Confidant - Autumn 2022

Acting for clients as they would want to act for themselves

CONFIDANT

Backing winners

Our Equity Research team discuss their top stocks, p6

Talking bonds

Mat Malek shines a light on this key asset class, p10

Getting in early

Gordon Smith talks to three VC experts, p14

Learning fast

Ten lessons from the Cryptocurrency crash, p20

Reaching the peak

Killik Lifetime Planning explained, p4

Head Office

46 Grosvenor Street, Mayfair, London W1K 3HN

T: 020 7337 0777

Private Client Team

Simon Marsh, Kristian Overend, Michael Pate, James Dunn, Gary Meredith, Michael Berry, Julian Spencer, Jeremy Sheldon, Fabrizio Argiolas, Joseph Henry, Julian Chester, George Harrison

T: 020 7337 0400

Killik Asset Management

Graham Neale

T: 020 7337 0008

Family Office

Jer O’Mahony

T: 020 7337 0664

Wealth Planning

Shaun Robson and Will Stevens

46 Grosvenor Street, London W1K 3HN

T: 020 7337 0724

Other locations

Chelsea

Guy de Zulueta

45 Cadogan Street, London SW3 2QJ

T: 020 7337 0590

E: chelsea@killik.com

Kensington

James Irvine-Fortescue

281 Kensington High Street, London W8 6NA

T: 020 7603 3618

E: kensington@killik.com

Hampstead

Peter Day

2a Downshire Hill, London NW3 1NR

T: 020 7794 3006

E: hampstead@killik.com

Richmond

Ian King

2 Paradise Road, Surrey TW9 1SE

T: 020 8948 7337

E: richmond@killik.com

House of Killik, Esher

Paul Martin

9 Esher High Street, Surrey KT10 9RL

T: 01372 464877

E: esher@killik.com

House of Killik, Northcote Road

Richard Morris

125 Northcote Road, Battersea SW11 6PS

T: 020 7337 0455

E: northcoteroad@killik.com

Killik & Co is a trading name of Killik & Co LLP, a limited liability partnership authorised and regulated by the Financial Conduct Authority and a member of the London Stock Exchange. Registered in England and Wales No OC325132. Registered office: 46 Grosvenor Street, London W1K 3HN. A list of partners is available on request. Telephone calls are recorded for regulatory purposes, your own protection and quality control. This communication has been approved by Killik & Co for distribution to retail clients. The value of investments and the income from them may vary and you could lose some or all of your investments. Past performance of investments is not a guide to future performance. The tax treatment of investments may change with future legislation. Prior to taking an investment decision based on the content of this publication, investors should seek advice from their Investment Manager on the suitability of such investment for their personal circumstances. Killik & Co accepts no liability for any loss or other consequence arising from the use of the material contained in this publication to make investment decisions, where advice has not first been sought from their Investment Manager. Killik & Co has no obligation to notify a reader or recipient of this publication in the event that any matter, opinion, projection, forecast or estimate contained herein changes or subsequently becomes inaccurate, or if research coverage on the subject company is withdrawn.

Partners or employees of Killik & Co may have a position or holding in any of the investments covered in this publication. You may view our policy in respect of managing conflicts of interest on our website.

Listening carefully

Tim Bennett Head of Education

Earlier this year, we sent out a survey asking our loyal Confidant readers to tell us what you thought of the magazine and our other educational content, which includes audio Soundbites, weekly videos, and a suite of “How to” guides. I am delighted to report that we received around 600 responses. Further, the majority of these were completed in hard copy form and were returned by post, a route which required some effort. So, the first thing I want to do this quarter is say another big thank you to everyone who took the time to offer feedback. I would also like to address a couple of the points raised most frequently about Confidant in particular.

I will start with the content. By way of context, Killik & Co’s approach as a firm revolves around three key words, “save, plan, invest.” Naturally, our Quarterly tends to reflect these. That is why you will often find articles about our saving app, Silo (“save”) alongside contributions from the Wealth Planning team (“plan”) and experts from our Central Research function (“invest”).

Nonetheless, one common piece of feedback from the survey was that you would like, where possible, to see more investment ideas reflected

in Confidant. That is why this quarter I have included a written summary of a wide-ranging equities-based webinar discussion, which some of you may have watched, hosted by our Chief Investment Officer Simon Marsh, on pages 6-9. You will also find the highlights from a roundtable chaired by our Head of Funds Research, Gordon Smith on pages 14-16. For further information about future similar events please email events@killik.com. The usual ideas-based contribution from our separate Special Situations team then appears on pages 18-19.

For our latest thoughts, I would also like to remind our readers about Killik’s daily, weekly and monthly emails. These contain a regular stream of our investment ideas, all of which your Investment Manager will be happy to discuss in more depth.

Next, I would like to address the format. Since I took it over almost ten years ago, Confidant has remained a 24-page, hard copy magazine. A number of you commented that we could look at supplementary ways of delivering it, including digitally. This is a topic we return to regularly internally. My current thinking, which seems to dovetail with that of quite a few readers, is that whilst many people

COMING UP Tackling inflation, p5 Supporting families, p11 Buying British, p18 Reaching out, p23

consume pure information and news in 2022 online (I know I do), magazines are different. As a quarterly digest, Confidant is designed to highlight some of the best ideas, analysis and thinking from the previous quarter (see pages 6-10), whilst flagging important initiatives that may be on the horizon for the next one (see pages 4, 12 & 13). In doing so it often takes a “deep dive” which is well suited to a hard copy format and a more reflective style of consumption. That said, we will continue to look at alternative ways to deliver it, over and above the current digital PDF and ISSUU versions we offer to anyone who prefers those formats.

I will finish this quarter by thanking those readers who expressed an interest in one, or more, of my series of six “How to” guides. These cover everything from the basics of equity market investing and tax effective saving through to generating an income after work and planning for later life. If you would like to receive a hard or digital copy, please pop into one of our high street locations (see page 2), contact your Adviser, or email me at editor@killik.com ●

SECURITIES IN THIS ISSUE

Aldi, Asda, McDonalds, Orsted, p5 LVMH, TJX, Nike, Sika AG, Linde, Keyence, Nestle, Proctor & Gamble, Experian, Visa, Microsoft, Salesforce, Lonza, BP, Shell, p6-9 Molton Ventures, Syncona, Seraphim Capital, p14-16

Paul explains how individuals and families will benefit from the firm’s new planning tool.

Imagine being able to visualise a dynamic future financial path for you and your family that takes account of your wishes and ambitions, as well as the life changes that we will all inevitably encounter. Well, I am pleased to say that what I have just described is being encompassed by an important new lifetime planning tool available via myKillik.com. Here is an overview.

Modernising saving

Our approach to Lifetime Savings is based upon the principle that our clients are either accumulating (saving) or decumulating (spending) wealth. We refer to the pinnacle of this approach as “peak savings.” Put simply, this is the point in the future where a client’s assets are maximised having benefitted from the power of long-term compound growth. As such, we tend to disregard the old-fashioned notion of “retirement,” as it is becoming increasingly irrelevant in a world where most people have to fund life after work themselves.

In that context, and as we gradually roll out this new service, we will encourage you to think about a target date and value for your personal peak savings. Since this requires careful consideration of a number of key assumptions, your Killik Adviser will be on hand to help. Once these key targets fall within the bounds of the possible, taking account of your attitude to risk, your Investment Manager will be on hand to discuss an investment strategy that will meet them and set up the appropriate underlying portfolio.

Measuring success

With the help of an Adviser, our clients will be able to gauge their progress towards peak savings using an interactive graph in myKillik. This will allow them to easily map the impact of changes. These might include an increase or decrease in their rate of regular saving as, for example, their income changes. Or, it could be a

Enhancing Lifetime Planning

Paul Killik

Senior Partner

one-off addition, for example, an inheritance, or a sizeable withdrawal of funds, perhaps to meet a property purchase. In a nutshell, this new tool will be able to flex to take account of the financial impact of any key change in the personal circumstances of an individual or those of their family as their lives progress. Naturally, where someone wishes to remove funds, reduce their regular savings, or increase their overall investment risk profile, we will help them to ensure that the resulting investment portfolio remains suitable and that new targets which have been agreed are realistic.

Investing intelligently

Traditionally, our clients have only been able to get a sense of longerterm performance by reference to the past. Yet, we have always seen more value in ascribing the possible forward looking growth rate of a portfolio over the longer term. The purpose of our latest enhancement to myKillik is therefore to give clients on our newer Investment Services the ability to visualise the long-term effects of compounding on the possible values of the securities that they hold, plus or minus monies added or withdrawn over a lifetime.

We believe that we can deliver on this goal as we intimately understand the longer-term themes which will shape portfolio investing over the coming decades as well as the individual companies that play to them. Our deep expertise and experience, overlaid on that which we glean from the world’s most prestigious Investment Banks via our paid access, gives us the confidence to weigh up both the possible long-term growth rates and the associated level of volatility. My colleague, Mike, discusses this approach in further detail on page 12.

Sometimes we will invest on your behalf into funds, rather than direct equities, typically in areas where we do not undertake original analysis of companies or markets. Looking at our Specialist Services, examples include

Global Smaller Companies, Global Emerging Markets, or more niche areas such as Global Venture Capital and Alternatives (including hedge funds). In such instances we use specialist managers, closely monitored by our fund analysts. Suffice it to say here that, regardless of the exact underlying mix of securities, I remain confident that our active approach to portfolio management, with the associated level of diversification across asset classes, regions, and individual securities, should deliver the best balance of risk, return and cost in the context of lifetime planning.

