all else equal, ageing demographics may spur additional investment in labour-saving technologies and automation. This transition to a more capital-intensive economy may buttress investment demand and limit the decline in economic growth in the process.

Which force will prevail? Despite the uncertainties making it hard to predict how rates will move, we are fairly confident that the demographic forces driving trend growth and rates lower will prove more powerful in the long run. That said, we do expect the tug of war between declining growth and falling savings to buffet interest rates along the way. n

For Investment Professionals only

An introduction to the M&G Episode Income Fund Everyone needs income… As more governments attempt to pass responsibility for their citizens’ retirement back to the individual, it becomes even more vital to make some plans for future requirements. This is particularly so in an environment where people are living longer, so likely to have to fund a longer time without a regular salary. Even before retirement, people will have other uses for their savings, such as holidays, children’s education or even a deposit for a home.

…though good returns are not easy to find The yields on most traditional sources of income have fallen to historically low levels in recent years as governments and central banks have attempted to suppress interest rates in support of their economies. In particular, the returns from many government bonds have fallen so far that holding them will result in either a minimal return or even a loss. What is more, investors have become increasingly concerned about the potential return of inflation and volatility.

A multi-asset approach A multi-asset solution could be the answer – an approach that invests across a variety of assets, geographies and sectors gives the flexibility to benefit from opportunities wherever they may arise in order to potentially generate both income and capital return.

Income as an outcome – the M&G Episode Income Fund The M&G Episode Income Fund is a potential solution to investors’ requirements for income at a time when the returns from most asset classes have fallen to historically low levels. The Fund is designed to generate income and capital growth over the medium term through a global multi asset approach involving dynamic and diversified investment across and within asset classes. Please note that there is no guarantee the fund will achieve its objective. Fund Manager Steven Andrew seeks to invest in different types of assets, including equities and bonds issued by governments and companies from anywhere in the world. The ability to invest across a variety of assets, geographies and sectors gives the flexibility to benefit from opportunities wherever they may arise. In Steven’s view, asset allocation is the main driver of returns over time. Steven believes that financial markets often move irrationally because investors allow their emotions to affect their decision-making. Using a robust valuation framework, he assesses the economic environment, seeking to identify occasions – ‘episodes’ – where investor behaviour has moved asset prices away from what he would consider their long term fair value, or ‘neutrality’. He seeks to take advantage of emotionally driven misalignments by positioning the portfolio to benefit from prices gravitating back towards neutrality.

The fund allows for the extensive use of derivatives. Past performance is not a guide to future performance. There is no guarantee that the Fund will achieve its objective over this, or any other period. The income distributions and the value of your investment may rise and fall and investors may not recoup the original amount invested.

To find out more please visit

For financial advisers only. Not for onward distribution. No other persons should rely on any information contained within. This financial promotion is issued by M&G Securities Limited which is authorised and regulated by the Financial Conduct Authority in the UK and provides ISAs and other investment products. The company’s registered office is Laurence Pountney Hill, London EC4R 0HH. Registered in England No. 90776. MAY 18 / 285909


STANDARD LIFE INVESTMENTS UK EQUITY INCOME UNCONSTRAINED FUND Aberdeen Standard Fund Manager, Thomas Moore, highlights a fund with a solid performance history.


l A differentiated income fund that offers diversification benefits using a proven, index-agnostic investment approach l Focus on total returns, driven by a combination of dividend growth and yield considerations

By identifying companies whose yield potential has been underestimated by the market, we seek to deliver superior returns to our investors.

l Well-resourced team, full market coverage and close corporate access provide deep investment insights


The Fund has a strong performance track record, delivering an average annualised return of 9.85% over the past five years versus the peer group average of 8.50%. We achieved this through the consistent application of our rigorous bottom-up investment process, seeking out high-quality companies with the potential for dividend growth surprise and avoiding those whose dividends we believe to be unsustainable.

31/03/2017 31/03/2018

31/03/2016 31/03/2017

31/03/2015 31/03/2016

31/03/2014 31/03/2015

31/03/2013 31/03/2014

SLI UK Equity Income Uncon






IA UK Equity Income Sector






Source: Standard Life Investments, to 31 March 2018, discrete performance based on most commonly used Inst Acc share class

Fallen by the wayside The Fund’s strong performance stands in contrast to many of its peers, a growing number of which have been ousted from the Investment Association equity income sector in recent years for failing to meet the requisite yield target. This is despite the yield requirement being eased in March 2017 from 110% to 100% of the FTSE All Share yield. Indeed, while there were 103 qualifying funds in 2011, this number had fallen to 81 in 2016. Lowering the target to 100% has allowed a few funds to be readmitted, taking the total to 87 in 2018. Throughout this time, we have retained a yield target of 110% for the UK Equity Income Unconstrained Fund, and have continued to



Summer 2018

deliver against this goal over the full length of the manager’s tenure. How have we achieved this?

Surviving and thriving Essentially, successful income investing depends on the quality of ideas generated. In this regard, we benefit from the strength and depth of our resource, our Focus on Change investment philosophy and our rigorous bottom-up investment process. While many income funds invest simply on the basis of a company’s current dividend yield, we use rigorous analysis to select stocks on the basis of the sustainability of their earnings, which provides the potential for dividend surprise. Equally, we look to avoid companies whose dividend we believe to be at risk.

Successful income investing depends on the quality of ideas generated.

company will be able to deliver more accretive deals in the US than the market expects. Moreover, with ample free cash flow, we believe National Express has capacity to grow the dividend ahead of consensus forecasts, and we note the company has a good record of returning surplus cash to shareholders. As well as potential for positive dividend growth surprise, we expect consistent high returns to drive a rerating of the shares, which would provide capital appreciation.

