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For today ’s discerning financial and investment professional

Auto-Enrolment – Bring ‘Em All In Japan – A Complex Problem Where Next For Fixed Interest?

INTO 2016

A BETTER YEAR IN VIEW? OUR FUND MANAGERS TELL ALL NOVEMBER 2015

ISSUE 44

CONTENTS C O N T R I B U TO R S

Brian Tora an Associate with investment managers JM Finn & Co. Lee Werrell a senior compliance consultant and industry adviser.

Richard Harvey a distinguished independent PR and media consultant.

Michelle McGagh brings a wealth of experience on industry developments.

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

Editorial advisory board: Richard Butler, Michael Holder, Ian McIver and Mark Pullinger

7 News All the big stories that affect what we say, do and think

16

Ed’s Soapbox Godzilla isn’t the only scary thing to have emerged from the Tokyo shadows, says Michael Wilson

21 2016: Value in Emerging Markets?

In a tricky year, says Brian Tora, the surprises may be – well, surprising

24 Outlook 2016: Looking Better for Europe Stephanie Butcher at Invesco Perpetual, says there’s reason for optimism

28 Outlook 2016: A Macro-Driven Market John Chatfeild-Roberts, Jupiter’s Head of Independent Funds, takes a robust view

32

A chilly autumn – but can the spring bring a better climate?

Our experts are mainly hopeful

11/15

THE FRONTLINE:

Editor: Michael Wilson editor@ifamagazine.com

Art Director: Tony Merlini

tony.merlini@thewowfactory.co.uk

Publishing Director: Alex Sullivan alex.sullivan@ifamagazine.com

Outlook 2016: The Big Divide A tighter US, a looser Europe. Jim Leaviss, of the M&G, sees a parting of the ways

35 An Intelligent Pack Market researchers Painted Dog talk about what makes a survey company truly successful

39 Investment Doctor Michael Wilson offers his insights into the details of pound cost averaging

CONTENTS

November 2015

40 Auto-Enrolment – Everybody In...

The smallest employers are now coming into the auto-enrolment pensions scheme, says Lee Werrell

42 Fun, Fun, Fun Oldies know what they want from life, says Richard Harvey. So why are they buying boring old annuities?

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

IFA Magazine is published by IFA Magazine Publications Ltd The Old Wheelwrights, Ham, Berkeley, Gloucestershire GL13 9QH Tel: +44 (0) 1179 089686 ©2015. All rights reserved IFA Magazine is for professional advisers only.

Full subscription details and eligibility criteria are available at: www.ifamagazine.com

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“Wolde ye bothe eate your cake, and have your cake?”

John Heywood, 1546

The Witan multi-manager approach – aiming to deliver both income AND capital growth.

Some people don’t think it is possible to do both. At Witan we think differently and, since 2004, our specialist investment managers have helped enable Witan shareholders to have their cake and eat it too.

Witan is the only fully multi-managed global equity investment trust.

Our carefully selected range of fund managers picks the stocks while Witan directs the overall portfolio strategy. The goal is to outperform the relevant equity benchmark and to grow the dividend faster than the rate of inflation. Naturally, this cannot be guaranteed so please read the risk warnings carefully.

By playing to the individual strengths of our managers we strive to reduce volatility which can arise from being dependent on a single manager. What’s more, Witan offers exposure to the world’s major equity markets, diversified by manager, geographical region, industrial sector and individual stocks. All of which could help your clients to both have their ‘investment cake’ and eat it…

Your clients can invest in Witan Investment Trust plc in a number of ways. Witan’s shares can be traded through many online platforms.

Witan is also available for investment via an ISA, share plan and children’s savings schemes.

40 year growth in Witan’s dividends per share versus UK Retail Price Index † 5000 4000

Witan Investment Trust plc is an equity investment.

Please remember that past performance is not a guide to future returns. The value of an investment and income from it can fall as well as rise, as a result of currency and market fluctuations and you may not get back the amount originally invested. *

Witan dividend (pence per share) RPI Index

3000 2000

1000 0 1974

1978

1982

1986

1990

1994

1998

2002

2006

2010

2014

†SOURCE: Datastream. Both data series have been re-indexed to 100.

Visit www.witan.com Available on a number of online platforms *

40 YEARS OF CONSECUTIVE DIVIDEND GROWTH FOR FINANCIAL ADVISERS ONLY. Issued and approved by Witan Investment Services Limited. Witan Investment Services Limited is registered in England no. 5272533 of 14 Queen Anne’s Gate, London SW1H 9AA. Witan Investment Services Limited provides investment products and services and is authorised and regulated by the Financial Conduct Authority. We may record telephone calls for our mutual protection and to improve customer service.

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WORDS OF WILSON

November 2015

Hold the Champagne The bad news. Britain’s over-55s withdrew almost twice as much as expected from their pension plans during the first six months of the April pension freedoms The better news: it was still only £4.7 billion, which took the form of £2.5 billion in cash lump sum payments and £2.2 billion in income drawdown. The greater part of which seems to have gone straight back into the system as fund investments.

And the really unexpected news: the net result was a £666 million windfall for the Treasury, more than double the amount that the government had forecast last year when it announced the relaxation of the rules.

And to think, there’s hardly a Lamborghini to be seen anywhere. Even among those who hung onto their cash as lump sums, it seems to have gone into paying off the mortgage, helping the grandkids with a home purchase, or something else that their mothers would have approved of. Most of the 166,700 straight cash withdrawals came from smaller pots – the average payout, apparently, was just £15,000, which wouldn’t have made the insurers a whole lot of money anyway.

Even the income drawdown brigade weren’t ambitious.

The 606,000 over-55s who took income drawdown payments during the second and third quarters settled for a measly average payment of £3,600.

And even if you scaled that up to £7,200 a year, it still wouldn’t be enough to suggest that the days of Spend, Spend, Spend were here to stay.

Annuities Get a Breather In short, on the face of it, the latest figures from the Association of British Insurers look like an unalloyed triumph for common sense. And a lot like a consolation prize for the annuities industry, which has unexpectedly seen its net inflows rising. During the third quarter, the ABI said, 22,380 annuities with a combined value of £1.17 billion were sold, compared to 18,200 (£990m) in the second quarter. The last time we saw a quarter-onquarter increase, says the ABI, was in the third quarter of 2012.

And here’s the good part.

During those six months, £2.85 billion of drawdown money was reinvested in 43,800 income drawdown products - an

to the effectiveness of the government’s programme to get the pensions message across. According to the ABI, 60% of those who’ve opted for drawdown rather than annuities have switched providers.

(Among annuity buyers the proportion of switchers was only 40%, but that’s often because providers make better offers to their existing savers.)

But that £666 million in extra revenues for HMRC still makes me wonder a little bit. Especially since it came from only about half a million investors – a cool £1,300 per head on average. Tax thresholds being what they are, you can bet that the savers who got hit were only a fairly small minority. But how many of them could have seen their tax burdens shaved or even saved by competent advice? And how many of them didn’t even seek it?

Mike Wilson, Editor

average of almost £65,000.

And among those 40,600 who opted for annuities, the average investment was almost £53,300.

A Success for the Treasury All this strikes me as simply amazing. And a testament

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“Anyone can hold the helm when the sea is calm.”

Publilius Syrus (100 BC)

When markets are volatile, you need a steady hand on the tiller.

Witan’s multi-manager approach could offer you a smoother course through choppy waters.

Witan is the only fully multi-managed, global equity investment trust. Which offers you a double benefit - we’re constantly striving to perform better than global equity markets and deliver a growing income - and by virtue of being a multi-managed fund we aim to smooth out the volatility associated with a single manager.

In essence, Witan offers you diversified exposure to the world’s major equity markets so that you gain diversification by manager, geographical region, industrial sector and individual stock.

It’s all designed to help you enjoy a smoother passage to help realise your investment goals.

At Witan, we hope many years of plain sailing await you.

Anchors aweigh! Contact us today, to find out more.

Witan Investment Trust is an equity investment. Please remember that past performance is not a guide to future performance. The value of an investment and the income from it can fall as well as rise, as a result of currency and market fluctuations, and you may not get back the amount originally invested.

Visit www.witan.com

Call 0800 082 81 80

Issued and approved by Witan Investment Services Limited. Witan Investment Services Limited is registered in England no. 5272533 of 14 Queen Anne’s Gate, London SW1H 9AA. Witan Investment Services Limited provides investment products and services and is authorised and regulated by the Financial Conduct Authority. Calls may be recorded for our mutual protection and to improve customer service.

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NEWS

Solvency II

Solved With the January 2016 introduction of higher reporting standards heaving into view, Bristol-based FundsLibrary reports that Jupiter Asset Management and Neptune Investment Management have both opted for the FundsLibrary’s Solvency II Manager solution

The January changes mean that asset managers will need to provide an increased quantity of data for their insurer clients in order to comply with Solvency II reporting.

“Solvency II is a real challenge,” said Solvency II Analyst at FundsLibrary Amber Jefferis. “Insurers and asset managers should ensure they have robust and timely data delivery

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mechanisms in place by 1st January 2016.

Time is running out to put the correct distribution agreements in place.