Simplifying payments

To make this tool as flexible and adaptable as possible, we are harnessing some technological changes. For example, we plan to move away from the somewhat clunky world of Direct Debits and Standing Orders to adopt what are known as “Variable Recurring Payments (or VRP),” under the “Open Banking” regime. This will permit regular payments to a Killik account from a bank account. Clients will have full control over this through the myKillik app, which will allow them to add, edit or vary a regular payment, or make ad hoc ones. My colleague, Nina, addresses this and some related issues on page 13.

Drawing down

I will finish by briefly considering what happens when someone successfully reaches Peak Savings. At that point, they will have the option to enter “Dynamic Decumulation,” a process designed to generate a regular income. The exact rate at which money is withdrawn will need to be agreed with an Adviser – our suggested starting point is 3.5% per year, based on a combination of income and capital appreciation. Whatever their final decision, our clients need to be sure that, having worked hard to achieve peak savings, they do not run out of money. With our help, I am confident that this risk can be minimised. ●

Bouncing along

Rachel Winter Partner

Rachel looks back on a choppy quarter for markets and highlights some brighter spots as we head into the final few months of 2022.

Global markets were at a low point for the year when our last issue went to press. The weeks that followed then witnessed a more positive performance thanks to a better-than-expected second quarter earnings season. However, a disappointing US inflation reading and then an adverse reaction to the new UK government’s mini-Budget sent stocks south again in September. We have often said that timing the market is nigh-on impossible – so far, 2022 is rather proving that point.

Interesting times

Inflation and interest rates continued to dominate financial news. Although the headline US number dropped slightly in August, an unexpected rise in “core” inflation spooked stocks. Recent inflation data for the UK was also something of a mixed bag. While the headline rate declined, the underlying data revealed that food prices had risen sharply since the previous year. Central banks have responded by continuing to raise rates and rein in quantitative easing.

The rise in the cost of food in particular has led to clear evidence of consumers ‘trading down.’ While Tesco remains the largest supermarket in the UK by market share, discount supermarket Aldi has recently risen up the ranks to join the top four. Furthermore, Asda recently reported that its new budget range has been so popular that it has had to restrict the number of items that each individual is allowed to buy. Low-cost restaurant McDonald’s has also seen sales grow as consumers cut back on spending. Meanwhile, the US dollar has continued to strengthen. This is due in part to its safe haven status, but also the magnetic effect of America’s relatively high interest rates. Sterling, by contrast, dropped to a record low against the dollar in September.

At these levels it presents a real problem for the Bank of England. A weak pound makes UK imports more expensive, a fact that puts upward pressure on inflation. However, boosting sterling would require the Bank to raise interest rates quickly and risk putting the brakes on economic growth.

Staying warm

Energy prices remain a key area of concern in the near term as winter approaches, with natural gas prices in the UK and Europe having risen over 300% in the last year. As a result, the G7 countries are frantically trying to find ways to reduce them. A proposed price cap on Russian gas fell flat as soon as President Putin threatened to cut off Russian supplies entirely in response. More recent proposals have therefore focused on reducing demand, with alternative sources of power being considered on a longer-term basis. The result has been some rapid wholesale energy strategy shifts – Germany and Japan, for example, have rejected nuclear power in recent years, but are both now publicly reconsidering it as an alternative to Russian fossil fuels.

Budgeting blues

In the UK, new Prime Minister Liz Truss is committed to boosting growth by cutting taxes and delivering a major energy support package for households as part of a range of measures included in her Chancellor’s first “mini-Budget.” This includes holding the energy price cap at £2,500, rather than the previously announced level of £3,500. The government will be picking up the tab for the difference, which effectively equates to a subsidy of £1,000 per household. This support for households is expected to be available for two years, alongside separate measures for businesses lasting six months. The cost is expected to top £150bn. To put that into context, the bill for the UK’s pandemic furlough scheme was £70bn. Little wonder the markets have become increasingly

jittery about the UK’s burgeoning £2.3tn national debt pile.

The mini-Budget sent the UK gilt market in particular into a tailspin. Although the Bank of England calmed the “bond vigilantes” down by announcing that it would purchase £65bn of gilts, yields remain at elevated levels as investors continue to require a higher returns for investing in UK government debt.

In 2020, the yield on the 10-year gilt dropped below 0.2%, but at the time of writing exceeds 4%.

Renewing vows

Meanwhile, Britain continues to make impressive strides in the field of offshore wind. For example, the Hornsea 2 farm off the coast of Yorkshire is now the world’s largest and is owned by Danish company Orsted. Elsewhere, UK-listed SSE is part of a joint venture that is building an even larger farm called Dogger Bank, also situated off the North-East coast of England.

The US also re-emphasised its renewable ambitions when Joe Biden signed the ‘Inflation Reduction Act’ into law. This piece of legislation will commit $369bn of investment into new renewable capacity. The hope is that this will help to reduce inflation by generating energy at a lower cost.

The Act will also facilitate a greater level of negotiation on the contentious issue of US prescription drugs prices.

These have skyrocketed in recent years and are a big contributor to the fact that healthcare now accounts for a massive 19.7% of GDP.

Peering ahead

As Autumn fades, markets will be looking ahead to the US mid-term elections in November. The S&P 500 index has historically demonstrated a higher-than-average level of volatility during mid-term years but has also often compensated patient investors in the final quarter. Whilst past performance is no guarantee of the future, investors will be hoping for a similarly positive end to 2022.

Simon recently hosted a webinar with the Equity Research team to discuss how some of the sectors they follow will cope during a period of market turbulence and to flag stocks that should prove to be resilient. To find out more about any of the companies mentioned, please speak to your Investment Manager.

What is the outlook for consumer discretionary stocks?

Mark Nelson, Senior Analyst

A good way to gauge the strength of the consumer sector is via the earnings reports of the relevant firms within it. What we have been seeing recently is a weakening in demand, triggered by rising inflation and, in Europe mainly, the war in Ukraine. The double whammy for some firms is that this has collided with rising inventories, something evidenced in the numbers produced by the likes of Walmart and Target.

This is the result, in no small part, of businesses like these trying to overcome the supply chain issues created by the pandemic, only to then discover that they are holding too much stock. That, in turn, will trigger higher levels of mark-downs and a corresponding hit to profits.

Staying safe

Simon Marsh

Chief Investment Officer

For an investor, the key to navigating this challenging climate is, firstly, to identify and screen out those firms where inventory levels are growing faster than revenues. Secondly, they should look for firms that service the less sensitive parts of the consumer spectrum.

That is why we like the luxury sector, where we think the higher-end consumer is less sensitive to a broader increase in the cost of living. Better still, the type of firm we favour, such as LVMH (the owner of brands like Louis Vuitton and Christian Dior) continue to run very lean inventory levels as a function of maintaining extremely close control over supply chains.

Louis Vuitton, for example, has no wholesale exposure. That means they only sell through their own stores, so they have clear sight over their inventory levels to the point where they have waiting lists for the most sought-after luxury items.

At the other end of this scale is an “off-price” retailer such as TJX. In the UK, they operate the TK Maxx brand and HomeSense stores. Meanwhile, they also own Marshalls and TJ Maxx in the US. With a business model built around buying excess stock from other retailers and brands, they could be a beneficiary of the current tougher environment if they can maintain a full range of products at attractive prices.

They are also likely to benefit as consumers trade down and go bargain hunting. This is something we have seen during previous downturns, and it is being reflected now in their revenue numbers and those of their competitors, such as Ross Stores.

We also continue to like the sportswear sector. Long-term, it should gain from both a continuing “casualisation” trend and growing sports participation, particularly in emerging markets. The better names in this area, such as Nike, are also tightening control over their supply chains. Indeed, the firm is following a luxury goods-style model, whereby they are trying to regain full control of their inventory by selling directly to consumers, rather than via wholesalers.

Another strong feature of sportswear is that it tends to be less seasonal than other clothing. That reduces the risk of overstocking ahead of the sales season that is a persistent headache for the likes of Gap or Zara. Running trainers, for example, are bought all year round.

Overall, although there are clear headwinds facing consumer discretionary stocks in general, we look for specific firms that are relatively well positioned. As a result, we are seeing some high-quality businesses trading at discounted valuations, particularly compared to the start of 2022.

Martin Maloney, Senior Analyst

Against a weakening macroeconomic backdrop, some investors may be tempted to reduce, or even drop entirely, their exposure to companies that are particularly sensitive to the economic cycle. However, we would caution against having no exposure to cyclicals. In part, that is because these companies tend to perform the best in the initial stages of a recovery. So, whilst timing cyclical shifts and markets in general is very tough, I would urge investors to stick with the sorts of high-quality names that should do well once the economy starts to improve.

Ideally, these should exhibit certain characteristics. The first is a decent level of underlying secular revenue growth, The second is established pricing power with customers. And the third is high, stable profit margins. I would like to highlight three stocks that tick all of these boxes.

I will start with secular revenue growth and Sika AG, the world's largest producer of chemicals for the construction industry. It offers a range of solutions that increase the lifespan and sustainability of buildings. That is a prime example of an area of construction that we believe will benefit from many years of future structural growth.

emerging markets it has a first-mover advantage as rapid population growth, urbanisation, and increased regulation drive demand. In more mature markets, on the other hand, its refurbishment products are set to surge as established infrastructure ages. The net result is a “win-win” in revenue terms.