Dividend cover tells the story Stalled Business process outsourcing firm Capita is an example of a company where our analysis pointed to the dividend being unsustainable and we avoided the stock. Traditionally regarded as a good-quality, high-dividend yield company, Capita was widely held among UK income funds. In recent years, however, the firm took on increasing levels of debt as it attempted to diversify and grow through acquisitions, to offset the pressures affecting their core business. As a result, margins continued to decline and cash flow dried up. Eventually, Capita issued a profit warning in January 2018 and suspended the dividend. As well as the dividend being sacrificed, shareholders saw capital losses as the share price slumped.

Travelling National Express is a mid-cap stock often overlooked by investors who regard it primarily as a UK-centric transport play. In fact, the company derives over 80% of its revenues overseas, providing it with a diverse and growing customer base. Management has established a reputation for astute capital allocation, for instance selling out of UK rail and buying high-return Spanish and US bus networks. Our analysis leads us to believe the

Chart 1 contrasts the dividend cover ratios of Capita and National Express. Dividend cover measures a company’s ability to pay a dividend from its current year’s earnings. Calculated as earnings per share divided by dividend per share, a ratio of two or higher is considered comfortable. National Express’ dividend cover is almost two, indicating the company earned almost twice the amount it paid out to shareholders in dividends. By contrast, Capita’s dividend cover ratio has fallen from over two in 2011 to zero in 2017, ultimately forcing it to cancel the dividend. n The value of an investment is not guaranteed and can go down as well as up. An investor may get back less than they invested. Past performance is not a guide to the future. This material is for informational purposes only. This should not be relied upon as a forecast, research or investment advice. Aberdeen Standard Investments is a brand of the investment businesses of Aberdeen Asset Management and Standard Life Investments. Standard Life Investments Limited is registered in Scotland (SC123321) at 1 George Street, Edinburgh EH2 2LL. Standard Life Investments Limited is authorised and regulated by the Financial Conduct Authority.

Identifying potential for dividend surprise 2.5


1.5 Dividend cover National Express Dividend cover Capita




FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 Est Est

Thomas won our ‘One to Watch’ award in 2014

Source: Standard Life Investments and Morningstar  Summer 2018



By Adrian Frost, Nick Shenton and Andy Marsh



o you invest in UK equities for income? It is less popular than it was; and the statistics show that flows into the UK Equity Income sector have turned down considerably. Instead, in many cases, investors have been seeking pure growth. But what are the facts about equity income? The chart below plots annualised price changes for 28 main FTSE sectors in the past 20 years against their dividend yields 20 years ago. You would expect to see a negative relationship between the two, with higher yields leading to lower performance in terms of share price. If that was your expectation, you would have been wrong. There’s been a positive correlation between yield and share prices – of 0.36 to be precise. Twenty years ago, some stocks were on good yields because investors regarded them as risky, in the sense of their being more heavily exposed than others to the risk of recession. Yet because this risk materialised only once in those 20

That, though, isn’t the whole story. Some high-income sectors have done well even though they are not obviously risky, such as tobacco, utilities, beverages and food producers. This happened because investors’ expectations for growth have been wrong. Years ago, they thought these sectors offered little growth and so they required high yields as compensation for holding them. Such pessimism, however, proved mistaken. Meanwhile, consider five reasons for equity income: 1. Income represents a big part of total returns. The value of shares goes up and



Dividend yield in March 1997

years, these stocks have done well on average. This is true for construction, miners and chemicals. If you consider only the past 10 years, which gives a greater weight to the slump of 2008-09, you see a different picture. In this sample, there has been a slightly negative correlation between yield and price performance – albeit largely due to banks having a high yield in 2007 and catastrophic subsequent performance.


5 4 Banks

3 2 1

IT 0





4 6 8 10 Annualised price change

Source: Thomson Reuters Datastream.



Summer 2018




down, but dividend income is never negative. This means that, over the long term, capital gains can be offset by losses but income, on the whole, just keeps coming. After an extended period, most of the rise in the value of a portfolio of shares is actually down to the yearly addition of dividends and the compounded growth of that income.

conditions mean that, in many cases, equity income is actually higher than that available from the same company’s bonds. Finally, a number of equity income funds have left the sector of late. That’s because to qualify for inclusion

Dividends and their reinvestment can help total returns. £140,000 £120,000 £100,000 FTSE All-Share, 6.8% compound annual return plus 3.8% dividend yield reinvested

£80,000 £60,000 £40,000 £20,000

FTSE All-Share, 6.8% compound annual return

£0 1


3 4

5 6


8 9 10 11 12 13 14 15 16 17 18 19 20

in the UK Equity Income sector, a fund must deliver an income higher than the FTSE All-Share Index’s yield over rolling three-year periods. Fail to do that, and you’re out. The managers of the £6.3 billion Artemis Income Fund remain confident that the fund’s target for income can and will be met; and believe that the fund’s staying in the sector gives investors a valuable peer group against which to measure and to compare the performance of the Artemis Income Fund. n

Years Source: Thomson Reuters Datastream.