Organisations who are not yet compliant risk missing the deadline and facing regulatory consequences.”

“Solvency II solutions need to incorporate strong lookthrough capabilities, a robust data file production process,

the requisite legal agreements and a permission controlled distribution service.”

Solvency II was established to provide greater transparency amongst insurance companies over the capital they hold in reserve. It demands much more stringent data reporting requirements for insurers, with the task of providing this data falling in part to asset managers. The

key to this additional reporting, says FundsLibrary, is the look-through process, which peels back the layers of financial product wrapping to reveal the data at security level.

FundsLibrary, which is part of Hargreaves Lansdown, says it has many of the required legal agreements in place and has been providing lookthrough data for more than ten years.

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NEWS NEWS IN BRIEF

Mind the Wealth Management Gap The Implicit Public Subsidy The world’s 30 biggest international banks need to beef up their capital ratios by up to $1.2 trillion, says the Financial Stability Board (FSB), which advises the G20 group.

The extra debt, it said, ought to be issued in the form of loss-bearing debt certificates which could, in extremis, be written down if the banks ever got into trouble. The idea was to reduce what FSB Chair and Bank of England governor Mark Carney (above) called “the implicit public subsidy” of such institutions in times of difficulty.

A new advice service has been launched by EQ Investors, the boutique wealth manager led by Bestinvest founder John Spiers Called Simple EQ, the company describes it as a new online and telephone-based investment advice

service for private investors seeking portfolio management at affordable rates.

The service offers

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25/11/2015 09:37

regulated advice and access to a range of investment solutions managed by EQ’s investment team.

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“Recognising that charges have a direct impact on returns, the cost of the service are completely transparent.

An investor with a Simply EQ Low Cost Portfolio of £10,000 will be paying less than £10 per month in total charges. EQ is also introducing the ability to invest

“As well as tailoring a clients’ investment portfolio to match their appetite for risk, the Simply EQ service includes an affordability assessment to measure

individually as part of a group, with discounted rates dependant on the number of members, starting from groups of ten.”

Sally Collins, who will head up Simply EQ, says that the new system is available for anyone with at least £10,000 (or £500 per month) to invest or transfer. “We believe that offering an efficient, affordable and accessible service will help people invest for their futures.”

John Spiers

the suitability of investing. The service also includes the ability to transfer a range of existing pension schemes including personal and stakeholder pensions.”

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Tel: Tel: 020 020 7291 7291 4700 4700 25/11/2015 09:37

NEWS NEWS IN BRIEF

Auto-Enrolment Rolling Into View China – Handle With Care Further signs of a slowdown in the Chinese economy were blamed for a disappointing start to November, with the FTSE 100 falling back by 4% in the first 14 days – leaving the index 14% down on its April peak. Commodity stocks once again took the brunt of the pressure, as the OECD issued a below-average 2.9% estimate for global growth in 2015. A bounce-back, it said, “requires a smooth rebalancing of activity in China and more robust investment in advanced economies.”

Sandringham Financial Partners has announced the launch of an auto-enrolment consultancy which it says will support partners working to deliver auto-enrolment solutions for business clients The new service, it says, will allow advisers to offer AE solutions to their clients, without having to manage the back-office and payroll issues.

Sandringham’s AE trained partners work on a consultancy basis.

They advise on and implement businesses’ AE needs. The AE specialists work with a wide panel of pensions providers, comprising Royal London, NEST, Aviva, Peoples Pension and Now: Pensions.

“With hundreds of thousands of small and medium sized businesses set to stage in the next year, autoenrolment presents a fantastic opportunity for advisers,” CEO Tim Sargisson. “The Pensions Regulator has indicated that AE compliance will be their main focus going forward and for many businesses this will be their first venture into a complex area. Intermediaries can therefore create tremendous goodwill

and income by offering this service, as well as showcasing their knowledge and expertise to new clients.”

“However, some advisers may not wish to conduct AE business and our system means that these partners can refer leads which can be redistributed. As a result, Sandringham’s partners are able to work with a higher number of clients across a wider range of services.”

“Auto-enrolment presents a Auto-Enrolment in the Final Phase The pensions auto-enrolment process entered its final phase, with the rules extending to the last batch of employers with fewer than 30 staff. Widely regarded as the most problematic phase of the process, the move was expected to trigger a surge of activity among UK advisers with small business clients.

fantastic opportunity for advisers”

Danny Cox

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Corpo

Intelligent access Commodities FX Equities Fundamental fixed income via our partnership with Lombard Odier Asset Managers

We offer one of the most comprehensive ranges of specialist exchange traded products (ETPs) providing a range of exposures from delta 1 through to short and leveraged.

etfsecurities.com This communication has been issued and approved for the purpose of section 21 of the Financial Services and Markets Act 2000 by ETF Securities (UK) Limited which is authorised and regulated by the United Kingdom Financial Conduct Authority. Investments may go up or down in value and you may lose some or all of the amount invested. Past performance is not necessarily a guide to future performance. You should consult an independent investment adviser prior to making any investment in order to determine its suitability to your circumstances.

Short and/or leveraged exchange-traded products are only intended for investors who understand the risks involved in investing in a product with short and/or leveraged exposure and who intend to invest on a short term basis. Potential losses from short and leveraged exchange-traded products may be magnified in comparison to products that provide an unleveraged exposure.

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12/10/2015 25/11/2015 10:01 09:39

NEWS NEWS IN BRIEF

Biggest Challenge for Risk Managers?

Clients…

Well, almost, Attacks in France Paris was shattered by a wave of terrorist attacks on Friday 13th November, as some 130 people were killed in half a dozen major bombing and shooting incidents throughout the leisure area of the city.

The attacks, claimed by Islamic State, were expected to impact on freedom of movement in several neighbouring countries and were felt likely to unsettle the financial sector as France prepared its response to what President François Hollande called “an act of war” against his people.

Housing Values Break £5 Trillion London’s housing market was valued by the Halifax mortgage lender at £1.12 trillion – making it worth more than twice as much as the combined total for Scotland, Wales and Northern Ireland. The net value of houses in the UK as a whole, it said, had risen to £5.1 trillion in 2015, representing an asset growth equivalent to £76,316 for every household.

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According to a new survey organised by Wellian Investment Solutions, client education is currently considered to be the biggest single challenge when managing risk That was the overwhelming conclusion of advisers who attended the recent Wellian Symposium 2015. Almost 80% of the advisers in attendance said their biggest challenge when managing risk in their client portfolios was creating suitable risk profiling questionnaires, and providing appropriate information and education. And around half of the advisers claimed to be concerned about the lack of safe haven options for clients in today’s market.

Also at the top of the concerns list was an over-exposure to equities and to China.

The advisers admitted that these concerns mean they increasingly make use of DFMs. Other major concerns included over exposure to equities as well as over exposure to China. Consequently, the majority of advisers surveyed at the event have also said they expect their use of DFMs to increase in the foreseeable future.

“This year’s Symposium shed light on some of the biggest challenges and concerns advisers face when it comes to managing client risk,” Wellian CEO Alan Durrant said after the symposium. “In order to find a solution to these challenges, the biggest question an adviser needs to ask themselves is: ‘If my client’s aspirations

and attitude to risk have not changed, then why has their portfolio?’”

“In our profession, we like to pigeon-hole risk, but the fact is that risk cannot be measured in one dimension. It is not possible to measure any given risk in isolation and as a multi manager, we take on the risk of those individual assets in our portfolios when blended together.

Similarly, we define the level of risk in our portfolios by considering a wide multiple of factors and outcomes but our underlying principle and defining strategy always stays the same. We always make sure to prepare for the worst, rather than hope for the best.”

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25/11/2015 09:39

NEWS NEWS IN BRIEF

HNW Accolade Slippery Slope

The boss of one of London’s best known independent boutique wealth management firms has won a top industry prize CEO Lee Robertson of Investment Quorum has been declared ‘Asset Manager of the Year for High Net Worth Investors’ at the prestigious Spear’s Wealth Management Awards held recently at London’s Savoy Hotel.

market performance, broader services and innovation, as well as client feedback.

Robertson, one of a strong shortlist, was picked by the judges for his “…exceptional track record and fine results over the past year.”

The award criteria is for a manager who has “…demonstrated outstanding returns and services to High Net Worth individuals in the UK, specialising in managing investable assets between £500,000 and £15 million, in 2014-15.” The judges took particular notice of changes in assets under management,

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Lee Robertson

Known as the ‘Oscars of the Wealth Management world,’ the awards celebrate the innovations and successes of entrepreneurs, philanthropists, private bankers and wealth managers.

“The Spear’s award is an excellent reward for all the hard work the team have committed “

He said: “At Investment Quorum we put the client first, every time – and whilst this award is made to a named individual, I view it very much as recognition for a real team effort on behalf of our clients, who have entrusted us with their investable assets, a responsibility we take extremely seriously.

“The Spear’s award is an excellent reward for all the hard work the team have committed in building the reputation we enjoy today, within the wealth management industry, and increasingly in the broader public arena.

As a smaller firm, working in a sector populated by many larger and sometimes better-known firms, we are proud to have landed an award of such prestige and to be flying the flag for the very best that boutique wealth management can offer.”