Next, pricing power. Here, we like Linde, a leading industrial gases company that serves a variety of markets across numerous applications. These include supplying oxygen for hospitals and hydrogen for clean fuels. The firm’s pricing strength, even during downturns, arises from the fact that it operates in a very concentrated market, with few competitors. Further, Linde tend to prefer long-term contracts which lock customers into taking its industrial gas or paying a penalty fee.

These factors combined give the firm a high degree of resilience during the economic cycle. Indeed, it has been able to raise prices virtually every year since 2008, including the period of the global financial crisis and, more recently, the COVID pandemic.

Further, the fact that it supplies products needed for all of the big phases of economic development helps to insulate it from the short-term variations in demand that are a feature of each cycle. As an illustration, in

Andrew Duncan, Senior Analyst

The last point that Martin made around pricing power is also critical to our stock selection within the consumer staples sector. As that phrase suggests, we are talking here about the sorts of everyday items that people cannot really do without. The ace card for this sector, at a time of high inflation and weakening consumer confidence, is that whilst people might trade down in terms of brands, or consume a little less of a product, they are very unlikely to switch away from the related product category entirely.

The third characteristic we like is a high and stable profit margin. Enter Keyence, a firm that has made regular outings in Confidant. This Japanese company is the dominant player in vision automation. Briefly, that is the application of cameras, lasers, and software to enable machines, such as robots, to “see” in factories, warehouses, and other industrial environments.

Its unique business model, which relies on minimal in-house production, as well as the firm’s ability to offer customers technical consulting as they hone solutions, all adds up to a significant competitive advantage. That means it can charge higher prices, which are consistently translated into high gross and operating margins over many years.

As such, we like companies within this space that demonstrate strong pricing power underpinned by top brands. It is those factors, combined by the scale needed to both control costs and innovate, which is a key driver for upselling newer, more expensive products. Brand width is also crucial as it means that, whilst customers may trade down to something cheaper, they are doing so within the same stable. A deep knowledge of how to manage organic growth – which is built on the relationship between the volume of items sold and the prices charged for them – is also important so that margins are maintained, and customers are retained.

Two firms that exhibit all these characteristics, are Nestlé and Proctor & Gamble. The first of these is well known for being the largest food and beverage company in the world. It is the owner of leading brands across coffee, confectionery, and even pet food. Meanwhile, Procter & Gamble is the world's largest consumer packaged goods (CPG) company and owns household brands such as Fairy, Ariel, Gillette, Head & Shoulders, plus dozens more.

Given the predictable, defensive nature of their demand, we like both of these stocks as the global economy shows increasing signs of slowing.

What view should investors take of cyclical stocks?

Which firms do you like within the financial sector?

Stephen Timoney, Senior Analyst

I would like to briefly mention two firms, neither of which fits the typical “financial services” label. The first is Experian, which operates more like an information services business and is best known for being the world's biggest credit bureau. It produces the reports that banks use to assess credit risk, but has also expanded over the years, into software, platforms, and consumer services.

My regular contact with the Chief Financial Officer leaves me feeling confident about the firm’s numbers and the resilience of the business model to a downturn. To echo a point that Martin made earlier, this is a firm that has grown organically every year since it listed in 2006 and which has weathered several major economic crises along the way.

That is largely down to the substantial number of countercyclical elements of its business. For example, during a downturn, core banking customers still use Experian, but with a focus on customer management and credit collection, rather than loan origination. Meanwhile, the consumer subscription business tends to do very well as people prioritise sorting out their finances to help them to weather economic headwinds.

Moreover, Experian has a big business in Brazil, a country whose economy is largely uncorrelated to the US and UK. As such, it has a number of operations that are not exposed to the same economic cycle, such as their healthbased business.

seen the impact on their most recent numbers and think these leave some room still to grow. It also has a lower exposure to credit cards, relative to the last downturn. That is good news as our “flexible friends” rely heavily on discretionary spending and therefore tend to suffer during tougher times. Meanwhile, the greater use of contactless payments for smaller purchases will help to boost transaction numbers.

Visa is another stock that we are positive about. Most of the firm’s revenue is based on the dollar volume of transactions they process – i.e., it is made up of a percentage of card spending – but about 40% of it is based solely on the number of transactions processed. This element tends to be more resilient in a downturn because consumers will usually buy the same quantity of goods, on average, but may trade down in terms of the price paid.

This was in evidence during the financial crisis, when Visa’s volumes grew by 4% at its lowest point, yet transactions grew by 10%. That meant overall revenue rose by a very resilient 9% in 2009.

Fast forward to 2022, and the firm still stands to benefit from a strong rebound in cross-border travel, post-pandemic. We have already

Furthermore, we should not forget about a key underlying structural driver – the increasing penetration of digital payments and the consequent displacement of cash and cheques. For example, card use globally is still only around 45% of total payments, a number that we see climbing to more like 70% by 2040.

In pure investment terms, we prefer Visa to its closest rival, Mastercard, thanks to its lower reliance on credit, and a greater exposure to the US.

How will technology stocks fare during a downturn?

Nic Ziegelasch, Head of Equity Research

A number of factors have had a downward impact on valuations. The main one is that rising interest rates push up the discount rate applied to future earnings. And whilst that is true for all firms, it has had a bigger effect on higher-growth names.

Another challenge has been the change in the funding environment. This has made it harder for some of the smaller, earlier-stage companies to raise the money they need to invest in building out their business models. That is why we have seen large-cap technology companies perform generally better than their small-cap peers.

A third part of this picture is the steeper drop we have seen from technology companies that have a strong consumer focus as a recession has loomed larger.

So, how are we positioned amidst all this gloom? The answer is that we remain focused on high-quality companies. In particular, we like those

that have platforms which can be scaled to create wide competitive “moats.” Given the pressure building on consumers, we have been focusing on companies that sell to other businesses (and other types of enterprises) because these customers have to continue to spend in order to continue mission critical technology projects.

An important investing theme that underpins this trend is digital transformation. Companies need to spend in order to innovate, stay competitive and reduce costs. Two firms at the epicentre of all this are Microsoft and Salesforce. Microsoft manages a number of crucial largescale platforms in this space. Azure, for example, supports cloud computing and artificial intelligence. Here they enjoy a strong competitive advantage amongst the more industrial, rather than new-economy, firms. Meanwhile, away from their enterprise offerings, they also have the Xbox gaming platform. This positions them at the heart of digital transformation and cloud computing.

Turning to Salesforce, we see another great example of a platform company engaged in digital transformation. This spans client-facing activities as well as other important supporting functions. Other software companies may be able to supply products that address challenges for individual product lines. However, Salesforce clients are increasingly looking for a single platform that allows data to be used and shared across multiple functions, which is then analysed using artificial intelligence and machine learning to make sense of it and provide useful insights.

As such we see it continuing to take market share as many of its competitors lack the same levels of multi-function scale and expertise that customers are looking for.

What about in healthcare?

Healthcare is, by its nature, a defensive (or non-cyclical) sector as demand for its core services doesn’t tend to drop during a downturn. However, we should not forget that it is also highly innovative, with growth driven by rising global population with people demanding wider access to more advanced treatments.

A great exponent of this is the Swiss company Lonza, which has been a pioneer in the field of outsourced drug development and manufacturing for four decades. The firm still outspends its peers to offer customers a uniquely reliable solution when it comes to delivering and manufacturing drugs. For example, the firm signed a 10-year partnership agreement with Moderna for its mRNA platform, which enabled the delivery of a successful COVID vaccine and will also underpin future product innovation. As such, we expect Lonza to benefit from any future mRNA breakthroughs.

Do you see opportunities in the energy sector?

A key theme here, and one that we have touched on many times, is the challenge presented by climate change, and the importance of investment in green energy. However, we also have to recognise that the world is not in a position to switch off oil and gas just yet. So, we need to see an energy transition phase that is fair and does not leave behind those who can least afford to pay. Meanwhile, the war in Ukraine has triggered an energy price spike which has merely exacerbated chronic underinvestment.

Picking innovators individually is nonetheless quite tough. That is why we prefer to focus on the firms that support new product development across the industry, leaving it less exposed to individual winners or losers.

As for specific stocks, BP and Shell have clearly benefitted from rising oil prices. Further, these are firms that tend to perform well during period of market weakness. Importantly, we also believe in their transition plans. They are both seeking to become less about “big oil” as they move towards net-zero by 2050. This involves gradually winding down their oil and gas operations and reinvesting into renewables and hydrogen power. In the absence of this level of “green” ambition, we would not necessarily be enthusiastic about investing in either company. However, provided they stick to their pledges, both firms will play an important role in the drive towards greater global sustainability. ●

As bond markets have whipsawed in the wake of the government’s “mini-Budget” and against a backdrop of global economic instability, Mat shines a light on some of the terms that may be baffling newer investors.

Having been almost boringly predictable for years, the fixed income space has been anything but in 2022. Rapidly rising inflation, and the associated hikes in central banks’ interest rates, have collectively pushed bond prices down and yields higher. At the same time, despite the fact that most companies have not experienced any fundamental deterioration, investor sentiment has weakened. Poor liquidity has further worsened conditions. The result of all this is that the spotlight is now firmly on bonds in a way that it has not been for many years. That is why this quarter I want to try to demystify five key pieces of jargon that appear regularly in bond market commentary for anyone wanting to follow what is happening.