2. Equity income is (relatively) stable. Companies are extremely wary of the reputational damage caused by a reduction in their dividend (or, even worse, suspending the dividend altogether.) So a company will often match the previous year’s payout even if the amount of earnings available to cover the payment has reduced. Equity income can beat inflation even if other income sources are falling behind. This is certainly so today, when the returns on cash are negligible and the income from government bonds is also falling behind the rise in the cost of living. 3. Dividends are a sign of quality. Shares which have the cash-flow to pay a steady stream of dividends, especially one that rises over time, are almost by definition high quality businesses. In uncertain times, this can provide investors with a further level of reassurance. 4. Demographic changes mean that the appetite for income is unlikely to diminish. Typically, investors look for growth in the early years but want income as they move into retirement. The ageing of the ‘baby boom’ generation means that more and more people are reaching this stage of their lives; so demand for this kind of share should continue or increase. 5. Because dividends are paid out of profits, they can grow over time – unlike the fixed income from bonds. Usually you would expect the price for that to be a lower yield than that available on the bond; but today’s

THIS INFORMATION IS FOR PROFESSIONAL ADVISERS ONLY and should not be relied upon by retail investors. The fund’s annual management charge is taken from capital. Any research and analysis in this communication has been obtained by Artemis for its own use. Although this communication is based on sources of information that Artemis believes to be reliable, no guarantee is given as to its accuracy or completeness. Third parties (including FTSE and Morningstar) whose data may be included in this document do not accept any liability for errors or omissions. For information, visit Any research and analysis in this communication has been obtained by Artemis for its own use. Although this communication is based on sources of information that Artemis believes to be reliable, no guarantee is given as to its accuracy or completeness. Any forward-looking statements are based on Artemis’ current expectations and projections and are subject to change without notice. Issued by Artemis Fund Managers Ltd which is authorised and regulated by the Financial Conduct Authority.  Summer 2018




Nick Kirrage, Fund manager and blogger on The Value Perspective asks if you are optimistic and impulsive, or do you follow the crowd?

IMPORTANT INFORMATION The views and opinions contained herein are those of Nick Kirrage and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. This material is intended to be for information purposes only and is not intended as promotional material in any respect. It is not intended as an offer or solicitation for the purchase or sale of any financial instrument, nor to provide advice of any kind. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. Regions/sectors shown for illustrative purposes only and should not be viewed as a recommendation to buy/sell. Issued by Schroder Unit Trusts Limited, 31 Gresham Street, London, EC2V 7QA. Registered Number 4191730 England. Authorised and regulated by the Financial Conduct Authority. UK12325


all have a range of “biases” – of which we are often unaware – and which can affect the way we invest. I’m intrigued by this branch of science, known as behavioural finance. As a fund manager specialising in value investing, I aim to find stocks that everyone hates. Part of achieving that is to play on the irrationality – the biases – of other investors. But irrational decision-making doesn’t just cloud stock selection, it can influence basic investment decisions. For some people, biases are strong enough to prevent them from investing at all. Fortunately, these biases can be measured. My employer, Schroders, has developed such a test. It offers a report that explains your investment character. It also charts your score against the average across a range of traits. I took the test. It concluded that I was a “level-headed optimist”, a calm investor who can tolerate the ups and downs of markets – something of a relief, given my line of work. I was also pleased that my aversion to making losses was low. Too many investors are overly concerned with the chances of losses and therefore don’t invest. Their money instead sits in cash and can be eaten away by inflation.



Summer 2018

But some traits were perhaps a little less fund manager-like. On “confidence”, I scored half the average. I feel naturally confident, but the conclusion is not wrong. I have consciously tempered this confidence. Self-belief can be dangerously reassuring in markets. I prefer instead to test and re-test the “facts” of every investment decision I’ve made. Whether you’re a first-time investor or an experienced professional, I’d recommend taking the test. A little introspection can help make you a better investor. Please remember that past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested. n l Take the investIQ test in eight minutes. Go to

Every day, the number of fish in a pond doubles. If it takes 24 days to fill the entire pond with fish, how long does it take to fill half the pond?

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

Know your own mind. Take the investIQ test.

Please remember that capital is at risk. Marketing material issued in February 2018 by Schroder Investment Management Limited, 31 Gresham Street, London EC2V 7QA. Registered No: 1893220 England. Authorised and regulated by the Financial Conduct Authority UK12531.

INVESTING? IT’S A FUNNY OLD GAME By Richard Colwell, Fund Manager of the Threadneedle UK Equity Income Fund and Head of UK Equities at Columbia Threadneedle Investments

With the 2018 World Cup in Russia underway, I’ve taken a break from portfolio management to draw five lessons from football that can be applied to investing¹. 1. Make your actions count Champions Manchester City lost 1-0 in the FA Cup to lowly Wigan Athletic, who only managed 17.5% possession and just two shots on target. How? Wigan did their research. Fund management is similar. It’s about what you do before and after a trade that determines long-term success: evaluating a company’s strengths and weaknesses versus its competitors, and monitoring to ensure it is worth its place in a portfolio.

2. Don’t ignore late bloomers Not all players arrive fully formed at 16. Some toil away in amateur teams before turning professional, such as Premier League champion Jamie Vardy. Companies develop at different speeds too. The market can be fixated on failing aspects of a firm, ignoring the fact there’s a great business waiting to get out: Rentokil, for example, was shackled by its parcels division City Link. But it sold it and has since more than trebled its price². The key, of course, is identifying the potential.

3. Strikers are overvalued, goalkeepers undervalued There’s only one goalkeeper in the Transfermarkt Top 50 most expensive transfers³ (Gianluigi Buffon), amid countless strikers. This is because, whereas clean sheets are merely valued, goals are actively celebrated. Similarly, getting your portfolio to consistently outperform is as much about avoiding share collapses as it is backing winners: ie, defence and attack.

4. Tune out the noise Pundits are momentum-driven or biased. Ex-Liverpool player Mark Lawrenson has a BBC column in which he predicts scores. For two seasons he has made a reasonable stab at



Summer 2018

picking the top four, but most noticeable in his predictions is that one team has managed two seasons unbeaten ... Liverpool! These cognitive biases are also rife in investing, with sell-side commentators and portfolio managers often anchoring to preconceptions despite evidence to the contrary.