The International Energy Agency says global oil stockpiles are now at alltime record levels, with an estimated 3 billion barrels in storage. The news prompted sharp falls in oil prices in November, with Brent crude dropping to $43 per barrel and US crude to $40.55. But although demand growth was still “at a five-year high,” it said, “vigorous production” from OPEC and strong nonOPEC supply would conspire to depress prices in 2016.

Terra Firma After a mere seven years, the last of the Northern Rock catastrophe moves a step closer with the government’s sale of around £13bn of former Northern Rock mortgages to US investment firm Cerberus. The deal brings an effective end to the role played by UK Asset Resolution, the government “bad bank” set up to handle all remaining loans from Northern Rock and Bradford & Bingley. According to experts, the Northern Rock mortgages fetched a modest but important £280 million premium above their book value.

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NEWS

Tavistock Updates AIM-quoted Tavistock Investments has updated shareholders on its acquisition of Standard Financial Group Ltd (including its two trading subsidiaries Financial Ltd and Investments Ltd), which was completed on 13 February, 2015 Back in October 2012 it acquired a 19.9% stake in the group for a reported £2m.

The Vision Group is a made up of Vision Independent Financial Planning and Castle Investment Solutions.

Brian Raven

It reports that since the acquisition, it has conducted a risk appraisal of all

members of Financial Ltd’s advisory network and has transferred the significant majority of those members across to a newly established network, Tavistock Financial Ltd. It has also disposed of Investment Ltd’s sub-scale investment management business and transferred all of the subsidiaries support

staff and operations across to Tavistock Financial Ltd. This, says the company, has reduced the operating costs of the network business by more than £1 million per annum, so that TFL trades profitably.

Tavistock now has a national network of 270 self-employed financial advisers, the company

“The restructured business will contribute significantly to the Company’s future profitability”

says, and it has secured the opportunity to offer the services of its investment management business, Tavistock Wealth Ltd, to their underlying clients, whose assets are estimated to exceed £3 billion.

“Having secured the cancellation of regulatory permissions for FL and IL from the FCA, the final step in the integration process is to close down the three entities, SFG, FL and IL. The Company is therefore pleased to announce that it has now placed these three entities into Members Voluntary Solvent Liquidation and has appointed Moore Stephens and Co LLP to act as the liquidator for each company.”

Tavistock’s CEO Brian Raven added: “Whilst the integration of these businesses into the Tavistock Investments Group has absorbed a considerable amount of management’s time over the past nine months, we are very pleased with the outcome and anticipate that the restructured business will contribute significantly to the Company’s future profitability.”

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The Association of Investment Companies The Association of Investment Companies

A new direction for your clients Discover more about investment companies A new direction for your clients Discover more about investment companies

Investment companies can help advisers add value to their clients’ portfolios.

The AIC is the trade body for closed-ended investment Investment companies can help advisers companies. We help our members deliver better add value to their clients’ returns for their investors. portfolios.

The represent AIC is theatrade investment We widebody rangeforofclosed-ended investment companies companies.

We help our members deliver better including investment trusts, offshore investment returns for their investors. companies and venture capital trusts (VCTs).

We represent a wide range of investment companies including investment trusts, offshore investment companies and venture capital trusts (VCTs).

Access to training We offer face-to-face and online accredited seminars across the UK and bespoke training for individual firms.

Access training In-depthtoinformation We offer face-to-face anddata online We provide guides, daily on accredited investmentseminars across the UK and bespoke training for individual firms. companies and industry news and opinion.

In-depth Register information We guides, data on investment Findprovide out more on thedaily AIC’s adviser site: companies and industry news and opinion. www.theaic.co.uk/financial-advisers

Register Find out more on the AIC’s adviser site: Issued by AIC Information Services Limited, wholly owned by the Association of Investment Companies. www.theaic.co.uk/financial-advisers Registered Office: 9th Floor, 24 Chiswell Street, London EC1Y 4YY.

Issued by AIC Information Services Limited, wholly owned by the Association of Investment Companies.

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SOAPBOX

November 2015

Trouble in Tokyo Godzilla isn’t the only scary thing to have emerged from the Tokyo shadows, says Michael Wilson

Then there was the realisation that America’s economic boom might also be slowing, at exactly the moment when Fed chairman Janet Yellen was hoping to ease US interest rates upwards.

There was the collapse in Brazil. The deliberate overproduction of OPEC oil, which has threatened to bankrupt not just American frackers but also entire governments. (Russia, Venezuela, Nigeria, maybe even Saudi Arabia eventually if things don’t change.) The shocking growth of emerging market debt, and the ruthless way in which it’s been marked down by anxious western creditors.

Finally, of course, there’s been the Syria crisis and the arrival of Islamic State terrorism in one of the world’s greatest capitals, Paris. Our guest forecasters in this month’s issue aren’t expecting that particular conflict to impact too badly on the global financial markets.

(And nor am I, actually – they rarely do.) But if it’s uncertainty you’re looking for, then 2015 was the year in which you found it. The Vix has been up down like – errrm, suddenly I’m running out of

Japanese Prime Minister, Shinzo Abe

You’ll have noticed that it’s been a bit of an eventful year, what with one thing and another. There was the Great Greek Poker game over debt that threatened for all of the first half either to sink the southern Europeans or to drag the northerners into the mire along with their furious counterparts in Athens.

(Or possibly both.) There was the slowing of China’s growth rate, which was really only quite small but still thumped the world’s raw material exporters so badly that everything else just dropped in sympathy. We’ve had a lot to think about.

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November 2015

There’s been the Syria crisis and the arrival of Islamic State terrorism in one of the world’s greatest capitals, Paris

similes. The bitcoin exchange rate has rocketed and plunged with every new shock to the system. Daily share price gains and losses of more than 1% have become so commonplace as to be almost routine.

Meanwhile, Out East, Something Stirs...

Japanese Prime Minister, Shinzo Abe

And somewhere, over on the other side of the world and perched off the eastern coast of Russia, an old and supposedly beaten monster stirs itself back to life. Japan’s bold and muchvaunted Three Arrows economic project has stuttered into nothing after only two years, with all its firepower exhausted and nothing very much gained.

And that’s something that impacts on all of us.

To be sure, Japan’s energetic Prime Minister Shinzo Abe has given it his best shot.

Retail taxes have been raised, in an effort to reduce the crippling government debt –

IFAmagazine.com

Ed's Soapbox.indd 17

currently estimated at 240% of Gross Domestic Product.

(Compared with 174% at the onset of the global banking crisis in 2008.) Business leaders have been tackled about their lack of transparency, their unwillingness to issue share dividends and their generally poor attitude toward their own shareholders.

But although that was enough to double the Nikkei 225 between January 2013 and mid-2015, it did nothing to protect Japanese investors from a near-25% price fall during the summer. Sentiment has improved since then, but by late November it was only scratching at the levels of April.

Suddenly, a new warning is being sounded to feckless European finance ministers who are watching their economies slow toward zero growth.

And to our own Chancellor too. Dark mutterings about Japanese-style deflation are coming at both the Treasury and the Bank of England itself.

The final UK inflation figure for October, as measured by the consumer price index

(CPI), was a -0.1% contraction – but, more importantly, it came on top of another fall in September. It was, said the Daily Telegraph, “the lowest level seen in the UK economy since 1960,” and it was “the first time Britain has been in deflation for two straight months since records began in 1996.”

Ouch. But what have Britain’s prospects got to fear from Japan’s deflationary example?

Warning Lights on the Dashboard Not much, on the face of it.

Japan’s economy is a remarkably self-contained affair with its own rules and customs, as we’ll see shortly. George Osborne is at least trying to rein in the rate of government debt expansion, while his Japanese counterparts are hell-bent on increasing it..

But by mid-November there were some far worse warning signs starting to light up on the government’s dashboard.

Official figures showed that consumer purchasing had fallen back sharply, consumer prices were heading backwards into negative figures again, job creation was weak – and exports weren’t nearly as good as the

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November 2015

nation’s architects had predicted because of tighter markets in America, China and Europe.

Should we be pushing the panic button here? Not exactly, because Japan’s investment markets are a very unusual place. In an age when we’re used to seeing extensive cross-border ownership of government debt, Japan’s huge balloon is a largely domestic affair. Remarkably, foreigners hold barely 4.5% of government bonds, with a large proportion still held by the housewives who still go out and buy them with the weekly shopping. Japanese banks and insurance companies hold a hefty - and worrying – 60%. And that’s not counting the Bank of Japan.

Too Much Money We said a moment ago that the Nikkei has bounced back tolerably well in the last six months. But we do need to remember that that’s in terms of Japanese yen, not dollars.

Which is where we get to the next stage of the logical Leviathan that seems to be wrapping its tail around Tokyo.

The currency is set to fall further. Nay, it’s designed to.

It’s worth remembering that part of Mr Abe’s Three Arrows policy famously set out to dilute

SOAPBOX

the value of money and weaken the exchange rate by promoting a colossal quantitative easing programme which will vastly inflate the effective level of debt held by the Bank of Japan (BoJ).