Fixed income securities

The reason for the name is simply that these “IOUs,” which may be issued by either government or companies, carry a fixed rate of interest. This makes their cost, in cashflow terms, easy to predict for any issuer and it fixes the income return an investor can expect. As such, they are more common than the alternatives, where the income on offer may be adjusted for inflation. So, a coupon of 2.5% for example, means a bond will pay £2.50 per £100 of “nominal value” (in effect a set quantity of a given bond). The corollary of this is that the price of this type of security must change to ensure that the return on offer remains competitive. That brings me onto “yields.”

Exploring bonds

Mateusz Malek

Head of Bond Research

Bond yields

There are several ways to quote a bond yield and they may also be adjusted for tax. The two most commonly quoted ones are the “flat” yield (the annual income as a percentage of the current price) and the “yield to maturity” (also know as the “gross redemption yield”). This factors in the annual income and capital gain, or loss, which accrues to an investor as a percentage of the current price. Since bonds carry a fixed maturity (or “redemption”) date and value, this gain or loss only materialises if the security in question is sold before that date.

Interest rates and QE

As we have seen recently, the actions of central banks have a direct impact on the price and yields of bonds.

There are two ways in which they can influence markets – via interest rate decisions and the deployment of quantitative easing (“QE”).

In anticipation of a change in interest rates, bond yields will move. In short, if rates rise, bond yields have to rise too.

On a fixed income security that means prices have to fall. The same thing is true in reverse if interest rates are cut.

Turning to QE, this is a process whereby a central bank commits to buy bonds in the open market. The hope is that in doing so, prices will rise, and yields will fall. We have seen this in action recently with the Bank of England relaunching QE in response to the turmoil which followed the government’s mini-Budget. The opposite strategy involves the government selling bonds back into the market and is known as “QT.” For a reading on what central banks might be expected to do in the future, some investors will look to the “yield curve.”

The yield curve

This much-quoted chart plots the yield on similar bonds (“gilts” for example) with different maturities. Join those up and you get a line, or more usually a “curve.” Normally, investors expect that they will earn a higher yield for committing their money over a longer time period – so a ten-year gilt will yield more than a two year. Plotted, these yields create an “upward sloping” curve. Commonly, this is equated with an expectation that the economy is stable, or growing, and that interest rates may rise in the future.

However, as the economic outlook has deteriorated, investors have shown a preference for locking into the fixed yields on offer from the perceived "safe haven" of gilts for longer. This can "flatten" or even "invert" the curve.

Credit spreads

Another measure of potential trouble is “widening spreads.” All other factors aside, the riskier a bond, the greater the annual return an investor will expect for holding it. So usually, a government IOU yields less than a corporate bond with the same maturity. And within the corporate bond world, different issuers will carry varying levels of risk as will the types of bonds that they sell. The gap between these yields is known as a “spread.”

The wider this is, the more nervous investors are about holding riskier bonds and the greater the return they demand to compensate. In stable markets spreads tend to be quite “narrow” and the converse is true.

Wrapping up

Despite recent volatility, bonds can play a central role in portfolios when it comes to diversification and meeting calls on capital. Please get in touch with your Investment Manager to find out more. ●

Building relationships

Jonathan Drysch Associate Director

As Jonathan celebrates ten years at Killik & Co, he reflects on his Family Office role and how he helps multiple generations to evolve.

Why did you choose a career in wealth planning?

I entered the industry in 2010, following a recommendation from my father’s financial advisor. He could foresee a huge future shortage of talent following the introduction of the Retail Distribution Review. One of its requirements was that advisers had to be qualified to a minimum standard. The impact, as he correctly deduced, was to send many existing ones into retirement whilst creating opportunities for people like me.

I started out at a large accountancy firm called RSM International. At the time they had a financial planning and investment management arm, but that was soon sold to Tilney (now Evelyn Partners). As a result, I started to look at alternatives, including a paraplanner role at Killik & Co, which involved background analysis and report writing. However, what really caught my eye was the firm’s comprehensive in-house training. Coupled with the relevant exams, I could see a clear route to Chartered status and the point where I could start engaging with clients directly.

What do you do in a typical day?

One of the things I love about this job is the variety. I have to constantly blend the appropriate level of technical expertise with a range of people skills. I need to be able to raise and discuss potentially tricky family issues as well as teasing out life goals, worries (e.g., “will we ever run out of money?”) and challenges (“how can we create a secure legacy for our grandchildren?”).

In the course of a conversation, I may be required to discuss anything from general tax efficiency to specific funding issues related to school fees, property acquisitions, life after work or later life care costs. What’s more, I may be meeting people who are at the start

of their financial journey, or much further through it and perhaps weighing up the sale of a business, an inheritance or even a divorce settlement.

Which aspects do you enjoy the most, and the least?

Whilst I get a buzz from researching technical solutions for clients, I much prefer meeting them. If possible, I like to visit them at home, where I can get a proper feel for who they are, what motivates them and how the firm can best support them. Naturally I still also conduct meetings remotely when that is their preference.

I also love attending the frequent networking events run by the Family Office. These are always packed with interesting people, whether clients, or the experienced professionals such as solicitors, accountants, property experts or educational specialists we may call on to help them.

I am fortunate enough to have the support of an administration team, which helps when it comes to the biggest challenge of dealing with the pace of regulatory change, particular regarding pensions. I also benefit from a regular program of Continuing Professional Development (CPD) plus the expertise of a well-established compliance department.

How is the industry evolving?

For starters, client conversations are becoming much wider than they used to be and may span investment management, tax guidance and estate planning. Sometimes our role is to unearth the questions families may not have thought about – the things “they don’t know that they don’t know.”

Coupled with that, we often find that different generations may hold conflicting views about goals, time horizons and how their money should be managed. It is then my job to help find the middle ground and steer everyone towards it.

Technology increasingly helps. For example, our cashflow modelling

software enables us to map how the financial future may look for an individual, a couple or a family. As part of that we can model changes in the various underlying assumptions which will affect, for example, how and when someone may hit what we call “peak savings.” My colleagues Mike and Nina discuss this at greater length on pages 12 and 13 in the context of our latest Killik Lifetime Planning initiative.

Meanwhile, we are innovating all the time through our save and invest app, Silo. Just recently, we introduced the concept of gifting, which enables family members to easily pass regular amounts, or lump sums, down to their children or grandchildren via a Junior ISA.

What tips do you have for an aspiring wealth planner?

Firstly, it is never too early to start building your network. School or university friends could one day be future clients and even referrers of new business. And so, as the saying goes, "always connect.” Secondly, understand the scale of the challenge when it comes to the relevant exams. Getting to chartered status takes time, sacrifice and commitment, albeit the payoff is well worth it. Thirdly, if you get the chance to speak to, or even work alongside, someone in this field, do take it.

Can you pick out your best ever financial decision?

My first flat purchase in London. It doubled in value over eight years, a fact that underlines the importance I attach to trying to help younger generations within a family to get onto the property ladder tax effectively.

What would you say to the 18-year-old you?

Waste less cash. When I think about how much I could have made if I had started investing even small amounts in something like a pension a little sooner, I regret not being more disciplined. ●

This quarter Mike explains how a new Lifetime Planning tool will enhance the firm’s approach to managed portfolio building and help clients journey to peak savings.

What is the overall aim of Killik Lifetime Planning (KLP)?

Our vision for this comprehensive new tool is to take our existing Wealth Management expertise, available to every client of the firm, and project it forward using KLP. Whilst forecasts never guarantee future performance, this process will give us a clearer picture as to whether, or not, they are on track to achieve their goals and hit a desired peak savings target. What is more, we will be able to model and assess the impact of key changes that will naturally happen as they move along their own personal timeline.

Why introduce it now?

We have always been innovators in the investment and wealth management spaces. As such, we want to stay one step ahead of our peers. Take the concept of risk management via global portfolios built on seeing the world through a thematic lens. That approach emerged and was adopted over a decade ago, becoming more common place amongst our peers more recently. In this time we have embarked on a new journey, one to engineer our processes to map the right combination of specialist and collective knowledge to the attainment of specific client goals. Here, we engage experts in specific services to build the appropriate portfolios, whilst our Advisers focus on understanding their clients and guiding them towards their lifetime goals. In that context, KLP is the natural next step.

The underlying investment strategy is built on refining the way we manage a client’s money by blending our core offerings, based around global equities and bonds, with our specialist services.

Taking the lead

Mike Pate

Head of the Advisers

How does it work?

In order to get the overall asset class blend right from the start, we need to understand how our clients see the future in terms of “three pots” – rainy day emergency funds, amounts set aside to meet foreseeable calls on capital and then lifetime savings. Having identified the size of the third pot, we can gauge what we call a client’s “natural attitude to risk” and start to map the kinds of future returns they might reasonably expect to earn in the context of their stated objectives.

What makes our approach unique is that we can pull together a portfolio that is built from our unique specialist services expertise. This will help us to maximise the level of expected return, given our understanding of a client’s expressed tolerance for risk. The result is that we are able to offer a composite portfolio-based solution supported by multiple levels of expertise rather than the typical “one size fits all” (or certainly “many”) approach adopted by many of our peers.

KLP then gives us the ability to show a client whether the expected returns we are offering are going to get them to where they want to be. If not, we can begin to discuss solutions. These might include working for longer, saving harder, supplementing an expected future income stream with other savings sources, or something else depending on each individual client’s circumstances and expectations. In short, we are moving away from the typical “snapshot” investment management solution to a much more personalised, dynamic, and forward-looking one. As such, I see it as nothing less than the next phase of asset management.