5. Squad management Sell any player if you’re offered more than he’s worth. Liverpool’s Phillipe Coutinho was bought for £8.5m and was the team’s focus and fulcrum. But Barcelona came sniffing and he was sold for £105m. Step forward Mohamed Salah, ably assisted by other star performers! This is portfolio management: always have an incubator of replacement stocks. Likewise, if one stock is sold entirely, there should be others ready to flourish. Like the best managers, we exchange and debate ideas collaboratively, always striving for consistency. This enriches our investment processes and ensures our best insights are applied to portfolios – all in the service of clients. But there’s something we haven’t mentioned – luck. It’s our job to ensure this is the one area where portfolio management doesn’t correlate with football. Enjoy the tournament! n l View Richard’s full article at ¹Concept inspired by Why England Lose & Other Curious Football Phenomena Explained, by Simon Kuper and Stefan Syzmanski, HarperSport, 2009. ²Bloomberg, as at 23/5/18. ³, 23/5/2018.

Please note the mention of stocks and shares is not a recommendation to buy. Past performance is not a guide to future performance.

ENGINEERED TO GO THE DISTANCE Aviva Investors Multi-Asset Funds • Dynamic: targets optimal asset allocation • Precise: underpinned by robust risk management • Efficient: maps across a broad risk spectrum • Powerful: robust track record Aviva Investors Multi-Asset Funds (MAF) cumulative performance 1 year

3 year

5 year





















Past performance is not a guide to future performance. Source: Lipper, a Thomson Reuters Company, as at 31 March 2018. R3 share class, cumulative performance, mid to mid basis, net income reinvested, net of ongoing charges and fees.

Discover a range of funds engineered to align with your clients’ chosen risk and reward profiles, actively managed to target long-term capital growth. The value of an investment and any income from it can go down as well as up and can fluctuate due to changes in currency and exchange rates. The funds invest in derivatives which may have the effect of magnifying investment gains or losses. Investors may not get back the original amount invested.

Sustainable Income | Capital Growth | Beating Inflation | Meeting Liabilities

For today’s investor For professional clients and advisers only. Not to be distributed to or relied on by retail clients. Ratings are no guarantee of future performance and can change. The Aviva Investors Multi-asset Fund range comprises the Aviva Investors Multi-asset Fund I (“MAF I”), the Aviva Investors Multi-asset Fund II (“MAF II”), the Aviva Investors Multi-asset Fund III (“MAF III”), the Aviva Investors Multi-asset Fund IV (“MAF IV”) and the Aviva Investors Multi-asset Fund V (“MAF V”) (together the “Funds”). The Funds are sub-funds of the Aviva Investors Portfolio Funds ICVC. For further information please read the latest Key Investor Information Document and Supplementary Information Document. Copies of these documents and the Prospectus are available in English free of charge on request or on our website. Issued by Aviva Investors UK Fund Services Limited, the Authorised Fund Manager. Registered in England 1973412. Authorised and regulated by the Financial Conduct Authority. Firm Reference 119310. Registered address: St Helen’s, 1 Undershaft, London EC3P 3DQ. An Aviva company. RA18/0416/01082018

Gold is the second largest holding among central banks, and markets are being directed by their policies.

GOLD: WHAT IS IT GOOD FOR? WELL, ABSOLUTELY SOMETHING… RSMR Investment Research Manager, Stuart Ryan identifies a golden opportunity for investors looking for a safe haven.


nlike the Edwin Starr 1970 song ‘War’, gold, to some investors, is absolutely good for something. The release of that song was one year prior to the Nixon shock where President Nixon announced a series of economic measures, the most significant of these being the cancellation of the direct international convertibility of the United States dollar to gold and effectively ending the gold standard. This led to the global fiat monetary system that we still use today i.e. one that is based on currency declared to legal tender by a government but is not backed by a physical commodity. Now John Maynard Keynes had labelled the gold standard a barbarous relic back in the 1920s so the events of 1971 should have come as no surprise, with no consequence and left gold as an item best found in the jewellers of Hatton Garden and certainly not the vaults of central banks. But that isn’t quite what has happened. Gold is one of the more divisive asset classes available to investors with as many seeing it as a pointless metal as others, affectionately known as gold bugs, seeing it as the ultimate safe haven asset. It falls in favour as quickly as it falls out, as the end of the 1970s saw a gold rush period where the



Summer 2018

price surged on the back of rising geopolitical tensions and high inflation. From the early 1980s until the 2008 crisis, gold, being a cyclical asset, entered a bear market and once again fell out of favour with investors. It even fell out of favour with the UK government as between 1999 and 2002 the then-Chancellor Gordon Brown sold approximately half of the UK’s gold reserves. Gold however comes back into investors minds during periods of turmoil and stress and this is reflected in the price increase that took place leading up to, during and after the financial crisis of 2008 when gold lived up to its reputation as a safe haven asset to hold during market downturns. Since the financial crisis of 2008, correlations between asset classes have become more pronounced and have left asset allocators looking for holdings that do provide some form of genuine uncorrelated diversification within portfolios. Gold, as well as silver, has demonstrated these characteristics. The monetary policies of central banks such as the Federal Reserve, Bank of Japan and European Central Bank of undertaking the policy of quantitative easing (basically printing money to stimulate the economy), has led some to believe that this makes the fiat monetary system worthless due to this devaluation. When the gold standard was in