And that in turn will eventually necessitate a painful structuring of the government’s finances – an issue which is hardly being thought about at the moment.

Let’s try and explain that.

Like other QE programmes around the world, the Bank of Japan’s money-printing works in the same way that was first tried by America’s Ben Bernanke at the end of the last decade. Essentially, the BoJ creates new money and uses it to buy up huge quantities of the government bonds that are being held by banks. That has the advantage that it frees up the banks and puts liquidity into the system. But it has a drawback.

My Word, My Bonds A recent simulation by Mizuho Research Institute suggested that, at present rates of QE issuance, the BoJ will quite literally run out of long-term bonds to buy by the time 2020 comes around. Yes, the banks will have sold out every last bit of paper. And that’ll create a different problem, because

government bonds form an important part of the Tier One capital adequacy that they all need as collateral when they advance loans. Rather bizarrely, QE will stop the banks from doing their job.

Well, sort of. Fortunately, QE has driven down yields and long-term interest rates, because the BoJ is so desperate to buy them up. And that in turn has made it easier for Mr Abe’s government to keep churning out even more bonds to finance its own obligations.

Does that sound like a good idea to you? It doesn’t seem so good to me. And it certainly explains why the overall debt ratio is ballooning. But heck, surely it doesn’t matter as long as the QE programme is driving down the cost of servicing it all?

Try telling that to the markets. It’s all very well knowing that the government can issue a ten year bond at a comfortable coupon of 0.5% or below. (Zero is not unusual.)

But what would happen if the rate environment ever turned?

A recent study at the Institute of Financial Studies at Waseda University in Tokyo cast a chilling shadow. If the average yield of outstanding government bonds were to surge from its current 1.18% to 4%, say, it would raise the central government’s interest payments to a staggering ¥78.1 trillion ($650 billion) during fiscal 2025 alone. Which, it said, would amount to 80% of the government’s entire general account at current prices.

Just Numbers?

Of course, it’s possible to dismiss all this out of hand.

And how likely is it that interest rates would really treble? And if they did, wouldn’t Mr Abe or his successors simply fire a fourth arrow?

Large numbers of government bonds are still owned by the housewives who still go out and buy them with the weekly shopping

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We can’t tell. But the numbers alone do tell us that Japan’s vulnerability is measured by factors that hardly apply to any of our Atlantic-zone economies.

Unless you count Greece, of course?

IFAmagazine.com

25/11/2015 09:41

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25/11/2015 09:41

November 2015

B R I A N TO R A

We Wish You… As New Year approaches, Brian Tora reads the midwinter runes In November I chaired the inaugural investment conference for JM Finn & Co. It was held just before the Bank of England’s Monetary Policy Committee pronounced on interest rates and issued the minutes of the previous meeting. We also had the Bank’s quarterly Inflation Report published on the same day. Indeed, some commentators referred to the occasion as “Super Thursday” – understandable, given the amount of market sensitive information being disclosed on a single day.

The absence of a further convert to the hawk camp in the MPC, and the dumbing down of inflation expectations that emerged from the report, both hit sterling – which was unsurprising, since an interest rate hike still seems to be vanishing further into the future as I write this.

Should we be concerned?

Probably not, though the dovish tone adopted by Bank Governor Mark Carney has been attributed to preparing for a possible British exit from the European Union. This is a future concern that I feel should be left to – well, the future.

Re-Emerging Market Value?

But to return to the investment conference, one of the highlights was the contribution from Aberdeen Asset Management’s Fiona Manning.

She is part of the group’s emerging markets team, based in London.

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Brian Tora.indd 20

Those investing in the shares of these lesser developed countries have been having a torrid time of late. With China slowing, Russia suffering from the lower oil price and Brazil in recession, there has been little cheer from this part of the investing world for some little while.

But all is far from lost, according to Fiona. For a start, valuation levels are now suggesting that these markets are as cheap as they have been in years - decades, even.

Moreover, there are some signs of an uptick in earnings. And, of course, we are talking about populous nations here that have been steadily growing their middle class ranks and should be capable of continuing to do so, given the more youthful profile they enjoy when compared with the ageing developed world.

Even so, Fiona was keen to point out that this was far from being a homogenous group of markets. Indeed, the bottom-up approach adopted by Aberdeen suited the conditions that prevailed very well. There were major differences between individual nation states, with some still

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November 2015

drowning in bureaucracy and corruption, while others were moving more swiftly down the corporate governance and more open markets route.

And such differences were reflected in the behavior of individual companies, too.

China Exits from the Bull Shop China, of course, remains at the core of what might happen in many of these markets.

The ending of the one child policy has highlighted the demographic pressures that exist there, while the massive expenditure on infrastructure and the encouragement of a more consumerist society has resulted in a debt burden being created that could still have severe repercussions. It seems no road ahead is without its unseen potential pitfalls.

As for bonds, which also received a few mentions at the

conference, this has been the sector that has confounded expert opinions. Developed sovereign debt has outpaced equities over the past year – hardly the result you’d expect with the US ending quantitative easing and the Fed poised to raise interest rates. Not that there is any sign yet that they will get round to taking the action so well signaled, but apparently put on hold for fear of upsetting the global economic recovery - and their own, for that matter. Still, one speaker put bonds further up the risk category for these very reasons.

Wired for Speed I came away, torn between the conflicting beliefs that markets today were even trickier to predict than ever and that we would somehow muddle through. Perhaps markets really are more efficient

these days? Certainly, rapid information dissemination, instant execution, increased dominance by so-called professional investors and a growing band of opportunistic market participants add up to a scenario where news is translated into action instantly.

Is this a good thing?

Well, you can’t turn back the clock. The important thing is to consider how the way markets behave might change your investment style. A stock picking approach from a well resourced, competent manager looks the best route into many markets these days. And don’t forget, markets always overreact in both directions – a characteristic likely to be accentuated by current dynamics. Who knows, perhaps some emerging markets are in this very place now?

An individual approach At JM Finn & Co, we understand the importance of treating you and your client as an individual. This is why our Tailored Platform Solution is a discretionary service that can integrate seamlessly into your proposition.

Mike Mount T 02920 558800 E mike.mount@jmfinn.com

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November 2015

O U T LO O K 2 0 1 6

A Brighter Year for Europe Stephanie Butcher, European Equities Fund Manager at Invesco Perpetual, says there’s reason for optimism

behaviour over recent years.

And in addition, politics has played a far more significant role than we are used to. Moving forward, however, we suspect that bottom-up factors will become increasingly important.

Perhaps the greatest surprise in any outlook piece for 2016 is that Europe itself is as unlikely to figure at the very top of the list of prominent investor concerns as it has done in any of the last five years. That doesn’t square with our own expectations.

This is not to suggest that all is rosy in the Continent; politics, low growth, deflation fears and immigration are all genuine debating points. However, the greater risks to the slow but steady economic recovery underway in most European countries are now presented by external forces - such as a Chinese hard landing, or the roll-over of the US economy, neither of which constitute base-case scenarios at Invesco Perpetual - rather than an imminent sovereign debt default or banking system crisis. That counts as progress in our eyes.

More Robust The combination of years of austerity, deleveraging, European Central Bank regulatory pressure and, in some cases, profound structural reform, have combined to create a scenario today where the European system is significantly more robust than it was five years ago.

Policy is clearly stimulatory, as pressures ease and as the benefits of change wash through: less austerity moving forward, lower currency exchange rates, a higher capital base for the European banking system, lower

24

Outlook 2016 - Invesco.indd 24

Stephanie Butcher

bond yields and hence funding costs, and of course, huge supply of liquidity provided by a central bank that has promised to ‘do whatever it takes’.

Add to this the effects of a lower oil price on a net oil importing region, and one should expect to see signs of life in the European economy. Those signs of life are manifesting themselves in myriad ways including robust Purchasing Managers Indices (PMIs), strengthening bank-lending surveys, falling unemployment (albeit off a high base) and an accelerating M1 money base which acts as a good lead indicator for GDP. Not to mention just how difficult it can be to find a hotel room for a business trip to Madrid nowadays.

Macro-Economic Advantage Macroeconomics appears to have dominated investor

In particular, the closely inter-related elements of earnings and valuation hold the key to performance in the mid to long term in our opinion. European earnings are depressed after the double whammy of the Great Financial Crisis, closely followed by the sovereign debt crisis. These combined events understandably created huge demand for ‘safety’ within markets - manifesting itself in the equity space by the significant premia that are now being paid for shares in companies in consumer staple and healthcare sectors.

That these sectors contain good companies is not in doubt. These are the companies that continued to grow throughout recent years, aided by exposure to emerging markets and by relative underexposure to domestic Europe.

However, domestic Europe is no longer a no-go area, while indeed emerging markets are facing challenges of their own.

Earnings growth and upside surprise is, in our belief, far more likely to come off depressed levels for European financials and domestic cyclicals than it is for global defensives already delivering earnings well above 2007 peak.

IFAmagazine.com

25/11/2015 09:46

November 2015

Overvalued Consumer Staples?

Just as important is the question of how much one pays for any particular set of assets.

We have long held at the centre of our investment philosophy that valuation is the single most important long-term driver of investor returns.

