Hub News #40

ISSUE 40

HUBNEWS WINTER 2019

IS IT SAFE TO COME OUT YET?

BAILLIE GIFFORD EUROPEAN FUND

WITH AN ACTIVE SHARE OF 89%, THE EUROPEAN FUND HAS THE POTENTIAL TO DELIVER SOME APPETISING RETURNS.

RIPE FOR THE PICKING. The Baillie Gifford European Fund invests in a variety of high quality businesses. Its goal is to identify companies with attractive industry backgrounds, strong competitive positions and management teams whose interests are closely aligned with those of their shareholders.

Once we find these firms we hold onto them for the long term – like owners not traders.

Why not take a glance at the juicy figures in the table below?

Performance to 30 September 2018*: 5 years

10 years

European Fund

81.1%

252.6%

Average of IA Europe Sector Excluding UK

58.5%

140.3%

As with any investment, your clients’ capital is at risk. Past performance is not a guide to future returns.

For financial advisers only, not retail investors.

Explore the difference, call us on 0800 917 4752 or visit www.bailliegifford.com/intermediaries

Long-term investment partners

All data as at 30 September 2018. *Source: FE, B Acc shares, single pricing basis, total return. Your call may be recorded for training or monitoring purposes. Baillie Gifford & Co Limited is the Authorised Corporate Director of the Baillie Gifford ICVCs. Baillie Gifford & Co Limited is wholly owned by Baillie Gifford & Co. Both companies are authorised and regulated by the Financial Conduct Authority.

CONTENTS & WELCOME

CONTENTS 4. European Companies: Forget They’re In Europe 6. Pressure Points 10. In The Spotlight: Global Equity Income 12. Is It Time To Retire The 4% Rule?

16. Hold On To Your Hat 20. Fixed For The Year Ahead 22. Where Next For Investors?

26. The Key Themes Shaping Markets In 2019 28. Better Signs Ahead For Emerging Markets 30. Why 2019 Might Be A Better Year For Investors 33. Millennials: Tomorrow’s Investors 34. Impact Investing: The Future Of Active Management?

36. Accentuating The Positive 40. Three Portfolio Ideas For 2019

WELCOME Is it safe to come out yet?

January has proved a better start to the year than many were expecting.

That said, many asset allocators are still debating whether these are the dying days of the bull market, or whether markets can continue to forge ahead in 2019.

There are plenty of political roadblocks. Trump may have been defeated in his bid to build a wall on the Mexican border, but he remains fully engaged in his trade war with China, much to the irritation of global stock markets. Brexit looms for all UK investors, though the end game is approaching. Europe has its own problems. At the same time, growth is slowing across the world.

However, there are also reasons to be cheerful: if growth slows, it may slow US interest rate rises, which would be welcome. Inflation remains benign and recession appears to be some way off.

Corporate earnings continue to be relatively robust.

In short, it could go either way and investors must prepare for all eventualities. In this quarter’s issue of Hub News, we look at today’s

situation from a number of different perspectives – Richard Turnhill of BlackRock gives his base case for the year ahead; Janus Henderson’s multi-asset team also discuss how the year is likely to evolve. Fidelity gives its views on the unwinding of quantitative easing and the impact that is having on all markets.

M&G discusses impact of a different kind, as it introduces its Positive Impact fund, while Square Mile discusses the good and bad in the global equity income sector. We also hear from Neptune on emerging markets and LGIM on drawdown. As always, we hope it brings you new ideas for your clients’ portfolios and a steer when navigating the year ahead.

We welcome your comments and suggestions for Hub News and every other aspect of the Adviser Hub service. Please do not hesitate to get in touch at enquiries@ adviser-hub.co.uk.

Cherry Reynard Editor www.adviser-hub.co.uk

ADVISER-HUB.CO.UK 0 3

EUROPEAN EQUITIES

“EVERY DAY, WE ARE BOMBARDED WITH BREXIT AND RECESSION AND WORRIES OVER THE OUTCOME OF TRADE TALKS. IT CASTS A SHADOW OVER EUROPEAN MARKETS AND SHARE PRICES TODAY REFLECT REAL PESSIMISM. YET THE REALITY IS DIFFERENT – CORPORATE EARNINGS GREW LAST YEAR AND ARE EXPECTED TO GROW 8-9 PER CENT THIS YEAR.”

0 4 ADVISER-HUB.CO.UK

EUROPEAN EQUITIES

EUROPEAN COMPANIES: FORGET THEY’RE IN EUROPE European companies continue to defy the pessimists, says Stephen Paice, joint manager of the Baillie Gifford European Fund, but investors need to be careful where they look.