place, the printing of money ad infinitum was not possible as money supply can only expand in line with an increase in the gold supply and potentially leads to stability in the financial system, something that some would argue has been lacking. The rise of cryptocurrencies, the most famous of which is Bitcoin, can be attributed in part due to their structure being reminiscent to the gold standard in the sense that a finite amount of ‘coins’ can be created. This has led to the label of digital gold and like the historic gold standard, prevents the use of the printing press that central banks have been fond of using. Old Mutual Global Investors launched their Gold and Silver fund in March 2016 to provide investors with a fund that combined both physical bullion and gold and silver mining shares to meet demand for this controversial asset class. The manager of this fund, Ned Naylor Leyland, is of the opinion that at this stage in the monetary cycle, gold is

something that everybody should have in their portfolio. Additionally, physical gold is the second largest holding held by central banks, after US Treasuries so Ned feels it is sensible to own something that central banks own as markets currently are being directed by the policy of these central banks. Obviously, the level of allocation will be determined by the risk appetite of the individual investor. Whether you are a gold bug or not, with the current policies of central banks resulting in increased correlation across asset classes, coupled with the increased geopolitical tensions, the benefits of holding some form of exposure to gold could be argued more compelling now than holding none at all. n  Summer 2018



RISING MARKET VOLATILITY DRIVES NEW OPPORTUNITY If 2017 saw one of the more benign market environments in decades, 2018 is already proving to have a bit more bite. This heralds the return of alternative or less directional trading, according to Steve Waddington, multi-asset manager at Insight. Challenging environments for traditional market directional strategies tend to be more rewarding for strategies exploiting alternative sources of return.


n 2017, the global economy transitioned from a period of sluggish, US dominated growth, to a more synchronised global recovery. With inflation still well behaved, corporate earnings grew strongly, buoying both equity and credit markets and suppressing volatility, which reached historically low levels. Half-way through 2018, the year has proved more challenging for investors. Volatility spiked in the first quarter, driven by the unwinding of US volatility products and then compounded by an increase in global trade tensions and profit taking in US technology stocks. Underlying this, however, was a change in the outlook for global growth. The global economy is evolving, shifting from a period of growth acceleration to one in which growth is moderating (albeit from elevated levels), a change which historically has been characterised by more modest returns for investors. Unanticipated volatility spikes generally hurt in the near term, but they can also offer opportunities. Although generally short lived, the fear of loss among investors drives risk appetite downwards and derivatives markets become dominated by those looking to hedge against downside risk. As a result, risk premia in option pricing can become elevated and this



Summer 2018

can create greater opportunity for alternative, option based strategies. We believe it is important investors are able to access a broad opportunity set during such times, to give them flexibility over time to access traditional risk assets, as well as a range of alternative strategies, which are generally less correlated with broad asset class returns. Generally, we tend to observe that challenging environments for traditional market directional strategies (generally characterised by higher volatility) tend to be more rewarding for strategies exploiting alternative sources of return and vice versa. Having access to both, can extend the potential for diversification and may provide more consistent return generation over a typical economic or market cycle.

šBloomberg, December 2017

Range rovers Using options, it is possible to pursue range-bound strategies, where the investor expects an index or currency to trade within a range over a specific period of time, perhaps as a period of consolidation following a directional move. The investor can sell a call and a put option on either side of the range, collecting the premium if the asset trades within the range to expiry. A volatility spike increases the implied volatility embedded in option prices, effectively broadening the range at which a strategy can be implemented for the same premium. Another strategy looks at ‘Skew’ – the amount people are prepared to pay to protect against market falls. During the Q1 volatility spike, the skew for markets such as the S&P 500 spiked to levels normally seen during major events such as the global financial crisis or European sovereign debt crisis. This creates the opportunity for upside breakout strategies, financing the purchase of a

call option which gives exposure to a market recovery via the sale of a put option. When skew is elevated, put options trade at a significant premium to call options, allowing the creation of strategies which can benefit if risk appetite returns, but should require considerable further falls before they generate losses. More complex strategies can take advantage of the term structure within option pricing and skew. For option prices, longer-dated implied volatility is normally higher than near-dated, reflecting the greater uncertainty further out (term structure). During the Q1 volatility spike the term structure for the S&P 500 inverted, an event which occurs very infrequently. Heightened volatility can open the door to alternative strategies that either offer a high degree of asymmetry in their pay-off profiles or wide buffers of protection should further weakness persist. n

The value of investments can fall. Investors may not get back the amount invested. For Professional Clients only. This is a financial promotion and is not investment advice. Any views and opinions are those of the interviewee, unless otherwise noted. For further information visit the BNY Mellon Investment Management website. INV01294-008 Exp 9 Nov 2018.  Summer 2018



THE GLOBAL ECONOMY: WHAT’S GOING ON? RSMR Director, Ken Rayner takes a look at current worlwide activity and asks whether the Goldilocks Effect is being replaced by the Princess and the Pea?


hat we called a ‘Goldilocks effect’ for investors, where a synchronised global economic recovery created benign, ‘neither too hot, nor too cold’ conditions, might have come to an end in the first quarter of 2018. If this is shown to be the case, it may have started with a ‘Princess and The Pea’ scenario where investors reacted sharply to unexpected, but marginal, US wage inflation data. At the start of 2018, the markets responded strongly to positive global growth predictions, but corrected quickly with the US announcement. This probably indicates increased market volatility in 2018. If so, it is likely to be part of global money supply and interest rate management finally returning to normal after the financial crash a decade ago and a healthy resetting of markets. So far, this year has already seen rate rise forecasts, inflation fears and new trade tariffs which have increased volatility effectively deferred from 2017 when fewer rates rises restrained volatility and returns. There are however no significant developments to indicate changes in the pace or trajectory of global growth.