What will determine a client’s future returns?

Our approach is ultimately underpinned by a client’s ability to stomach short-term market volatility. Once we understand this, we can model target returns using historic data. As part of this process, we

will take a client through our data pool which captures annual volatility (using “beta factors”) the historic five-year “worst case” scenarios and a simulation of the last 30 years encompassing annual returns and intra year drawdowns in portfolio values. If they are not comfortable with, say, the possibility of suffering a double-digit markdown, we can discuss changes to, for example, the specialist services mix so that the overall result is more defensive. Naturally, the corollary is that future returns may be reduced, and therefore the date at which target peak savings are achieved, deferred.

KLP is predicated on our ability to use historic data to make logical assumptions about future returns but that is something we are confident about for reasons Paul touched on in his earlier article (see page 4).

In some cases, our approach will expose the fact that a client can comfortably hit their required level of peak savings or may have even already done so. In that scenario, KLP can help us to identify surplus amounts which may, for example, be available to pass down to future generations.

Why set a 3.5% peak savings decumulation rate?

Our internal analysts have done a lot of work in this area, looking at historic data in some detail. Our conclusion is that a 3.5% drawdown rate should give most clients the ability to achieve a balance between maintaining capital once they pass “peak savings” and also generating a decent income, having stopped, or scaled back, work. As such, it can best be viewed as our best estimate of a sustainable drawdown rate. Naturally, 3.5% is just the starting point – some clients will want, and be able to, draw funds from their portfolio at a higher rate, whilst others will be more comfortable with something lower. Once again, the key to getting this right is a deep understanding of our clients and their goals. ●

Digging down

Nina Manning

Head of Digital Delivery

Nina answers some early frequently asked questions about our new tool.

How will this new KLP tool be used?

As Paul and Mike note in their respective articles (page 4 and opposite), guided by an Adviser, KLP will allow our clients to visualise their future wealth holistically via one simple, dynamic dashboard. This will enable us to help users to do three specific things. Firstly, they will be able to project the value of their Killik investment holdings so that they can judge whether, or not, their finances can support their future goals. Secondly, we will be able to model alternative scenarios to assess the impact of saving more, or less, over time. And thirdly, it will allow us to map the impact of choices made now, and in the future, on their family's financial position.

Where can I find it?

KLP can be accessed via myKillik.com either via a client’s Dashboard or via the ‘Main Menu.’

How can I get help?

An Adviser will be happy to talk anyone through their personal goals, natural attitude to risk and the wealth of historic data that supports our approach. When it comes to using the tool within myKillik.com, there are some helpful links in the top right-hand corner. Here, there is the option to

be taken through a tour on how to use KLP via a range of useful popups. There are also links provided to the full “help” documentation, including one that connects a user to an Adviser.

What are ‘Future Events’?

This is the way we describe any contributions or withdrawals, whether one-off or regular, over the course of a client’s lifetime planning horizon. These can be added to, amended, or deleted as circumstances and expectations change. We dynamically plot them along each client’s timeline so that they can easily map the impact on their financial future and the potential effect of adding new ones. These may arise for a number of reasons, including a change in income (and therefore regular savings), the receipt of an inheritance or perhaps the proceeds from selling assets such as property, or even a business. As part of our investment process, an Adviser will also help to factor in the impact of known future withdrawals (“foreseeable calls on capital”).

What is a “Valuation History”?

This feature is coming soon to the myKillik app and website. Available through the main menu, it will allow clients on our newer Investment Services to view the historic value over time for their individual services. Clients will also have the ability to filter

valuations as they wish, for example by connected accounts. This facility will interface with our new tool to also allow them to project valuations forward and, with the help of an Adviser, to weigh up progress towards their future objectives.

How can I set up a monthly savings contribution?

As Paul notes on page four, our Digital Team are working on facilitating regular saving and instant payments within the myKillik app. More details will be available soon.

Where can I learn more?

Our webinars will take newcomers through our investing philosophy and guide clients in the use of this new tool. Naturally we will aim to answer any questions that are raised in relation to any aspect of KLP. Further information will be sent out periodically in digital form and our Advisers will also be happy to discuss the wider client context within which this new tool will operate.

How can I offer feedback?

We have included a ‘give feedback’ link in the KLP tool to allow clients to complete a short survey about their user journey and experience. Feedback can also be emailed to research@killik.com

How will this tool evolve?

Based on dynamic feedback, the development of KLP will be a continuous and iterative process.

As our clients’ needs change so, hopefully, will the functionality it offers. Rest assured that further information and educational support will also follow. Finally, and to reiterate, our Advisers will be more than happy to field queries on any aspect of Killik Lifetime Planning. ●

Gordon recently spoke to three experienced fund managers in the venture capital space. Here are the highlights. For further information about the Killik & Co Global Venture Capital Service, please speak to your Investment Manager.

Martin, how would you describe your investment approach?

Martin Davis, CEO of Molton Ventures PLC

Molton Ventures is, perhaps, the most mainstream player of the three represented here. We are a FTSE 250 company on a mission to try to bring venture capital (“VC”) to the attention of medium-to-long term UK savings institutions. I believe that every pension fund, for example, should have an allocation to it, even if it is relatively small, because it offers one of the few routes to the sorts of yields they need to achieve for their customers.

In terms of our investment philosophy, we aim to build a portfolio of highly attractive assets that can deliver strong returns and the corresponding growth in our net asset value (NAV). One of the pillars of our success in achieving this is the fact we don’t overspecialise and invest right across the corporate spectrum. Currently that means we hold around 70 companies.

When it comes to managing downside, in what is undoubtedly a risky space, this level of diversification helps. The types of business we invest in are typically about to break out and expand quickly to deliver high gross margins (ideally well above 50%) and revenue growth (of between 50% and 100% per year).

Getting in early

Gordon Smith

Head of Fund Research

By spreading our capital, we hope that the overall portfolio will contribute to our goal of annual NAV growth above 20%.

So, what sort of firm makes the cut? Typically, they will have a large addressable market and be either a market definer, or a disruptor. Very often they will also be software based. Geographically, we only invest in European-based companies that we think will become the next “unicorns.” As for sectors, we invest across a spectrum that encompasses many key themes, from the growing demand for healthcare through to decentralised finance.

Why do you focus on Europe?

In one word, “opportunity.” The European VC market is only about one third of the size of its US equivalent, but it is growing faster and delivering better risk-adjusted returns. That is thanks to the thought leadership, technological advances and product development coming out of companies in Europe as the market develops at the sort of pace the US enjoyed five to ten years ago. It is no surprise, therefore, that American money has been pouring into Europe over the last 12 months.

What is the main driver for deal flow?

Deal flow is certainly critical in this space and, at the moment, we have to be very disciplined, as otherwise the volume of opportunities could prompt a “kid in a sweet shop” mindset.

One of the ways we filter them is by getting close to a firm’s founders to ensure we achieve strategic alignment – we should be pitching to our target management teams as much as they are to us. As I always remind our shareholders, anyone can spend money, but doing so wisely is much harder.

The hottest assets in the market are highly sought-after and most are not short of funding offers. It therefore falls to us to position ourselves as their backer of choice. We do that in a couple of ways. The first is through the depth and quality of our research. However, we have another USP, which is the fact we run one of the largest “seed funding” programs in Europe. It means we have around £150m spread over 50-60 small-end funds. That, in turn, gives us visibility across 1,200 of the best early-stage businesses. Our constant monitoring, regular contact with founders and our ability to move fast when the time is right, puts us in a strong position.

What challenges does this market face?

When I talk to investors, they are often baffled by the disconnect between public and private markets. Take technology – whilst valuation multiples have plunged in public markets, the same thing has yet to happen in our space. However, I question the validity of the comparison. Unlike public markets,

which can swing around on sentiment and momentum alone, we gauge each opportunity on its own merits. As a result, we only carry businesses in our books at what we believe to be a realistic value. As a listed vehicle ourselves, the level of transparency, governance, oversight and auditing we have to contend with means that our valuations can be significantly lower than the equivalent publicly listed firms.

As a result, although the NASDAQ has been pretty volatile over the last two years, our valuations have not moved as much in either direction. We just have better visibility over the value of the assets that we manage than the public markets do, because we are sitting on the boards of the relevant companies and monitoring them directly.

I should also mention that although individual technology stocks have taken a hit, the structural themes they represent have not gone away. The way we all work, play, interact and build new products and services is still changing at pace. As such, some of the companies we invest in are solving today’s problems – for example, by helping banks to build cloud-based core retail banking systems – while others are busy solving tomorrow’s, in areas such as climate change and space research. And on that note, I will pass the baton to Mark.

What are the biggest opportunities in space?

Mark Boggett, CEO Seraphim Capital

We think there are three. Firstly, our global accelerator business focuses on seed-stage companies that we put through an intensive three-month programme. We have helped 55 of them to raise capital over the last few years.

We also operate a space venture fund that invests in rapidly expanding “Series A” stage start-ups. That has delivered a terrific internal rate of return (IRR) over the last five years.

Then, last summer, we listed a space growth fund in London, the Seraphim Space Investment Trust. Through it we've invested over the last nine months into a further 14 space companies. We've got an annual target for that fund of a 20% IRR, with some of our biggest shareholders being the largest space companies, such as Airbus.