As Germany flirts with recession, Italy squares up to the EU on its budget, and President Macron in France tussles with the ‘Gilets jaunes’, there appear to be precious few reasons to invest in European stock markets. Stephen Paice, one of the managers of Baillie Gifford’s European Fund, argues that this is based on a number of false premises: that Europe’s weaker economy affects everyone, and European companies are performing poorly.

“Every day, we are bombarded with Brexit and recession and worries over the outcome of trade talks. It casts a shadow over European markets and share prices today reflect real pessimism.

Yet the reality is different – corporate earnings grew last year and are expected to grow 8-9% this year. Plenty of European companies are growing profitably but also investing in the future.

This is where you make a lot of money. From a fundamental point of view, European companies appear to be sound and increasingly good value.” Paice says.

Yet share prices keep on falling. The MSCI Europe ex UK is 11% lower from 30 September 2018 to 31 December 2018. In normal circumstances, the combination of falling share prices and improving earnings should prompt interest, but Paice says sentiment towards European markets is still poor. Nevertheless, he believes this represents an opportunity to pick up high-growth companies at better valuations.

European markets still have plenty of the type of company that Baillie Gifford likes, in spite of the region’s relatively poor reputation for entrepreneurship. Paice continues: “There are companies such as Spotify and Zalando, which both have the potential to be much larger in five to ten years. They have sold off recently because people are nervous. We saw a similar phenomenon in reverse with President Macron. Investor behaviour can be schizophrenic. Our view is that we have no idea on the outcome of Brexit or European politics, but these companies have a bright future.”

Nevertheless, in Paice’s view, this is a market where investors need to be genuine stock pickers; to dare to be different. Unlike the US, Europe’s largest companies are not dynamic technology companies, but are slower-moving industry and consumer goods businesses. Technology, for example, is less than 7 per cent of the MSCI Europe ex UK index. That means investors need to look harder to uncover real growth across Europe.

It also means however, that where there is growth, it can often be overlooked. As such, Europe’s most dynamic growth companies don’t always command the lofty valuations seen among US or Chinese technology giants. European companies may be rejected for not being as profitable, or being earlier stage, but their growth trajectory is just as exciting, says Paice. Big winners in Europe may also be in unglamorous sectors and niche industries. These big winners tend to fly under the radar.

Europe can do technology. Recent additions to the Baillie Gifford European Fund include Takeaway.com and Delivery Hero.

These may not have the name recognition of Just Eat in the UK, or Grubhub in the US, but they’ve built up local monopolies across

Europe, the Middle East and other emerging markets. Paice says: “The online takeaway market has the potential to be fantastically profitable. It doesn’t require much capital once the platform has been built because they are just connecting restaurants and their customers. Penetration rates are rising quickly, linked to rapidly changing consumer behaviour.” These companies are breaking down the perception of takeaways as the unhealthy option, bringing in healthy foods and new alternatives.

In general, however, technology companies aren’t where Europe excels. The world-class companies tend to be in industrial and consumer brands. Paice also believes that the strongest opportunities lurk in the small-cap and mid-cap sectors, rather than the mega-cap sectors. The majority of these companies have inside ownership and managers with ‘skin in the game’, ensuring proper alignment of interests.

Paice says the possibility of finding these top-performing companies is as high in Europe as it is anywhere else: “What we know from our work on long-term returns is that, within the overall performance of a stock market, there are very few companies that generate a huge return. Over the past 30 years, there have been around 70 companies that have gone up ten-fold in any ten-year period. The characteristics of those big winners are the same as the companies on which we are focused. They are seeing strong sales growth and expanding operating margins.”

He still believes in the prospects for the major holdings in the portfolio: airline group Ryanair, speciality chemicals group IMCD and technology group Bechtle. Although the retail sector has weakened, Paice has been adding to the fund’s holding in that area, believing that it will win out in the long term in spite of the short-term concerns.

He says: “The companies we’ve been adding to have attractive market positions and lower prices. That is usually when investors achieve strong upside, if they can look longer-term.”

In other words, investors in Europe need to focus on the companies and their potential growth, and forget that they are in Europe.

The value of an investment and any income from it is not guaranteed and may go down as well as up and as a result your capital may be at risk.

For financial advisers only, not retail investors. All data to end of December 2018 and source Baillie Gifford unless otherwise stated. The information contained within this article has been issued and approved by Baillie Gifford & Co Limited, which is authorised and regulated by the Financial Conduct Authority (FCA). Baillie Gifford & Co Limited is an Authorised Corporate Director of OEICs. The views expressed in this article should not be considered as advice or a recommendation to buy, sell or hold a particular investment. The article contains information and opinion on investments that does not constitute independent investment research, and is therefore not subject to the protections afforded to independent research.