Summer 2018

THE ASSET CLASSES – a quick update Equities The start of 2018 saw investors more confident about global growth and supporting stock markets around the globe. This changed in mid-February when a sudden leap in volatility appeared to be based on investor trepidation rather than economic data when the US wage data created market jitters. Although the basic economic data had not changed, the blip was, for some investors, a sign that there would be increased volatility in 2018 after a benign 2017. March saw more fluctuations with investor concerns that US and China trade wars would cause markets to fall further around the globe, and worries about US technology stocks. Most markets ended March in the red for the first time in two years. Only time will tell if 2017’s benign conditions will return. The weakest markets have been those that have trailed for other reasons, such as the UK with Brexit, and political issues in India. US equities rose through the technology sector which, until March, remained robust despite market falls with FAANG stocks (Facebook, Apple, Amazon, Netflix, and Alphabet’s Google) attracting investors but

recent government scrutiny in the US and Europe, and issues around data controls, led to an end-of-quarter fall.

Fixed Interest The fluctuating returns from fixed interest markets have continued to confuse investors during the first quarter of 2018. In a period of stronger economic growth and rising rates, many economists have predicted the end of the current bond bull market and the longer-term forecast for fixed interest is poor compared to global growth rates. The narrow gap between government and corporate debt rates across all market sectors suggests there is little room for fixed interest to deliver real returns. In 2017 rising income returns were healthy for corporate bondholders but there is far less scope to repeat this in 2018. Pockets of value include emerging market debt, which has been more volatile than its western counterparts but is now judged to be more stable due to its looser link to the US dollar and stronger economic positions. Fixed interest assets should not be dismissed because of likely global interest rate rises, as they can still be safer than many others if stress returns to global markets.

Property Although property has fallen from favour in recent years, it can play a role within a diversified portfolio if investors take a longer-term view. The popularity of e-commerce has led to increasing demand for well-located fulfilment centres and smaller distribution units. Strong competition to occupy these has led to an improvement in landlords’ expected lease terms. In retail, secondary assets – those not deemed topclass by location or specification – face the greatest difficulties as weak tenant demand leads to more empty units and fewer shoppers. The basics of the market remain reasonably good. Distribution, logistics and warehouses are particularly popular due to demand for the most convenient means of delivery or in-store collection. The global REIT/property securities market is sensitive to interest rate movements. A close watch will be required as further US rate rises are expected but not necessarily fully priced into market values. Overall, property still has a viable role within a diversified portfolio; especially in the low interest rate/ bond yield environment investors currently face.

RSMR global round-up l Asian equity markets do not appear overvalued but gains are likely to be lower and more volatile. l China’s ambitious One Belt One Road (OBOR) drive for geo-economic integration means the rest of Asia can also benefit. l The acceleration of European expansion is an underlying positive for the UK economy. l Progress towards lifting inflation in Japan remains slow. l China’s soaring stock market made it among the best performing emerging markets in 2017. l India is the world’s fastest-expanding economy with growth running at 7.2% a year. l There are hopes in the Philippines that the government will drive forward infrastructure projects. l Escalating trade tensions may cause shorter term volatility in markets. l Malaysia’s economy seems to be improving after weakness caused by political instability. l Consumer sentiment is starting to improve in Indonesia after a period of dull growth.

SO, WHAT’S NEXT? The ‘Goldilocks period’ potentially ended in early 2018 after investors took fright at data which would not have created much concern a year ago. There is clearly an increase in sensitivity but market falls were eased by strong economy-wide data including that, for the fourth quarter of 2017, the annual rate of Eurozone GDP growth rose to 2.7%, while in the US, it was around 2.5%. The case for continued global economic growth remains intact alongside more volatile global stock markets. However, it also seems clear that loose monetary policy is coming to an end in most western markets as they move from quantitative easing to enhance cash flow, to quantitative tightening to restrict it through interest rate rises. The most watched market outside the US is Europe and the European Central Bank. Monetary tightening must be managed carefully as global growth, while stronger, is subject to mood swings. A volatile first quarter might be behind us, but the environment remains challenging as more sensitive investors assess trading risks and opportunities in equities and bonds during 2018. n  Summer 2018



THE RETURN OF FIXED INCOME VOLATILITY BlackRock’s Ben Edwards gives us his opinion on why there is a renewal in uncertainty in the sector and the opportunities arising from it.

A flexible approach is crucial to delivering strong investment performance through the cycle.




hroughout January and early February this year UK gilt yields rose, dragged higher by rising US Treasury yields and increasingly hawkish rhetoric by the Bank of England. Since then, a May rate hike has been abandoned, the spectre of trade wars has risen and volatile European politics has resulted in a flight to quality into gilts, bunds and treasuries. UK gilts have generated strong positive returns, recently, with 10 year yields now around the same level of where we started at the beginning of the year at 1.23%. The Sterling credit market produced positive returns in May due to the decline in risk-free yields, but spreads widened and credit underperformed gilts.¹ These are the sort of volatile markets that we were prepared for and where we tend to fair well. Central to this renewed volatility, in our view, is the change in US monetary policy, creating an attractive ‘risk free’ asset for the first time in 10 years. For example, the two year US treasury yield sits at around 2.5%,² meaning that cash is once again a viable investment option. For a decade, central bank policy globally has made cash so unattractive that investors chased risk in all its forms, supporting higher valuations in bonds, credit, equities, property and cryptocurrencies.