Like space itself, the investment opportunity in this area is therefore vast. These activities combined make us the most prolific investor in the space market globally, with a portfolio of nearly 80 companies.

As for the sector’s game-changer, one name stands out – Elon Musk and his

firm SpaceX. He has transformed the space market via reusable rockets. For example, the cost of sending one kilo into space in the 1980s was around $80,000. Now it is more like $1,000. Meanwhile, another 150 largely unknown rocket-launching companies are racing to drive down that cost further still. This stampede has opened up the possibility of commercialising space.

However, it is only half of the story. The other concerns the revolution in the satellite industry. These used to be the size of a bus and could cost $1bn or more each. But in recent years private entrepreneurs have been adapting technology from adjacent markets, whether consumer electronics, smartphones, or oil and gas. The resulting satellites are smaller, lighter, and cheaper. Many are the size of a shoe box or a microwave oven and can be built for a few million dollars.

Combine these two mega-trends together and suddenly we are in the realms of launching constellations of satellites capable of driving a whole new digital infrastructure that will shape and define society over the coming decades. We are already seeing evidence of it in our approach to connectivity, mobility, smart cities, and climate change.

All of which means the time to invest is now. For example, although there are only around 3,800 operational satellites in space today, 80% of them were launched over the last three years. Over the next five years, that number could increase to tens, or even hundreds, of thousands.

As probably the busiest global investor in this market, we see 50 to 100 space-related investment opportunities every month. Many come from generalist, technology firms such as Molten Ventures. As they spot opportunities, we get approached both for our specialist view and to see whether we want to co-invest. Our investment trust is mainly focused on the full spectrum of growth-stage companies through to larger, more mature firms, however, we also like to help to incubate very earlystage opportunities.

How do your accelerator programs work?

We run two each year. We select the top few companies where we like the management team, the proposition, and the technology, but which are very early stage. We then invite them to participate in our three-month program.

During the first stage, we engage our corporate partners, who include the likes of Airbus, MDA, SES, and Telespazio. They help us to evaluate each opportunity.

The second part of the program is all about making the chosen few teams investable. We help them with their pitch deck and take them through the process of talking to investors. We then introduce them to around 300 of our VC contacts globally, in the hope that they will syndicate, and invest in, these businesses.

However, it is what happens next that really counts for us – we take a twoyear investment option over all of the participants that stay the course. Over that period, we carefully monitor them to determine how they are progressing technically and commercially.

The proof of this approach is the fact that five of the companies that are now maturing within our investment trust originated from our accelerator programmes. As such, it is a fantastic way for us to filter very early-stage businesses.

Can you pick out some examples of the trust’s investments?

One of our thematic drivers is how we solve the two biggest challenges faced by our planet: climate change

and sustainability. Space-based digital infrastructure is a key part of this, as it will help us to monitor companies in terms of their use, or misuse, of resources.

Enter one of our biggest holdings, ISISPACE, an Earth observation business, with the largest constellation of radar satellites in the world. These enable it to “see” earth, even faced with weather events such as tornadoes, floods, and hurricanes, or at night-time, to track what is happening on the ground to a precise level of resolution.

Their aim is to build a portfolio of assets large enough to enable them to monitor every square metre of the planet at three-hourly intervals. Once they have that level of detailed historic data, they can apply algorithms to try to determine what might happen in the future.

We believe that the data thus generated will be relevant to firms across almost every sector. Insurance is the obvious growth market, but they are also seeing interest from areas such as emergency management and humanitarian aid.

Another example of the type of company we hold is Spire Global. They have around 150 small space satellites which carry sensors that can collect more weather data than all of the global governments combined. They also track every boat and aeroplane, using the data gathered to help an entire range of industries interested in everything from measuring greenhouse emissions to tightening up long-range planning.

Meanwhile, a company that we believe is effectively addressing connectivity around the world is AST Space. They have generated a technology solution that enables them to be able to effectively build cell towers in space. These can connect to any mobile phone, wherever it is located without the need for a hardware or software change. Currently they are busy building up a satellite constellation to target the world’s equatorial regions which have the most limited mobile network coverage. To that end, they already have contracts with eight of the world's leading mobile network operators, with potential access to 1.8 billion subscribers.

The ability to connect to them all will help to drive improvements in health and education and address social inequality around the world. And, as Martin will no doubt confirm, we are not the only fund with an interest in that outcome.

How significant is the “third wave” of the life science revolution?

Martin Murphy, CEO Syncona Investment Management

Let’s start with what it is, to which the short answer is the part of the life sciences focused on gene and cell therapies. Our role involves collaborating with academics, who have typically spent 20-40 years working in their chosen field, often with a medical background as well as a grounding in research. In addition to treating patients, via existing tried and tested therapies, they seek to identify gaps where they are being poorly served and that may offer a sizeable commercial opportunity as a result.

Underpinning their work is a drive to push important innovations through the laboratory, get them translated into clinic procedures, and then out to the market. That is where we can help.

Syncona partners with these individuals, working as a coentrepreneur and helping them to write business plans that will credibly develop technologies into well defined, proven, and reimbursable (which means someone will pay for it, whether a commercial firm or an insurer) medical products. We've been doing this at a rate of two to three companies per year, and today we have twelve in the portfolio.

About two-thirds of these are focused mainly on the opportunities being created by what we call ‘third-wave technology.’ Every decade or so in the life sciences, we witness a step change that enables a whole new raft of drug development. The first wave featured traditional chemical drugs, such as pills. These became the blockbuster products for everything from ulcers to irregular heartbeats, on which the large-cap pharma businesses were built. Most were brought to market through the 1970s and 1980s. Then, in the 1990s, we saw the second wave, the cornerstone for which was the molecular biology revolution. That allowed large protein drugs to be made for the first time. Initial scepticism about their commercial viability (given they were expensive to make, had to be kept cold and needed to be injected, rather than swallowed) quickly faded. Eight of the world's best-selling drugs are based on this newer technology, including one of

the most successful COVID vaccines. Now, we are experiencing another revolution of third-wave drugs built not just around innovations such as mRNA, but also cell and gene therapy.

Here, the big break through is the ability to genetically re-engineer a virus with the aim of delivering a therapy that can replace a broken gene. Investors need to realise that this is no longer science fiction – we are in the realm of approved clinical medicines.

An example is a cell therapy for a disease called a ‘lymphoma,’ a cancer of the white blood cells. Sufferers have been traditionally offered chemotherapy, and in some cases a bone marrow transplant. However, both solutions vary in their effectiveness.

That is where “Yescarta” fits in, an approved cell therapy that involves immune cells being taken out of a patient and genetically engineered outside of their body. They are subsequently replaced to retarget a tumour. In end-stage patients, about 40% of those people who would normally have died within 6-12 months survive to live disease-free.

In summary then, third wave technologies, whether cell therapy, gene therapy, nucleic acid technology or DNA sequencing, will allow previously intractable medical problems to be solved in a whole new way and with better results.

That, in summary, is the space that we operate in. We have built a number of gene therapy companies and have been highly successful at exiting them. Last year, for example, we sold a company called ‘Gyroscope’, a business focused on the treatment of a retinal disease called ‘dry AMD’, to Novartis. A second example is ‘Nightstar,’ another retinal gene therapy business, which we sold to Biogen.

Is what you are doing traditional VC?

Not really. That is because although Europe (including the UK) has an exceptional track record in basic lifescience innovation and transformative healthcare solutions, historically it has punched below its weight in terms of translating them into commercial propositions. A big part of the reason is that the normal routes to market are blocked in a lot of cases by a lack of capital.

That’s why we like to help directly to build businesses from the ground up in partnership with the relevant academics. This approach requires proper long-term business planning and potentially large investments in, for example, areas such as manufacturing. So, we follow a long-term strategy to find and convert great research and ideas via licensing rights, clinical delivery, and full commercialisation.

What gives you an edge in this area?

Our three rules of thumb help. The first is that building proper life sciences expertise takes time, and lots of it. That means rule two is “don’t run out of money.” Once we finally exit a business such as Gyroscope, we benefit from a sizeable cash inflow, but until that point, we need solid long-term funding in place. That gives us the ability to finance a development cycle that can last a decade or more. Rule three then follows – “never become desperate to sell.” Our deep capital pool allows us to negotiate an exit without liquidating any position cheaply. In short, we never sell because we need the money there and then. Rather, we only do so once the potential value to us has been maximised. ●

Peter highlights three smaller stocks that he views as great British consumer brands. Please note that these are not covered by Killik Research.

The bear market in smaller company shares has now lasted for over a year. So, whilst we never try to time the markets, it is nonetheless encouraging to see a number of contrarian indicators flashing that suggest we may be at, or close to, the point of maximum pessimism and perhaps even the bottom. Amongst them are, the fact that every market participant we talk to is bearish, a fixation amongst economic commentators on doomladen predictions, big cash outflows from the smaller-cap sector, and the near disappearance of capital raising activity. The result is that huge swathes of the market trade on highly depressed valuations. And none more so than the consumer sector.

UK consumer confidence is at a record low and is now below the level we saw at even the nadir of the global financial crisis or the peak of the pandemic. This is despite unemployment remaining low. We suspect that at least part of the explanation is the shock people have felt as they have transitioned from being stuck at home, with relatively high levels of enforced savings as a financial cushion. Now, the move back to normal life has come with a nasty sting in the form of aggressive inflation. It is this sharp and jarring transition between the two regimes that makes the current backdrop feel so awful.