Some of the views expressed are not necessarily those of Baillie Gifford.

ADVISER-HUB.CO.UK 0 5

GLOBAL ECONOMY

“GLOBAL POLITICAL UNCERTAINTIES MAY BE IMPORTANT DRIVERS OF BOTH RETURNS AND VOLATILITY IN THE YEAR AHEAD, AS THE MARKET ADJUSTS TO TRADE UNCERTAINTIES, SPILLOVERS FROM BREXIT AND ITALIAN BUDGET RISKS.” 0 6 ADVISER-HUB.CO.UK

GLOBAL ECONOMY

PRESSURE POINTS From the pace of economic growth, the withdrawal of monetary policy, escalating trade tensions, and geopolitical risk, financial markets face a series of pressure points, says James Ashley, Head of International Market Strategy in GSAM’s Strategic Advisory Solutions group.

Investors today face a market of pressure points.

These markers of sensitivity include the pace of economic growth, the ongoing withdrawal of monetary policy accommodation, escalating trade tensions, and geopolitical risk. Each of these can drive episodic volatility. While markets may come under pressure in 2019, we are both confident in the continued global expansion and cautiously optimistic of late-cycle conditions.

Among the reasons we remain constructive despite these pressure points: none appears to possess the muscle to initiate a recession on its own. Together, they magnify sensitivities emerging in the system, which is why they need to be closely watched. As the year unfolds, we believe that macroeconomic fundamentals and the evolving market environment will remain supportive of risk assets. Now is the time for investors to stay focused on a commitment to risk management and strategic portfolio design.

Consequently, we would emphasise revisiting the balance between growth and value style weights; emerging markets strike us as poised for a comeback. We are also deploying alternatives to manage a riskier market landscape.

Macro: Economic conditions are beginning to return to more “normal” settings: GDP growth is slowing toward potential, rates are rising toward neutral, and volatility is reverting to mean.

Growth: Tightening financial conditions and the waning boost from fiscal and monetary policies may be contributing to a US-led deceleration in global growth, albeit to a still healthy pace of expansion. Trend-like growth could re-assert its gravitational pull over the next few quarters.

Inflation: Headline rates of inflation globally may be driven in the short term by developments in volatile energy markets.

Underlying inflationary pressures still vary widely across regions, reflecting contrasting macro fundamentals and differing levels of slack left in the world’s major economies.

Monetary Policy: We expect developed market central banks to continue pursuing a strategy of gradual normalization, while retaining tactical sensitivity to macro developments. Measured increases in interest rates will now also be accompanied by a progressive unwind of global central bank net asset purchases: a move from QE to QT. Politics & Populism: Global (geo-) political uncertainties may be important drivers of both returns and volatility in the year ahead, as the market adjusts to trade uncertainties, spillovers from Brexit, and Italian budget risks.

Risk: A combination of moderating global growth, late-cycle concerns, uncertainty around the timing and sequence of evolving central bank policies, and elevated geopolitical tensions is likely to remain a source of pressure points for investors. These risks create the potential for further spikes in market volatility.

Markets: After a period of leadership by the US, we think markets are set to transition back to global synchronization. Preparation is warranted as episodic volatility and potential stress on corporate earnings pose significant pressure points in 2019.

Equities: Late-cycle dynamics reinforce the need for realistic return expectations. Nonetheless,

equities remain our favored asset class, as earnings growth continues to fuel return potential moving forward. We believe the macro environment will stay supportive of risk assets, with emerging equities poised for a comeback.

Rates: Global sovereign rates continue their move higher toward fair value, with the US nearing the upper end of rate pressure. The rate differential between the US 10-Year and German Bund is unsustainably wide in our view, while concern over Italy’s fiscal sustainability persists. The evolution of inflation remains a key catalyst for global yield shifts.

Credit: Increased leverage, rising levels of corporate debt, and tight spreads reflect late-cycle conditions, highlighting the need to focus on idiosyncratic positioning.

Fundamentals remain intact, but beta-caution is warranted in both investment grade and high yield, as security selection remains key.

Currency: Despite US dollar strength in 2018, risk going forward may be to the downside given a re-convergence in global growth, interest rates, and monetary policy.