Summer 2018

With asset prices broadly expensive, a lowrisk competing asset has the potential to cause volatility at best and higher risk premiums/ lower prices at worst. We are watching this closely. For now, though, this newly-attractive, low-risk alternative is only really viable for US dollar-based investors. Nearly prohibitive currency hedging costs (the highest in decades for UK investors)³ means Pan-European and Japanese savers would need to expose themselves to the volatility from late night tweets and precarious geopolitics through unhedged positions - defeating the whole lowrisk rationale. There are still plenty of factors that suggest a sharp spike in yields is unlikely. Inflation continues to disappoint and economic growth has shown some weakness recently. Certainly, there are temporary factors involved in this – such as poor weather conditions – but we don’t see significant economic momentum, particularly in the UK. There is little domestically-generated inflation in the UK, and US and European core inflation figures continues to be contained. In the UK, the Bank of England took weakening data as a sign to leave rates on hold at its May meeting and we believe there would have to be progress on Brexit, a pick-up in consumer spending and wage growth before any enduring rise in policy rates.

This is likely to keep the rate rising cycle in check which is why we are more comfortable holding interest rate exposure in the UK than in other markets and this is where we have the bulk of our duration exposure.

The opinions expressed are as of May 2018 and are subject to change at any time due to changes in market or economic conditions. The above descriptions are meant to be illustrative. There is no guarantee that any forecasts made will come to pass.

1. ICE BofAML Sterling Corporate and Collateralised Index, May 2018

How are we positioned in this environment?

2. Government Bonds, Bloomberg, May 2018

Recent market volatility has created opportunities to add to credit risk at more attractive levels however we view this as tactical and look for opportunities to return to our strategically defensive position. We are also neutral on duration. With this in mind, we have moved out of areas such as financials and insurance into areas such as utilities given their more stable cash flows. This has proved positive in the recent volatility, particularly as lower quality credit has underperformed higher quality credit.â ´

3. BlackRock, May 2018

We continue to believe that the best opportunities are in the UK market, particularly in sterling corporate bonds. Yields are being held in place by low rates and the Bank of England has shown how difficult it is to adjust monetary policy amid a weaker economy and Brexit uncertainty. We maintain a preference for sterling corporate bonds over US and European counterparts, based on relative fundamentals and strong technical support. In the US, higher interest rate volatility and unpredictability makes us inclined to hold less exposure. We have minimal exposure to US dollar corporate bonds, partly due to prohibitive foreign currency hedging costs. We retain a preference for alpha versus beta. These are markets where the generic return may not be very appealing, but there will be opportunities to add risk selectively amid bouts of market volatility. Opportunities - where they arise - will be idiosyncratic. A final point to bear in mind when considering fixed income at this stage in the market cycle is that interest rate risk impacts all assets, not just bonds. We believe investors need to be mindful of this when constructing their portfolios.

About our approach We aim to target alpha opportunities in corporate bond markets. We are not constrained by the benchmark and it does not guide our positioning. We combine a top-down sector allocation with bottom-up credit research, which aims to identify mispricing across global markets. Overall, we still believe it is possible to produce returns in corporate bonds while taking a low risk approach. There are uncorrelated opportunities within bond markets that active managers can exploit to generate returns. We believe that we need to be not just in the right issuer, but in the right bond from that issuer. This allows us to develop a more nuanced risk and reward for our investors. n

4. BlackRock’s Edwards: The best place to be right now is here at home in the sterling market, Investment Week, Nov 2017

IMPORTANT INFORMATION This material is for distribution to Professional Clients (as defined by the Financial Conduct Authority or MiFID Rules) and Qualified Investors only and should not be relied upon by any other persons. Issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel: 020 7743 3000. Registered in England No. 2020394. For your protection telephone calls are usually recorded. BlackRock is a trading name of BlackRock Investment Management (UK) Limited. Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. You may not get back the amount originally invested. Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy. Changes in the rates of exchange between currencies may cause the value of investments to diminish or increase. Fluctuation may be particularly marked in the case of a higher volatility fund and the value of an investment may fall suddenly and substantially. Levels and basis of taxation may change from time to time. Any research in this document has been procured and may have been acted on by BlackRock for its own purpose. The results of such research are being made available only incidentally. The views expressed do not constitute investment or any other advice and are subject to change. They do not necessarily reflect the views of any company in the BlackRock Group or any part thereof and no assurances are made as to their accuracy. This article is for information purposes only and does not constitute an offer or invitation to anyone to invest in any BlackRock funds and has not been prepared in connection with any such offer.  Summer 2018



A VIEW FROM THE OTHER SIDE… What can often be worse than the embarrassment of holding one stock that does very badly is holding a portfolio of stocks which, in general, are doing reasonably badly.

Alastair Mundy, Head of Value, Investec Asset Management takes a look at the options for contrarian investors during worst case scenarios.


‘Simple but not easy’ nvesting, and particularly contrarian investing, is often described as being ‘simple, but not easy’. The simple part is straightforward. One waits for a share price to fall, carries out some due diligence to check for any hidden nasties, checks the stock is cheap on some sensible assumptions and then buys the share. And if everything goes to plan, the shares, as they recover, will attract the attention of other investors and provide the investor with a handsome profit. The ‘not easy’ part is where the sweating begins. A stock only tends to fall if investors have some concerns about a company’s future. There may be issues over a company’s indebtedness, accounting, industry exposure or some purely idiosyncratic issue and virtually all of the time it is perfectly rational to hold these concerns. And in many cases history tells us it is correct to have such concerns as worst-case scenarios can often play out (of which a recent example is Carillion). But a more dispassionate assessment of history tells us that on the whole these worstcase scenarios are a fairly rare species. They just tend to stick more in investors’ minds than those stocks which do recover. What can often be worse than the embarrassment of holding one stock that does very badly is holding a portfolio of stocks which, in general, are doing reasonably badly. This typically happens in markets which are influenced by a significant and prolonged theme – such as the technology,



Summer 2018

media and telecoms bubble in the late 90s and the mining bubble in the mid-noughties. At such times equity markets can become bifurcated with a group of stocks heavily infavour and the rest unloved. We have been in one of these times over recent years. The belief that inflation will remain low for an extended period of time has seen interest rates fall to extraordinarily low levels, and this has created a number of market wide effects that have worked against us. By reducing the discount rates that are applied to equity earnings, lower interest rates have disproportionately favoured more highly rated quality/growth stocks which have a greater proportion of their value further out in the future. I’ve been on the wrong side of things and am seated firmly on the naughty step. I’ve been sitting there for so long now, that I’m starting to leave an impression.