I emphasize the words ‘long-term’. We look at many valuation factors, but one that works very well as a longterm driver of our positioning is the Shiller PE (or 10 year cyclically adjusted PE). What this seeks to do is iron out the effects of where one is in the cycle and looks at a longer term history of valuation, and can be analysed by sector and country.

What the Shiller PE demonstrates is that the undoubted earnings success of the consumer staples space is being met with valuations well above historic long-term

IFAmagazine.com

Outlook 2016 - Invesco.indd 25

average valuations. Why is this?

Put simply, it is the combined effect of years of earnings disappointment elsewhere in the market, the fears of deflation and low growth forever, and therefore the belief that the ‘bond proxy’ nature of these assets can and should be priced off bond market valuations justifying ever higher multiples.

That’s a logically argued view, but in no way does it, to our minds, constitute ‘safety’ or ‘defensiveness’. It is a macro-driven viewpoint that increasingly becomes divorced from the fundamentals of the underlying assets. As and when the macro scenario changes, the support for the stocks drops away.

Strong Cyclicals and Financials In contrast, earnings for European financials and cyclicals are well below previous

peak. We can have extended debates as to what degree a recovery should be expected, but few would coherently argue for no potential for recovery at all.

On a Shiller PE basis, these depressed earnings are matched by valuations well below previous historic averages. This is a much richer area to hunt for opportunities.

Here we can find first class companies, with robust balance sheets, clear dividend policies and huge potential for operational leverage.

European companies are well used to a lower growth environment, and they have cut their cloth accordingly.

Costs are a key focus for any successful domestic European company and this allows them to take advantage of relatively minor accelerations in top-line growth. The financial sector has begun to show evidence

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November 2015

O U T LO O K 2 0 1 6

production cuts and inherent decline rates of the industry will create equilibrium over time, possibly as early as 2016. The oil price will not go back to previous peak in any forecastable horizon, but the significant changes being made across the industry mean that return on capital, cash flows and therefore the rating attributable to the sector can and should be higher at any specific oil price than it was in the previous cycle.

Our view is that 2016 will offer increasing evidence of the changes underway in the industry, and increase confidence in the sustainability of cash flow and hence dividends available.

Steady Rehabilitation

over the course of 2015 that earnings are coming off the cycle lows. Domestic cyclicals such as media, travel and food retail similarly show encouraging signs. We believe these trends will continue into 2016.

An Upturn for Oil Companies?

Shiller PEs reveal one other stand-out area of valuation opportunity versus long term history, coupled with depressed earnings. To be overweight the integrated oil companies in the face of one of the steepest drops in the commodity price in history might be regarded as a triumph of optimism over sanity. However, this is an industry that failed to demonstrate improving returns in the face of high oil prices.

Incremental sales of barrels at $110 oil were channelled into increasingly technically complex (and expensive)

26

Outlook 2016 - Invesco.indd 26

forays into new frontiers of oil exploration, and accordingly the market de-rated the sector in response to a fundamental lack of capital discipline.

But significant management change at major oil companies began to engender a change of attitude late 2013 when the first declarations of the virtue of ‘value over volume’ were heard. This piqued our interest.

The subsequent collapse of the oil price shifted the gears fundamentally. 2015 has witnessed Capital Market Days from all the major integrated oil companies giving granular detail on cost cutting, capex reductions, re-engineering of projects and portfolio reorganisation and optimisation.

We are strongly of the view that the oil price decline was driven by excess supply rather than a demand shock to the downside. To that end, the

In summary, we believe Europe is in the process of a slow but steady rehabilitation. The traumas of the last few years have, understandably, made investors wary of the region and resistant to the attractions of exposure to domestic cyclical and financial Europe rather than the comfort-blanket of international defensives.

However, we believe that evidence of the beginnings of earnings recovery in the former should narrow the valuation gap with the latter.

This is a long-run process, unlikely to be proven definitively in any particular quarterly earnings season. The discipline of valuation-focused investing and our long-term horizon has reinforced this stance over the course of 2015, and we see no reason to change it moving into 2016.

The most significant change in terms of portfolio positioning over the last 12-18 months has been the energy sector where the shift in capital discipline emphasis from the companies has prompted us to take an increasingly positive long-term view. Earnings delivery and cash-flow resilience in the face of a modestly recovering domestic environment is, we believe, the story for Europe in 2016.

IFAmagazine.com

25/11/2015 09:46

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The team focused on other asset classes Oil supply increased², plummeting sale prices and devaluing these bonds¹ by more than 23%³

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Trusted to manage more money than any other investment firm in the world4 This material is for professional clients only and should not be relied upon by retail clients. Sources: 2. Info Energy Agency – Q1 2015. 3. Barclays High Yield Oil Field Services Index 01/01/14 – 31/01/15, CCC bonds fell by at least 23% (USD). 4. BlackRock as at 31/12/14, AUM based on $4.525 trillion. Issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel: 020 7743 3000. Registered in England No. 2020394. For your protection telephone calls are usually recorded.

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November 2015

O U T LO O K 2 0 1 6

A Macro Driven Marketplace John Chatfeild-Roberts, Head of Independent Funds Team at Jupiter Asset Management, takes a robust view of the next twelve months The year ahead looks promising for global growth, but the tricky problem of rebalancing the Chinese economy and handling growing policy divergence on interest rates could make for choppy waters. Against this background, we, as longterm investors, believe that equities remain the asset class of choice, with selective areas of the bond market continuing to offer attractive income opportunities.

Oil and Geopolitics: a Combustible Mix Competing interests in the Middle East are also playing their part in keeping the oil price in check. With Iran about to strike a deal with the West over its nuclear programme, it was logical that Saudi Arabia chose to raise its oil output to its highest level on record in June2.

John Chatfeild-Roberts

No Major Oil Bounce The developed world will most likely drive much of the pickup in economic growth we will see in 2016, boosted by cheaper commodities. The IMF calculates that lower oil prices have been delivering an extra 0.3%-0.8% in world GDP growth1. The price of a barrel of oil, in our view, is likely to oscillate in a $40-$60 range in 2016 and there is a chance that it could fall below $40, with the caveat that forecasting any commodity price is perilous at the best of times – after all, it was only in 2008 that Goldman Sachs was confidently asserting we were on the way to seeing $200 a barrel!

Commodities: Chinese Appetite Curbed There are reasons to believe the oil price is likely to remain subdued. On the demand side, the manufacturing boom that powered China’s export-led economic growth and the surge in commodities is largely over.

1

28

2

China is now suffering from overcapacity, its labour force is less competitive abroad as wages have risen and the transition to a growth model driven by domestic consumption is only in its early stages. The heady days when China could boast GDP growth of 10% or more are behind it; for us, a growth rate of around 5% or less next year looks more realistic.

On the supply side, large parts of the oil producing community look quite unstable whether it is in the Middle East or in countries such as Russia, Venezuela, Brazil and Nigeria where the fall in the price of crude oil has stoked political and economic tensions. Outside of OPEC, these countries could take a stand and cut production to boost oil prices, but none have the market power to take the initiative – the result is most likely lower oil prices for longer.

Iran, free of Western sanctions, can resume oil exports, and is likely to do so next year; Saudi leaders chose to send a clear message to their Iranian counterparts that they remained in charge of the oil market. It is a message of power that has a wider resonance given the quasi proxy war the two countries are waging in Yemen.

Separately, the Saudi authorities have been using a lower oil price to try to drive the US shale gas industry out of business. It has only partially succeeded in its efforts as the American ‘can do’ attitude has sharply increased productivity and lowered costs over the last four years so that even at $40 per barrel, many producers are profitable. US shale oil, a swing producer, may well keep a lid on the oil price for years to come.

Interest Rates: Central Banks are Parting Ways While lower commodity prices are supportive of global growth, the pace of growth among countries is uneven, leading to central banks around the world adopting increasingly divergent

IMF, Seven Questions about the recent oil price slump http://tinyurl.com/lw3vaqj Saudi Arabia’s crude oil output hits 10.6m b/d record in June (FT 13.06.15) http://tinyurl.com/nltlzub

Outlook 2016 - Jupiter.indd 28

IFAmagazine.com

25/11/2015 09:49

November 2015

policies on interest rates. In the US or the UK, where growth is stronger, it is likely that interest rates will be going up at some point. We are agnostic about the timing but we have no reason to doubt Mark Carney when he says 2.5% should be the new norm for UK interest rates, even if the Bank of England governor, like his counterpart in the US, Janet Yellen, has struggled to provide clarity and leadership when it comes to telegraphing his intentions.

In countries where economic growth is anaemic or running out of steam, we expect to see further interest rate falls. China, for instance, has already cut rates six times in the last year and is likely to do so again in 2016. The European Central Bank (ECB) may also announce a further expansion in its quantitative easing (QE) programme,

IFAmagazine.com

Outlook 2016 - Jupiter.indd 29

accompanied by additional cuts in its deposit rate, even if in real terms, this rate is already in negative territory.