Recovering growth outside the US could provide a tailwind for European and emerging market currencies, while sterling remains tethered to political risk in the UK. Volatility: Markets remain highly vulnerable to exogenous shocks potentially driven by escalating trade tensions, heightened political risks, and stressed liquidity. The rise of algorithmic trading intensifies the markets’ susceptibility to episodic volatility as trade volume is increasingly dominated by speed, not capital.

This information discusses general market activity, industry or sector trends, or other broad-based economic, market or political conditions and should not be construed as research or investment advice. This material has been prepared by GSAM and is not financial research nor a product of Goldman Sachs Global Investment Research (GIR). It was not prepared in compliance with applicable provisions of law designed to promote the independence of financial analysis and is not subject to a prohibition on trading following the distribution of financial research. The views and opinions expressed may differ from those of Goldman Sachs Global Investment Research or other departments or divisions of Goldman Sachs and its affiliates. Investors are urged to consult with their financial advisors before buying or selling any securities. This information may not be current and GSAM has no obligation to provide any updates or changes. Economic and market forecasts presented herein reflect a series of assumptions and judgments as of the date of this document and are subject to change without notice. These forecasts do not take into account the specific investment objectives, restrictions, tax and financial situation or other needs of any specific client. Actual data will vary and may not be reflected here. These forecasts are subject to high levels of uncertainty that may affect actual performance. Accordingly, these forecasts should be viewed as merely representative of a broad range of possible outcomes. These forecasts are estimated, based on assumptions, and are subject to significant revision and may change materially as economic and market conditions change. Goldman Sachs has no obligation to provide updates or changes to these forecasts. Case studies and examples are for illustrative purposes only. The opinions expressed in this paper are those of the authors, and not necessarily of GSAM. The investments and returns discussed in this paper do not represent any Goldman Sachs product. This paper makes no implied or express recommendations concerning how a client’s account should be managed and is not intended to be used as a general guide to investing or as a source of any specific investment recommendations. Although certain information has been obtained from sources believed to be reliable, we do not guarantee its accuracy, completeness or fairness. We have relied upon and assumed without independent verification, the accuracy and completeness of all information available from public sources. Views and opinions expressed are for informational purposes only and do not constitute a recommendation by GSAM to buy, sell, or hold any security. Views and opinions are current as of the date of this document and may be subject to change, they should not be construed as investment advice. This material is provided for informational purposes only and should not be construed as investment advice or an offer or solicitation to buy or sell securities. United Kingdom and European Economic Area (EEA): In the United Kingdom, this material is a financial promotion and has been approved by Goldman Sachs Asset Management International, which is authorized and regulated in the United Kingdom by the Financial Conduct Authority. Confidentiality No part of this material may, without GSAM’s prior written consent, be (i) copied, photocopied or duplicated in any form, by any means, or (ii) distributed to any person that is not an employee, officer, director, or authorized agent of the recipient. © 2019 Goldman Sachs. All rights reserved.

ADVISER-HUB.CO.UK 0 7

Quantinomics™

Quant investing doesn‘t have to be a black box.

Behind the algorithms and computers are people researching and testing fundamentally based, economically motivated signals that drive our investment strategies.

Quantinomics gives a behind-the-scenes look into how we leverage technology and apply human judgement to make data-driven investment decisions.

Visit GSAM.com/Quantinomics THIS MATERIAL DOES NOT CONSTITUTE AN OFFER OR SOLICITATION IN ANY JURISDICTION WHERE OR TO ANY PERSON TO WHOM IT WOULD BE UNAUTHORIZED OR UNLAWFUL TO DO SO. Views and opinions expressed are for informational purposes only and do not constitute a recommendation by GSAM to buy, sell, or hold any security. Views and opinions are current as of the date of this presentation and may be subject to change, they should not be construed as investment advice.

This information discusses general market activity, industry or sector trends, or other broad-based economic, market or political conditions and should not be construed as research or investment advice. This material has been prepared by GSAM and is not financial research nor a product of Goldman Sachs Global Investment Research (GIR). It was not prepared in compliance with applicable provisions of law designed to promote the independence of financial analysis and is not subject to a prohibition on trading following the distribution of financial research. The views and opinions expressed may differ from those of Goldman Sachs Global Investment Research or other departments or divisions of Goldman Sachs and its affiliates. Investors are urged to consult with their financial advisors before buying or selling any securities. This information may not be current and GSAM has no obligation to provide any updates or changes.

United Kingdom and European Economic Area (EEA): In the United Kingdom, this material is a financial promotion and has been approved by Goldman Sachs Asset Management International, which is authorized and regulated in the United Kingdom by the Financial Conduct Authority. © 2019 Goldman Sachs. All rights reserved.