However, whilst it may be too early to be sure, that is what also makes the consumer sector the sort of space where potentially sound stocks, which could thrive in the future, have been marked down too aggressively. Here are three examples.

Backing Britain

Peter Bate

Portfolio Manager

Mothercare – moving on Mothercare has morphed from being a struggling, UK-focused “bricks and mortar” retailer into an international designer and sourcing agent in clothing and accessories for mothers and babies. Despite the almost complete loss of its UK brand (other than via a small presence in Boots), its products still go to market through around 600 stores in over 30 countries. In many of them it enjoys premium positioning thanks to a reputation for good design and quality.

Then there is the pension deficit, an overhang from the restructuring of the UK operation in 2018. Back then, the group’s large rental liabilities brought the UK operation to its knees at a time when it was being challenged by online operators and supermarkets. The company was effectively placed into administration, which extinguished those obligations but left a pension fund deficit of around £125m. Encouragingly, by February 2022, this was estimated to have fallen to nearer £66m. As a result of the cessation of operations in Russia, the trustees have shown their pragmatism in relaxing the near-term contributions the company must make to the fund.

The firm makes money in three ways. Firstly, it charges manufacturers a percentage share of a product’s cost for agreeing to engage them. Secondly, it charges a fee to get those products out to its franchisees and thirdly, it takes a royalty percentage on the final sale.

Looking ahead, Mothercare will benefit from the fact that the vast majority of its products are now shipped directly from suppliers to end retailers, meaning the firm has no working capital to fund. That is why we are not overly concerned by the recent decline in the underlying headline revenue forecast, as we think it largely reflects a move away from traditional retail towards capital-light, design-led franchising.

Nonetheless, three headwinds persist. One is the impact of the war in Ukraine. Prior to the invasion, around a quarter of sales originated from Russia plus about one third of earnings (EBITDA). Assuming that market never reopens, the firm’s “steady state” annual trading profit potential is around £10m per annum, rather than the £15m it once enjoyed.

A third area of potential concern is £13m of net debt from a specialist lender. The current facility, which matures in 2025, carries an eye-watering 13% coupon. However, as the company proves it can trade profitably without its Russian operations, we suspect the group will be in a position to refinance on much more attractive terms.

Overall, therefore, we remain optimistic. We think that the market has set revenue expectations conservatively and not fully factored in the scope for further cost cuts. What is more, we see significant growth emerging from several key initiatives. One is the recruitment of additional franchisees – the group still has no exposure to seven out of the top ten global markets by wealth and birth rate. Another is the ongoing transition away from selling “end of line” UK stock internationally and towards proper brand localisation. Further, we are excited by the firm’s product range expansion aimed at taking a greater “share of wallet” in areas such as specialist babywear and skincare.

At current levels the shares trade on less than 10 times what we feel to be its recovered earnings capacity. We feel this undervalues what is increasingly an international intellectual property licencing business, rather than a conventional retailer.

Portmeirion – homing in

This designer, manufacturer, and distributor of branded homeware products is internationally diversified, with its top three markets being the US, South Korea, and the UK. From a broad brand stable, which boasts 700 years of combined history, the firm sells products under the Portmeirion name (ceramics), alongside Spode (pottery), Royal Worcester (bone china), Pimpernel (placemats), Wax Lyrical (home fragrances) and Nambe (premium US homeware).

As at 7th October 2022, the shares trade on 6.2 times 2023 earnings and offer a 5.4% dividend yield. This represents a discount of around 50% to the firm's long-term average forward price to earnings (PE) ratio. If Portmeirion can successfully achieve greater online sales penetration, we see an obvious potential takeover angle. Alongside any premium that could create significant sourcing, manufacturing and distribution synergies should arise too.

Halfords – gearing up

Halfords is a UK retailer with a focus on motoring & servicing. This accounts for around 70% of revenue, with cycling products and services contributing the balance. In addition to its 400 stores, the group operates about 600 garages, making it a sizeable independent operator in the highly fragmented market for vehicle servicing, maintenance, and repair. Overall, Halford’s sheer size, combined with its leading market share, all backed by a 130-year-old brand, make competing difficult for other operators.

less discretionary income stream. It also generates higher and more recurrent margins whilst lowering the foreign exchange exposure that comes with buying large amounts of product from China in US dollars. Meanwhile, from a customer perspective, the strategy offers a clear differentiator from pure online retailers and non-specialists who are generally transaction-led and tend to “race to the bottom” on price.

The business is focused on leveraging these brands by launching new products into new markets. Meanwhile, the sharp recent acceleration in online sales following the pandemic – to around 55% of the total – provides a significant opportunity for the firm to get closer than ever to its end customers. This should result in more efficient marketing and increase the firm’s profits per order as it captures both retail and manufacturing margins.

The group continues to benefit from a “drop ship” model with retailers such as John Lewis, who can pass online customer orders through to Portmeirion’s fulfilment centre. This allows them to list more product lines on their website, as they do not need to hold the corresponding stock and therefore avoid the associated cost should a sale fall through. The impact is to maximise their online “shop window” and prevent the loss of sales through the items they would hold being sold out, a particular problem at busy times such as Christmas.

For several years, the key strategic focus has been to become more services led. From a financial point of view this creates a more dependable,

This directional shift also dovetails with a pronounced change in consumer behaviour, away from “do it yourself” (DIY) to “do it for me.” Halford’s own research reveals that around 70% of their potential customers are too time poor, or lack the technical skills, to undertake DIY. That is why the firm opens it stores at the weekend, when many independent garages and bike shops are closed. What is more, customers can usually get a problem diagnosed and fixed on the spot. This model is likely to gain in popularity as cars (and to a lesser extent bikes) become increasingly complex and the pool of DIY enthusiasts continues to shrink.

The firm’s shares have, nonetheless, been extremely weak so far this year. However, we have been reassured by management that this is largely due to the ongoing weakness in cycling, particularly at the lower end. Whilst this is disappointing, the motoring and service parts of the business remain robust. As such, the firm is in a relatively strong position to capitalise should the market turn.

Halfords trades on a 7.3 times 2023 PE ratio with a 6% dividend yield. This seems cheap for a market leader with an increasingly reduced exposure to discretionary consumer spending and a strong cash position. ●

People in the news – regular readers may like to know that Mike Savage recently represented Team GB in the European Aquabike championships in Portugal.

Tim explains what has gone wrong for cryptocurrencies this year before highlighting ten takeaways that apply to all investors.

Some things are only clear with hindsight. Others, however, are more obvious in advance to more experienced investors. The recent collapse of cryptocurrencies ticks the second of these boxes. Although the exact timing of the recent price drop could never have been predicted, other than through sheer luck – an observation that holds equally true for shares, property, and commodities –the fact that one was coming could be. I was one of many commentators who warned that it was “when” not “if” last summer in my short Killik Explains video entitled “Why I don’t invest in cryptocurrencies.” So far, so negative. However, there are also some useful lessons, relevant to all investors, which can be drawn from what has happened this year. What therefore follows is a short summary of what went wrong, for anyone who missed it, followed by my ten top takeaways.

Learning lessons

Tim Bennett

Head of Education

back of Blockchain technology, a genuinely exciting innovation, which warrants much more space than I have here. Bitcoin, and the many rivals it has spawned, are its most visible manifestation and were marketed as a brand new safe, anonymous, fully electronic, and decentralised way to store and move wealth around as well as being a medium for getting transactions done. As such, fans still claim that these cryptocurrencies are the natural successor to the conventional ones controlled by central banks, and in particular the globally dominant US dollar.

As that anti-establishment idea won converts, more currencies were launched, alongside a host of related products. An elaborate ecosystem, comprising everything from dedicated exchanges and even crypto lenders, sprang to life around them. Many of these appeared to mirror the functions of organisations in the non-crypto space and perhaps helped to boost this brave new world’s appeal even further.

vision of this new financially democratic world created to liberate those who felt the most disenfranchised from the global economy.

So, with all of this momentum behind them, what went wrong for cryptocurrencies in 2022, a year during which the Bitcoin price has crashed by more than 70% at the time of writing? It has also witnessed the closure of the popular Coinbase exchange and the bankruptcy of some of the larger crypto lenders.

Analysing a crash

First off, a short recap on the basic mechanics of a market that became widely accessible “on exchange” around 2010. Cryptocurrencies were created and marketed on the

Rising prices then garnered their own momentum as many newer investors simply saw them as the opportunity to make money quickly. Indeed, a view quickly formed that crypto prices could only ever go up. This unlikely premise was underpinned by the idea that the supply of digital “coins” (and any related “tokens”) was constrained by the increasing difficulty of “mining” new ones. This is thanks to the challenge of solving the ever more complex mathematical problems required to do so, and the fact that the total number that could ever be created was finite. Interest in these new currencies started to soar over the last few years as celebrity endorsements and tales of “Bitcoin billionaires” helped create a widespread “fear of missing out.” This took hold most aggressively amongst younger and social media savvy generations who were sold on the

The answer lies in the fact that cryptocurrencies such as Bitcoin –perhaps the best known – always suffered from one fatal flaw. As fund manager Terry Smith once put it, “I have absolutely no idea what they are worth, or how to go about valuing them.” As such, anyone buying over the last few years was relying on a “greater fool” to buy at even higher prices. This mindset is always dangerous in any market. Even now, after a huge correction, I read about “price floors,” “support levels” and “resistance points” – but, given the valuation challenge, this amounts to little more than puff. While everyone who bought in waits nervously to see where prices will settle, my view of cryptocurrencies remains little changed. To recap, whilst the underlying Blockchain

technology on which they have been built remains potentially transformative for fields ranging from central banking to property ownership and conveyancing, Bitcoin, Ether, Dogecoin and the like remain little more than a speculative gamble.