The intended, or unintended consequence of central bank policy divergence on rates is an increase in volatility on the currency markets. The chart below illustrates how emerging markets and the US dollar have been inversely correlated – in other words, when the dollar has been strong, emerging markets have been weak and vice versa. Arguably, the dollar bottomed out in 2011 and has been particularly strong in the last twelve months, notably against emerging market currencies, amid rising expectations of an increase in US interest rates.

Emerging markets are vulnerable to a stronger dollar because many governments

and companies in these countries have borrowed heavily in US dollars making it more expensive to pay back loans as their own currency drops in value. We have been reducing our exposure to emerging markets since 2013 and currently have very little exposure.

Rate Rises: No Death Knell for Equities If and when interest rates in the US do start to rise, we remain sanguine about the effect on equities. Since 1971, in the year leading up to an initial rise in US rates, the MSCI World Index has risen by an average of 10.8%; in the year following a rate rise, it has posted an average increase of 12.9%; two years after the first rise, the figure is an average 19.2%, though of course ‘past performance is no guide to the future’.

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O U T LO O K 2 0 1 6

November 2015

US Dollar remains the transmission mechanism for inflation around the globe 125

1.0

115

0.8

105 95

0.6

85

0.4

75 65 Dec-87

Jun-93

Source: Bloomsberg 31.10.15

Dec-98

Jun-04

Nov-09

0.2 May-15

–– US Trade Weighted Major Currency Dollar 03.73 = 100 on 31.03.14 (lhs) –– MSCI Emerging Markets Index / MSCI World Index (rhs)

MSCI World performance before and after the US Federal Reserve starts raising interest rates Date of Hike

1 year leading up

1year after rise

2 years after rise

July 1971 23.8% 17.9% 15.8% August 1977 1.0% October 1980 10.7%

5.3% -4.0% 14.5%

31.2%

March 1984 13.5% 31.9% 60.0% December 1988 -11.2%

22.2%

24.9%

February 1994 22.2%

-8.0%

15.8%

June 1991 20.1% 15.0% -1.3% June 2004 11.2% 8.9% 22.1% Average

10.8% 12.9% 19.2%

Historical example for illustrative purposes only.

Source: FactSet, Fisher Investments, MSCI, using geometric mean

QE in Europe and Japan: It’s Still With Us Talk of interest rate rises might let us forget that there are still some areas of the world where QE is still in full swing. In March this year the ECB launched its own €60bn euro a month bond buying programme in order to stimulate economic growth in the euro zone.

There has been a modest pick-up in growth, but the overall rate has been lower than hoped; clearly a view held by ECB President Mario Draghi. He has already flagged that he is ready to consider raising the ceiling on monthly bond purchases, prolong QE beyond September 2016, bring down rates further or carry out a combination of all three to jolt the economy.

The question remains whether it will work when you consider the euro zone up to now has only been able to produce the weakest of growth despite enjoying what has essentially been

30

‘free’ money for a number of years, subdued energy prices that have been helpful to both consumers and manufacturers, low inflation and a massive injection of liquidity from its central bank.

It would be wrong, though, to consider the euro zone a writeoff. It is better in our view to approach it on a selective basis.

In 2016, we believe, for instance that European banks, now mostly recapitalised, may have the scope for appreciation, partly through further internal measures to improve their profitability, but also as a result of strengthening domestic economies that should boost demand for credit.

Over in Japan, the central bank launched its own huge $1.4tn QE programme in 2013 aimed at jump starting the economy and ending the best part of 25 years of deflation and low interest rates. Japan’s Prime Minister Shinzo Abe set a 2%

inflation target, but we believe that is unlikely to be achieved in 2016. Inflation remains tame as the country, which imports almost all its oil, benefits from a weak crude price. Weaker demand for its goods and services from a slowing China is also having an impact even if the domestic economy remains buoyant. We believe that the root of the country’s problems remains the significant size of accumulated debt and how to overcome the tendency of a whole generation, if not generations, of Japanese to hoard their money rather than go out and spend it.

QE: a Deflationary Impact?

There has been little talk of late on how the central banks will eventually unwind QE, or dispose of all bonds they acquired at the height of the financial crisis, and we are not sure it will be high on central bankers’ agenda in 2016.

The experiment is still ongoing however it does beg the question as to whether QE has been successful in providing inflationary pressure in what was, for many countries, a potentially deflationary environment.

Increasingly, it could be argued that QE is in fact a deflationary mechanism, based on a number of factors. First, virtually ‘free’ money means that productive capacity is created or kept going by companies who would not be able to survive in a more normal environment, thus creating excess supply of goods and services, and downward pressure on prices. Second, the (increasing) numbers of pensioners almost universally only spend what income is forthcoming from their investments, but not their capital.

As interest rates are low, their spending, which is significant, is distortedly lower than it otherwise would be, which again reduces demand. Third, low interest rates make pension funds need larger pools of investment to fund their outgoings and the resulting deficits must be financed from their own revenues, diverting money into financial instruments rather than into end demand.

It must be said that none of these arguments probably hold sway in the corridors of central banks.

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November 2015

O U T LO O K 2 0 1 6

Bonds: A Transatlantic Divide Jim Leaviss, Head of Retail Fixed Interest at M&G and Manager of the M&G Global Macro Bond Fund, expects tighter US monetary policy but more stimulus in the eurozone Writing for M&G’s Bond Vigilantes blog back in June, I noted it felt as though we’d crammed a whole year’s worth of events into the first six months of 2015. Deflation, liquidity and Greece were among the main themes for bond investors in that period, with much attention focused on the launch of an historic quantitative easing (QE) programme by the European Central Bank (ECB). In turn, government bond yields fell to historic lows, although the prospect of monetary tightening remained open in the strengthening US economy.

It feels like we haven’t paused for much breath in the second half the year.

While the Greek situation has settled down for now, the ECB’s QE activity remains in the headlines. The market witnessed a very dovish ECB president Mario Draghi in late October, with a commitment to re-examining the central bank’s QE programme in the final month of the year. In doing so, Draghi gave a clear signal that QE will probably be increased and/or extended.

What’s apparent is that the ECB remains concerned about the pace of the economic recovery in Europe, and about the implications that this will have in meeting its inflation target of below (but close to) 2%. It’s interesting that the ECB has already bought around €478 billion of bonds since

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in the US and UK should continue at a healthy pace.

Jim Leaviss

QE was implemented, which equates to only around 3% of GDP. By way of comparison, the Bank of England’s £375 billion QE programme represents close to 20% of GDP. By this measure, it’s clear that the ECB could act to increase its asset purchase programme at its next meeting, as there is plenty of scope to do more. Any move to beef up QE would likely support asset prices, particularly in European bond markets and would probably result in a weaker euro.

US Strength Outside of Europe, the key macro themes have continued to include China’s economic slowdown and its knock-on effects not only for other emerging markets, but also global economies. Despite softer data in recent months, my view is that the growth

I also believe that, with a time lag, monetary policy works, and that the slow recoveries underway in the eurozone and Japan should continue to be supported by the unprecedented easing policies of the ECB and Bank of Japan. In the US, I believe markets are right to be considering that a rate rise in December is a serious possibility, as particularly robust employment growth appears to be finally feeding through to wage growth.

Against this backdrop, despite the likelihood of enlarged QE by the ECB, my assessment is that the current very low government bond yields across core markets lack relative value.

I have therefore been reducing duration risk and currently hold substantially short positioning relative to a neutral level.

Within government bond markets, I consider that inflation protection is currently quite cheap, given that breakeven rates have become appealing. As a result, I’ve been selectively finding more attraction among inflationlinked securities compared to conventional government bonds and have raised my allocation to the former area.

I would also note that markets are currently pricing in five years of very low inflation in Europe, when in reality, periods of negative inflation have historically been extremely rare.

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November 2015

Value in Corporate Credit Elsewhere in the global bond markets, I believe that better relative value currently lies in corporate credit. Following underperformance by the asset class during the summer months, credit spreads have widened to levels that I believe over-compensate investors in an environment where default rates are likely to stay low.

Consequently, I have recently added back some corporate bond exposure after being underweight for the past six months.

Together with fixed coupon investment grade and high yield bonds, I have also bought floating rate bonds, since these assets will provide a higher coupon with rising yields. From a geographical perspective, I prefer the US dollar market, where the higher yields and spreads offer greater downside protection.

While recognising that wider spreads could represent some

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element of compensation for lower overall levels of liquidity, I believe that an improving economic environment, coupled with robust corporate balance sheets, should be supportive of spread tightening.

In the shorter term, returns are more likely to be driven by fluctuations in credit spreads, and further volatility should not come as a surprise. However, for investors with a longer term outlook, meaningful spread widening introduces a good deal of value into fixed income. As well as looking attractive from an income perspective, I believe there is now also scope for solid capital gains if spreads continue to tighten from this point.

Currency Calls I’m also closely monitoring valuations in emerging bond markets. It’s an asset class that I’ve been cautious toward for some time, given factors such as the

further economic deceleration in China, lower commodity prices, and the strong US dollar. However, the significant adjustment of emerging market currencies has potentially left some more attractive value to be found, although it may still be early to think the correction is over and that a sustained rebound can be expected.