So what to do? There are three options. Option one is to simply capitulate – admit that the world has changed, that the old rules do not work and to embrace the dark side. Option two is to sit tight, accept one’s portfolio is significantly different from the market and trust that eventually themes (however strong the story) will reverse. Option three is to break the first law of digging holes made famous by Dennis Healey, the Labour politician, who opined that, “if you find yourself in a hole, stop digging”. If the bifurcated market throws up increasingly attractive opportunities it is surely right to keep buying?

At this point, the career risk that Jeremy Grantham, founder of GMO, has often talked about becomes relevant. It stops being how long the fund manager can take the pain of underperformance and morphs into a discussion on how long the client is willing to take the pain of underperformance.

Underperformance is never nice, but for investors with high conviction portfolios and/or distinct investment styles it is unfortunately an almost inevitable price to pay for subsequently experiencing the good times. n

For a contrarian investor (and we are talking about a portfolio of stocks here rather than an individual stock) the typical response is somewhere between options 2 and 3. Continue to analyse the opportunity set and as it becomes ever more attractive to do so, skew the portfolio more towards the cheapest stocks. However, it is probably best not to come over as too pig-headed, bloody-minded or unprepared to investigate alternative views. ‘The market is obviously wrong’ rarely wins plaudits with clients on the receiving end of one’s underperformance.


Looking in the tea leaves The psychologist will tell you at these times that to remain rational, one should actively search for those whose views oppose yourself. Continually seeking solace from like-minded individuals can quickly encourage ‘confirmation bias’ – the belief that something must be right because someone else agrees with you. Clearly it is healthy to search for contrasting views, but at such times the opposition have the upper hand – they are both supported by a good narrative to which a trending share price brings further validation. The contrarian on the other hand appears to have just conjecture – ‘what if it the story reverses even though there is no sign of it in the tea leaves’, or history – ‘something typically turns up; the market’s just not always smart enough to see it’. It’s not that the psychologists are wrong – it’s more that when markets or stocks are at extreme levels, there is probably not a great deal of rationality on either side. Someone who sold a stock a lot higher is busy patting themselves on the back and telling their war story rather than considering whether the price has gone too far or the facts have changed. Whereas someone who purchased a stock on the way down only to lose a reasonable amount of money is busy licking their wounds, reluctant to add to a position and worried that the market knows something they don’t. In these cases it is often good to return to analysis conducted in quieter, more rational times. The popular view may be well made, but at a lower price and valuation, what odds are being received for taking the contra view?

TThis communication is for institutional investors and financial advisors only. It is not to be distributed to the public or within a country where such distribution would be contrary to applicable law or regulations. If you are a retail investor and receive it as part of a general circulation, please contact us at www. The information may discuss general market activity or industry trends and is not intended to be relied upon as a forecast, research or investment advice. The economic and market views presented herein reflect Investec Asset Management’s (‘Investec’) judgment as at the date shown and are subject to change without notice. The value of investments, and any income generated from them, can go down as well as up and will be affected by changes in interest rates, exchange rates, general market conditions and other political, social and economic developments, as well as by specific matters relating to the assets invested in. There is no guarantee that views and opinions expressed will be correct, and Investec’s intentions to buy or sell particular securities in the future may change. The investment views, analysis and market opinions expressed may not reflect those of Investec as a whole, and different views may be expressed based on different investment objectives. Investec has prepared this communication based on internally developed data, public and third party sources. Although we believe the information obtained from public and third party sources to be reliable, we have not independently verified it, and we cannot guarantee its accuracy or completeness. Investec’s internal data may not be audited. Except as otherwise authorised, this information may not be shown, copied, transmitted, or otherwise given to any third party without Investec’s prior written consent. © 2018 Investec Asset Management. All rights reserved. Issued by Investec Asset Management, issued June 2018.

Bridging the gap between research and portfolios THE INVESTMENT SOLUTIONS FOR A MIX OF INVESTOR NEEDS The new RSMR portfolio service has been created to deliver improved investor outcomes, simplify the advice process and enhance the overall client experience.

If you want to avoid additional administrative work, or avoid portfolio drift through not being able to perform fund switches or rebalancing swiftly, then you may wish to consider our range of discretionary portfolios. Here, these tasks will take place automatically, although you will still have the opportunity to utilise the platform of your choice. This is intended for investment professionals and should not be relied upon by private investors or any other persons. Past performance is not a guide to future performance. The value of investments and any income from them can fall as well as rise, is not guaranteed and your clients may get back less that they invest. RSMR Portfolio Services Limited is a limited company registered in England and Wales under Company number 07137872. Registered office at Number 20, Ryefield Business Park, Belton Road, Silsden BD20 0EE. RSMR Portfolio Services Limited is authorised and regulated by the Financial Conduct Authority under number 788854. Š RSMR 2018. RSMR is a registered Trademark.

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RSMR Invest magazine - issue 2  

Exclusive insights on markets from top fund providers. Summer 2018 edition. Advisers can request a free print copy of the latest edition: en...

RSMR Invest magazine - issue 2  

Exclusive insights on markets from top fund providers. Summer 2018 edition. Advisers can request a free print copy of the latest edition: en...