That brings me to my ten lessons. Whilst my observations centre on what has happened in the crypto space, all have a much wider application right across the spectrum of investing.

Investing is not gambling

A classic point of confusion. As the Nobel prize winning economist Paul Samuelson once put it, “investing should be more like watching paint dry or grass growing. If you want excitement, take $800 and go to Las Vegas.” Young people tend to want to find ways to “get rich quick” and take shortcuts to the kind of wealth that their parents may have built up over decades. But whilst a few lucky folk will always make some money from gambles such as buying cryptocurrencies sufficiently early, the majority are destined to lose out. And the more desperate they are – whether to pay back debt, or fund major asset purchases quickly – the greater their losses are likely to be. Equity investors in particular should always remember that their only free lunch – the power of compound growth over many years – works on a “get rich slowly” basis.

What you do not understand, do not buy

I am irritated by people who claim that if I only really understood how cryptocurrencies worked, I would be converted to the cause. In response,

I can only say that I know enough to have make my decision about them, which can be summed up as “not for me.” To reiterate, Blockchain technology is exciting and may overhaul, given time, many oldfashioned processes associated with asset ownership and transference. The problem is that many so-called crypto “investors” piled into its most visible offshoot, on the back of little more than faith, fear of missing out, or pure greed. None are the right motivators for a proper investor.

Never try to time the market

The “greater fool” theory I mentioned earlier posits the idea that the reason so many people knowingly enter a rising market late is because they hope to cash in before everyone else bails out. They assume that their hapless peers will not spot the top of the market before they do and will sell up too late.

This is crazy thinking. Studies have shown that we all believe we are better than average at everything from driving to investing. As such we think we know more than those around us and can “beat the crowd.” However, that mindset ignores the fact that short-term investment markets are dominated by computers, not to mention other humans who are faster, more aggressive, better informed, and better able to stomach big losses. As such, trying to get one step ahead, even if you are a relatively experienced individual investor, is a fool’s game because, as economist John Maynard Keynes once noted, “the market can remain irrational longer than you can stay solvent.”

Do not “double down” on losses

Another infamous mistake, favoured by gamblers, is doubling up the amount of money already committed in the hope of more than recovering previous losses. We all do the equivalent as investors sometimes too. I remember sinking money into a falling stock on the basis that it “couldn’t get any cheaper” and that I would be “buying on the dips.” That stock crashed to zero and I lost 100% of my investment. My conclusion? When the facts change – as they had in that case – change your view and approach.

Avoid blindly following the crowd

Momentum is a powerful force in investing. The trick, however, is to get ahead of it rather than playing “catch-up.” That is why our research teams spend so much time trying to spot structural trends, themes, and potential future winners early. That is a preferable approach to the much lazier one of assuming that “this many people can’t be wrong” and buying into a rising market without having much of a clue about why. As former federal Reserve Chairman Alan Greenspan once cautioned, crowds can suffer from “irrational exuberance” on the way up and the opposite on the way down. As such, they are not always to be trusted, no matter how large.

This time isn’t different

As the prices for various cryptocurrencies rose fast over recent years, fans dismissed any comparison to previous frothy investments. However, history is littered with them, from Dutch tulips in the 1630’s to Dotcom stocks in the 1990’s. Further, many books have been written on the stages of classic financial bubbles.

So it was with Bitcoin. Once again, investors latched onto a great story and then invested on the back of it, sending prices to levels far beyond any provable worth. As such, a crash was always priced in.

Liquidity really matters

This underrated investment term describes the fact that buying and selling anything from shares to gold to cryptocurrencies is not all about following prices. Equally important is understanding whether there is a deep pool of genuine buyers and sellers supporting them and if not, under what circumstances liquidity (the ability to get in or out with ease) might dry up.

The risk for crypto investors was signposted early on. Many people tried, and failed in many cases, to use it to buy anything other than underground economy goods and services via the “dark web,” where its anonymity provided perfect cover for many dubious transactions.

However, investors elsewhere should be aware that liquidity issues can also quickly plague other markets at any time. Open-ended funds are one example – these sometimes have to sell assets quickly to fund big redemptions by unit holders. Another is the "alternative assets" space for art, vintage cars and their like.

Anchoring is dangerous

Human brains crave structure and certainty. And where there is none, they often create it instead. When it comes to investing, this can be dangerous. We may say things such as, “it’s a pity this IPO stock has dropped but when it gets back to the initial offer price I will cash in,” or “look at where “X” was a year ago – it can only be a matter of time before it regains those levels.”

The fact is that yesterday’s prices may be irrelevant to a decision today. As a personal example, I remember starting work in the 1990’s and congratulating myself on not buying a property in a falling market. Years later I would come to regret the fact I was still anchored to the belief that property was a poor investment, when all the evidence suggested the market had turned and was booming as I sat on the sidelines.

Do not be selective with evidence “Confirmation bias” is our well documented tendency to look for data that supports a fixed view of the world, rather than dispassionately using it to tell us what is really going on. No-one likes to be proven wrong, so it is natural that we seek facts and opinions that support our position.

So it was that, even as prices for crypto currencies soared, fans created theories about why. These ranged from economic (the idea of potentially unlimited global demand colliding with a finite supply of coins), to societal (a revolution was under way that would end the global financial system in its current form) to quasi-scientific (Bitcoin would prove itself the ultimate diversifier when other markets crashed). All were examples of our desire for confirmation that we are right.

Equally, when it comes to investing in shares, be wary of firms that sell a powerful story well before they have a credible product to support it. An infamous recent example was Theranos, the biotechnology firm founded by Elizabeth Holmes. She claimed to have revolutionised blood

testing and brought many investors on board on the strength of that boast. However, she never delivered even a working prototype of the relevant machine and the firm collapsed once it became clear that her promises were built on flawed, faked, or non-existent, blood testing.

If something looks too good to be true, it probably is My final lesson is a timeless one that applies much more widely than the recent crypto crash. Warren Buffett once noted that “investing should be simple, but it isn’t easy.” Cryptocurrency investing was touted as both – a guaranteed one-way investment, available to anyone, anywhere.

The reality is that the best longterm investors are knowledgeable, dedicated, patient and circumspect when it comes to the latest innovations. My old history teacher at school used to quip, “If in doubt, keep snout out.” The time to heed that advice was summed up many decades ago by Joe Kennedy. He said that once his shoe shiner started tipping stocks, he knew it was the moment to sell. Similarly once people with little clue about investing start boasting about the amount of money they have made on cryptocurrencies, “meme” stocks, biotech plays or anything else, chances are the relevant market is reaching fever pitch and is about to collapse. ●

Killik Explains videos

If you would like to find out more about the investing principles I have covered here, please head to our extensive educational library at www.killik.com/learn and try the “shares” or “investing principles” tabs. For the links to videos about cryptocurrencies specifically, please email me at editor@killik.com

Reaching out

Kate Fairhurst

Marketing Executive

Kate draws out some of the highlights from our involvement with Pub in the Park this summer.

Over the summer, Killik & Co were fortunate enough to have a considerable presence at the UK’s biggest food and music festival, Pub in the Park. Run in three separate locations: Wimbledon, Dulwich, and Chiswick, it was the brainchild of Michelin-starred chef and celebrity Tom Kerridge. His aim was to orchestrate a series of events that would invoke the spirit and atmosphere of the Great British Pub in high profile parks across the Southeast of England.

To realise his vision, a dedicated team brought together some of the finest food, drink, music, and comedy providers from across the country. Featured names on the food front included chefs such as James Martin and Atul Kochhar, presenter Matt Tebbutt and critic Grace Dent.

Meanwhile, headline music acts ranged from Sophie Ellis- Bextor, to Sister Sledge and Craig David.

Based on feedback obtained from clients at our House of Killik on Northcote Road in Battersea, we need sometimes to reach out to people who may be relatively unfamiliar with the Killik brand rather than expecting them to always come to us. As such, a family-focused festival like this was an obvious one for us to attend.

Getting involved

So, what could a visitor to Killik’s “Big Tent” within each location expect? Whilst anyone attending the three festival days was welcome to drop in at any time, families in particular were drawn to our modern, spacious areas for the many activities on offer that were created specifically for them. As a family-owned, independent business ourselves, the firm has always prided itself on being family

oriented and so we designed our space to be somewhere that members of all generations could relax away from the hustle and bustle of the festival. Thanks to our extensive partnership initiatives, children could get stuck into everything from face-painting to arts and crafts, while their parents were able to sample gin and beer tastings, or just enjoy a cup of tea or coffee. Visitors of all ages were, of course, welcome to sample our free ice cream as the summer heat built up over the course of each day.

Members of our Advisor teams were also on hand to chat throughout and to encourage people to enter our quiz-based competition. Naturally, they were also happy to answer any related financial questions. The quiz prize was a £100 voucher for an investment into our Save and Invest app Silo. In all, 285 people had a go at it, resulting in nine lucky winners over the three days.

Looking ahead

If you would like to see more pictures from these events, please go to our Pub in the Park highlights area on Instagram. And for details of any future events which we will be involved with, please get in touch with your Advisor or email, events@killik.com ●

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