In my global outlook for currency markets, I continue to believe the US dollar should perform well, supported by the relative strength of the US economy and the probability that the Fed will be the first major central bank to raise interest rates. I’m expressing this view by maintaining a sizeable exposure to the US dollar, with more modest exposures to currencies such as the euro, sterling, and Scandinavian currencies. Among the latter is an exposure to the Norwegian krone, which I consider a better way to play an oil rebound than holding high yield energy bonds.

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08/09/2015 09:51 14:46 25/11/2015

INSIDE TRACK

November 2015

A Good Loud Bark How do you get people thinking? Calling your market research company Painted Dog Research might be a good start, says Neil Martin

Based in Bristol, but also with an office in Perth, Australia, Painted Dog provides market research services to a wide range of organisations, from small local firms through to major multinationals.

The company, which just completed the first annual readers’ survey for IFA Magazine, employs a whole range of unique surveying tools and analysis

techniques which in our case has given us insights that we’d probably have struggled to achieve in any other way.

Not least because the Painted Dog questionnaires themselves were graphically interesting and engaging in a way that’s all too rare these days. The response rate we got was great. But also because the thinking behind the questions,

and the way they were presented, had been thorough.

But first, the inevitable question. What’s a painted dog? Well, it’s another name for the African hunting dog, the largest wild dog in Africa. And it’s a very determined animal.

But what’s that got to do with market research? Read on.

Managing Director Matt Gibbs has strong views on what makes a successful research

“We take our name seriously. Just like the real painted dogs, collaborating in highly strategic, intelligent teams to tirelessly succeed in environments where there are often larger, and more cumbersome competitors, is what we’re all about”

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November 2015

company. “In our experience the specific needs of each client will differ,” he says, “so it’s essential to tailor research to our clients’ business objectives.

We take our name seriously too.

Just like the real painted dogs, collaborating in highly strategic, intelligent teams to tirelessly succeed in environments where there are often larger, and more cumbersome competitors, is what we’re all about.”

Particular Approach The difference, Gibbs explains, starts right at the very first meeting. “We arrive at the table without bias or preconceptions, and that is fundamental to the true value of market research.

Our aim is to provide an independent role in representing the voice of the customer.”

“You might already be receiving a lot of feedback from a whole host of channels, but we work to focus and structure that feedback around a particular project or issue.

That’s important because businesses might hear only from their most vocal customers,

while the majority of views are not actually being heard.”

The IFA Magazine Contract As we’ve said, the survey on behalf of IFA Magazine was a case in point. “It all started with quite a top-level brief from IFA Magazine,” says Gibbs, “which wanted to understand more about its readership in order to create its focus for 2016. The meetings and workshops together refined the research objectives and developed a series of questions which would deliver actionable insights.”

“We produced a snappy survey, designed to match the high quality presence of IFA Magazine. It was personalised and fully adaptable so that IFAs could complete it using whichever device was convenient for them. The IFA Magazine database is extremely productive and we hit our target sample in no time.

Data was analysed and reported via an engaging PDF document.

Our hope is that the reporting format helps to revert raw data

back into a representation of what the numbers actually are - the voice of your readers.”

“Overall, it was a really enjoyable process for us. Great to learn more about the views of IFAs, and a real pleasure collaborating with a busy team who are the leaders in financial services publications. We can’t wait for the next wave.”

Value of Quality Information So what does Gibbs have to say to the readers of IFA Magazine? “Well, they’re reading the magazine, so they’re already well informed individuals who appreciate the value of quality information.”

“But we’d just like to dispel the myth that MR is only for the big players. Of course, we do run pretty awesome ongoing projects for some of the world’s largest companies. But everyone can benefit from market research.

At Painted Dog we’ve developed a whole spectrum of services and price points, so please feel free to get in touch and we’ll see how we can help you.”

Enough said.

“We’d just like to dispel the myth that market research is only for the big players. Of course, we do run projects for some of the world’s largest companies. But everyone can benefit from market research”

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IFAmagazine.com

25/11/2015 09:54

ACQUISITION AND SALES

O F I FA BUSINESSES Retirement?

Time for a change?

There are countless reasons to dispose of an IFA business, just as there are countless reasons to get hold of one.

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We consider every business to be unique, and therefore finding the right solution for you starts with a thorough understanding of your business operations and your wish list.

Only from here can we make valuable introductions which align to both party’s needs.

If you would like to discuss options to sell, exit or retire, or acquire IFA businesses, please get in touch for a confidential discussion.

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INVESTMENT DOCTOR

November 2015

Pound Cost Averaging There are some principles in investing that seem so simple to us that it surprises us a little to hear that they need explaining at all, says Michael Wilson

Pound cost averaging is a simple way of conveying the point that a typical client will often be better off making small but absolutely regular cash purchases amounts of a fund (or any other investment) over a longish period, rather than putting in sizeable lump sums at irregular intervals. In principle, of course, the argument goes that the investor’s cash will buy more units of the fund during those months when it’s cheap, and less when it’s expensive. And what could be more logical than that?

The logic is indeed impeccable, as far as it goes.

If a client with £10,000 to invest decides to buy shares or fund units in 25 monthly instalments, rather than buying the whole lot in one go, he can insulate himself against the possibility of a price fall during those 25 months because the lower it goes, the more units he can get for his money. And, on the expectation that prices will eventually return to the mean, he’ll have increased the eventual cash value of his holdings.

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Of course, the converse also applies. Should the shares or units increase in value during those 25 months, he may wish that he’d bought them all on day one, because he now has fewer shares with an overall value which, although it has gone up, has not accelerated as fast as if he’d held the lot from the start. He will also have missed out on a sizeable proportion of any dividends or other distributions that might have been made during those 25 months.

Side-Stepping the Market’s Timing That, you’ll be saying, is not the point. Pound cost averaging is a defensive strategy that protects the interests of a client who may not be the world’s best judge of the market cycle, and indeed who might not be very clued up about investments at all. It has the added advantage that, should something awful happen, he can suspend or cancel his purchasing programme so as to reduce his losses.

Much of the time, this is a question that doesn’t really need to be asked. A significant part of an adviser’s time is spent on persuading his clients to commit to a regular savings and investment plan of some sort – be it a pension scheme or a monthly builder of some other sort.

The trouble is that the client, on the other hand, is constantly reading in his Sunday newspapers about how China is going down or America is going up, or how gold or oil or pharmaceuticals or small companies are likely to fare

in the next few months. And, somewhere in his mind, the idea has taken shape that he’ll be onto a good thing if only he can time his purchases so as to catch the next wave. If only…

Market timing is, of course, the siren song that lures far too many investors onto the rocks. Too few people really have the aptitude for it, and even among those who succeed, even temporarily, too few have the discipline to sell at the right moment, or – even more difficult – to close a losing position and reconcile themselves to their losses.

Human pride is always looking for face-savers, often at the expense of long-term results.

Does it Work?

We may as well concede that pound cost averaging is not optimal in all market conditions. A series of empirical studies in various countries have indicated that the benefits are most noticeable during periods when share prices are generally falling, and that they do less well during bull phases. With the important proviso that different stock market sectors and different asset classes follow different cycles, it’s an issue that deserves careful consideration.

But, for the most part, and for the averagely passive or uninformed client, pound cost averaging forms an important element of the holistic care that an adviser can bring to bear.

There’s no better safety net being advised by somebody who can detach himself from the emotion of the situation.

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November 2015

Going, Going, Gone?

Auto-Enrolment is now sweeping up the smaller firms, says Compliance Consultant Lee Werrell. Are you ready for the confusion?

With the final batch of employers - those with fewer than 30 employees – now coming under the auto-enrolment rules, just what can you do to help employers, especially the smaller ones, who may be struggling to understand the process and options available?

As a qualified adviser you can help to address the following points; n Provide investment advice to employers choosing a pension scheme, but, remember, you need to be authorised to provide advice to individuals. n Offer support to an employer by providing factual information and analysis, helping them to compare schemes, making a recommendation or referring them on to another adviser. n Check that a scheme meets the automatic enrolment requirements and will accept all your client’s staff. n Consider issues such as whether it works with your client’s payroll software, what additional help they need, the investment options offered and the charges to pay. n Help your client to choose a new scheme if they can’t use their existing scheme for automatic enrolment.

Ultimately, it’s the employer’s legal responsibility

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to choose a pension scheme, but relationships can be made and strengthened at times like this.

Authorisation to Provide Advice As an IFA you can provide investment advice to an employer and help them to choose a suitable pension scheme for automatic enrolment of their employees. Unless you are appropriately qualified and authorised by the Financial Conduct Authority (FCA), you cannot provide investment advice to any individual.

It is vital that you are clear whether you are providing advice to an employer as an employer or as an individual?

Or, in other words, whether your client is thinking about joining the scheme themselves?

It is good practice to specify in your letter of engagement that any advice you provide to a client is provided in their capacity as an employer and not as an individual - and that individuals will be dealt with on a separate basis, including any owners, directors or senior management.

As most professional advisers belong to a professional body, they/you will have a set of ethical standards that you should refer to – and among these may be a stipulation that you have sufficient knowledge and experience to offer autoenrolment services. But that’s not all. Before entering into this field, if you haven’t done so

already, you should make sure that any auto-enrolment work that you carry out is covered by your own professional indemnity insurance.

How the Automatic Enrolment Process Works: www.thepensions regulator.gov.uk/ docs/detailedguidance-5.pdf

General Guidance www.thepensions regulator.gov.uk/ doc-library/automaticenrolment-detailedguidance.aspx How You Can Support Your Clients Ultimately, the responsibility for selecting a suitable and appropriate scheme lies with the employer. That said, as a professional, you can support any client with this task in a number of ways: n By providing factual information and explanations of schemes, e.g., you could identify the pension schemes available and provide a comparison of the available schemes’ investment funds, charges and services. n By recommending a specific pension scheme for auto-enrolment.

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COMPLIANCE DOCTOR

n If needed, by referring your client to another adviser.

If you recommend a specific pension scheme, there are a number of issues that you may wish to consider with your client.

Auto-Enrolment Solutions If you offer a solution that links to one or more specific pension schemes you should make your client aware that there may be other pension schemes available that could be more appropriate for their staff. If you don’t do this, there’s a danger you could be seen to be restricting an employer’s ability to actively choose their own pension scheme.

Check to ensure that your client’s payroll system can handle multiple pension payments to multiple providers.

This is more important with the smaller companies who may not have a complex payroll or accounting system.

Write to your Client’s Staff If you have agreed as part of your services to write to your client’s staff about auto-enrolment and their rights, you need to make sure you don’t inadvertently provide investment advice.

There are letter templates available on http://www. thepensionsregulator.gov. uk to help you with this area.

Can Your Client Use the Scheme?

The scheme that your client uses for auto-enrolment has to meet certain requirements, e.g., it doesn’t require staff to do anything to join the scheme or to choose their own investments.

Other requirements included in the scheme: 1. Being tax registered in the UK 2. Being an occupational or personal pension scheme 3. Depending on the scheme, there may be a requirement for a minimum level of contributions to be paid into the scheme.

For more information on

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the minimum requirements for schemes to qualify and to be used for automatic enrolment, Detailed guidance 4: Pension schemes (PDF, 346kb, 38 pages) http://www. thepensionsregulator.gov.uk/ docs/detailed-guidance-4.pdf Some schemes may only accept employers with a minimum number of staff or who have staff that earn a certain amount. Check if your client can use the scheme for all their staff Types of Pension Scheme The type of scheme typically available to your client is a defined contribution scheme usually run by a large, specialist provider that is designed to be used by many different sized employers. These include ‘Master Trusts’ that are run by a board of trustees and ‘group personal pensions’ that are run by financial service companies, e.g., insurance companies and other investment managers.

These ‘Master Trust’ schemes generally cost less and require less involvement from the employer compared to some other schemes.

Find a Pension Scheme There are a number of different ways to find a pension scheme.

Depending on the aims and objectives of the employer, as well as speed or simplicity of administration, your client could consider, with your guidance, several or even all the different schemes before deciding which one to use. For example, you could look at: n The UK government’s scheme n ‘Master Trust’ schemes that have been independently reviewed n Schemes made available on industry websites.

Government Scheme National Employment Savings Trust (NEST) is the pension scheme provider that has been set up by the government and must accept all employers that apply to use it for auto-enrolment.

November 2015

Master Trust Assurance Schemes The trustees of some master trusts have purposely had their pension schemes independently reviewed to help them show that they meet the specific required standards of administration and governance. This is known as the ‘Master Trust Assurance Framework’, which was developed by the Institute of Chartered Accountants in England and Wales or ICAEW in association with the Pensions Regulator.

The following schemes have ‘Master Trust Assurance’ and have said they’re open to small employers looking for a scheme provider for automatic enrolment: n National Employment Savings Trust (NEST) www.nestpensions.org.uk n NOW: Pensions www.nowpensions.com n SEI Master Trust www.seic.com n The People’s Pension http://thepeoplespension. co.uk Schemes Listed by Industry Bodies You can find lists of schemes on the following websites: Association of British Insurers: ABI members providing qualifying automatic enrolment schemes: https:// www.abi.org.uk/Insuranceand-savings/Products/ Pensions/Saving-intoa-pension/Automaticenrolment/Providers Pensions and Lifetime Savings Association (PLSA) Pension Quality Mark: PQM READY schemes: http://www. pensionqualitymark.org. uk/pqmreadyschemes If you need any assistance with regulatory compliance in these areas, please contact your compliance professional or Call us on 0207 097 1434 or email info@complianceconsultant.org

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T H E OT H E R S I D E

November 2015

Antipodean Logic Australians have had their priorities all upside down, says Richard Harvey. Can we do better? with £385 among those still toiling at the coalface.

When I was a callow lad of 22, I asked my Dad if he would fund a flight to Hong Kong, where I had landed a job as a reporter on the China Mail - an English-language tabloid which made British red-tops look positively monastic.

As Paul Johnson, director of the IFS, observes: “The UK used to be the worst place in the world to be a pensioner, because poverty rates were so high. So this is a triumph.”

Pa duly stumped up (£208 Heathrow-toHong Kong - now there’s an example of inflation), and thus began two of the most, umm, educational years of my life.

Many adventures, in what was then the most freebooting and liberal colony in the world, were conducted in the company of Australian journalists who were equally eager to sample the exotic mysteries of the Orient (particularly if she was called Suzy Wong).

Of course, today it would be quite wrong to stereotype Aussies as hard-drinking, profane, lascivious pursuers of instant gratification.

But back then it seemed that most of them were.

Including the women.

I’m sure that today’s Antipodeans are a much more responsible, caring, socially inclusive breed - although judging by the sometimes rabid pronouncements of recentlydeposed premier Tony Abbott, it ain’t necessarily so.

So maybe it’s no surprise to learn, from a new report by the Social Market Foundation, that instead of nurturing their savings for a comfortable retirement, 40% of Aussies have blown their entire pension pot by the age of 75.

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The Other Side.indd 42

This cautionary tale is accompanied by a recommendation that our own government should set up a system to alert the elderly from running out of retirement income. Assuming, of course, that there weren’t too many who followed ex- government minister Steve Webb’s notion of splashing out on a Lamborghini.

Fun, Fun, Fun At the time that idea seemed risible, given the public perception that millions of UK pensioners were struggling to keep body and soul together, and that their idea of a fun day out was a walk down to the food bank.

But it’s another case of old prejudices dying hard, because a further piece of research from the Institute of Fiscal Studies says that, for the first time, British pensioners now have more weekly disposable income than those still working.

It claims that, on average, pensioners have £394 a week after housing costs, compared

However, what the research doesn’t highlight - and neither do those who continuously carp about the alleged unfairness of the so-called ‘wealth transfer’ from the younger to the older generation - is the anxiety felt by many at the paltry interest rates earned on their savings.

Back to What We Know Which may partly explain why so many are now scarpering for the safe haven of an annuity (you remember, those schemes which seemed destined for the scrapheap following the pension reforms). According to the Association of British Insurers, annuity sales rose by almost a fifth between July and September, to a whopping £1.17 billion.

Those who opted for an annuity presumably felt that it was better to be sure of at least being able to buy a half-bottle of drinkable wine to go with the Saturday takeaway, rather than risk their equity-heavy investments dribbling away as a result of the slowdown in China.

At least they are better off than their counterparts Down Under, many of whom would now be hard-pressed to buy a stubby of Fosters. Selfinflicted, maybe - but as one of my old Australian mates would say: “Don’t give us the raw prawn, sport”.

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25/11/2015 10:00

IF

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Twenty Four Seven IFA Magazine, Britain’s premier online portal and print publication for financial advisers, has launched its ver y own app designed to help you stay up to date with all the latest financial and economic news as it happens.

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To see all the ingredients for smoothed returns visit www.pruadviser.co.uk/10years

“Prudential” is a trading name of the Prudential Assurance Company Limited, which is registered in England and Wales. This name is also used by other companies within the Prudential Group.

Registered office at Laurence Pountney Hill, London EC4R 0HH. Registered number 15454.

Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority.

Past Performance Proof Annualised performance of the PruFund Growth Life Fund over the last 10 years.

3 years to 31/07/2015

5 years to 31/07/2015

10 years to 31/07/2015

7.2%

8.3%

6.9%

Percentage growth since 25 November 2004 Prudential PruFund Growth Life Fund 120.0% 100.0% 80.0% Performance %

…is in the eating.

60.0% 40.0% 20.0% 0.0% -20.0% Nov 04

Dec 05

Dec 06

Dec 07

Dec 08

Dec 09

Dec 10

Dec 11

Dec 12

Dec 13

Dec 14

25/11/04 to 31/07/2015

Source: Financial Express, bid to bid, net income reinvested but net of fund tax Prudential PruFund Growth Life Fund ABI Mixed Investment 20%-60% Shares PruFund Performance shown is gross of all applicable charges. Please note that some if not all of the Funds comprising the sector average will have fund management charges deducted from their performance. Past performance is not a reliable indicator of future performance.

The value of investments can fluctuate which will cause fund prices to fall as well as rise, investors may not get back the original amount of capital invested. The charges will vary depending on the product. Visit www.pruadviser.co.uk for details on the products (including charges).