Free Independent Advert Placement Research and Insight Square Mile is an independent investment research business that focuses first and foremost on in depth, qualitative fund research.

Register for free at the Academy of Funds to access our latest fund research, insight and opinion.

www.squaremileresearch.com/funds

Fund opinion, ratings and factsheets

Video fund snapshots and talking factsheets

Adviser focussed educational reports

Important Information This advert is for the use of professional advisers and other regulated firms only. It is published by, and remains the copyright of, Square Mile Investment Consulting and Research Ltd (“SM�). SM makes no warranties or representations regarding the accuracy or completeness of the information contained herein. This information represents the views and forecasts of SM at the date of issue but may be subject to change without reference or notification to you. SM does not offer investment advice or make recommendations regarding investments and nothing in this presentation shall be deemed to constitute financial or investment advice in any way and shall not constitute a regulated activity for the purposes of the Financial Services and Markets Act 2000. This presentation shall not constitute or be deemed to constitute an invitation or inducement to any person to engage in investment activity. Should you undertake any investment activity based on information contained herein, you do so entirely at your own risk and SM shall have no liability whatsoever for any loss, damage, costs or expenses incurred or suffered by you as a result. SM does not accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance is not a guide to future returns.

GLOBAL EQUITY INCOME

IN THE SPOTLIGHT: GLOBAL EQUITY INCOME Daniel Pereira, Investment Research Analyst at Square Mile, takes a closer look at the global equity income sector, its composition and recent performance.

INTRODUCTION TO SECTOR As at the end of December 2018, the IA Global Equity Income sector comprised 56 funds with combined assets in excess of £19bn. To meet the IA’s sector requirements, funds must achieve a yield premium to that of the MSCI World index and allocate at least 80% of their assets to global equities. In practice, the sector includes funds seeking to deliver multiple outcomes, and is one that we would further categorise into three sub-groups: funds that seek to provide a yield in excess of the index (including enhanced income strategies); funds that seek to grow their dividend distributions over time; and those that seek to provide a level of total return when income is reinvested.

SECTOR NUANCES We would highlight that there are funds which, in our opinion, get misclassified and therefore should fall in/out of the sector. For example, one of the characteristics that Stuart Rhodes, manager of the M&G Global Dividend fund, looks for is companies with 10 years of consecutive dividend 1 0 ADVISER-HUB.CO.UK

growth. However, the fund does not meet the IA Global Income sector’s yield criteria, and therefore falls into the IA Global sector. Conversely, a number of infrastructure funds, for example, are included within the sector and investors need to be aware that such funds may be investing in niche areas of the market.

One must also be mindful that many of the managers in the sector are reliant on some form of quantitative screen within their processes to help narrow down the universe of companies. The global equity universe consists of a substantial number of stocks and how a fund manager attempts to cover such a universe is crucial to understanding how they intend to deliver their objectives. It does not follow that larger levels of resource –­ headcount for example – translate into superior returns. In addition, in-depth qualitative assessments are also often required to assess many of the non-numerical factors that could impact upon a company’s ability to pay a dividend. Thus, active management is generally a preference within the sector, which is reflected by the low demand for and lack of availability of lower-cost, higher-yielding passive solutions.

GLOBAL EQUITY INCOME

IA Global Equity Income Sector. Fund Yield Dispersion

Fig 1 10% 9% 8% 7% 6% 5% 4% 3% 2%

Source: FE Analytics Data as at 31st December 2018

FUNDS IN FOCUS

SECTOR OUTLOOK In addition to the idiosyncratic risks that funds in this sector undertake, the current middle-to-late cycle macroeconomic backdrop is one where the most obvious and imminent risk to global equities is the impact of rising interest rates, particularly in the US where the Federal Reserve continues its gradual tightening programme. Companies with significant levels of debt may struggle in such an environment, especially if they are unable to cope with increasing debt repayments. This is undoubtedly a period where actively managed strategies may add value in their assessment of future cash flows.

Other areas for concern include further trade tariffs in the US and the uncertainty of Brexit; both are largely in the hands of politicians and may have a significant impact on currencies. For example, a strengthening US dollar has historically been a natural headwind for emerging markets and a weak sterling would see the value of overseas investments increase for a UK based investor.

Global equities generally offer a limited amount of protection in market turmoil, but an allocation to global equity income funds may be a more appropriate way to participate in markets for the more risk-averse investor.

In addition, the compounding effect of reinvesting dividends can be powerful and is one that has served investors well over the long term.

Fig 2

5 Year Cumulative performance to 31st December 2018 for the IA Global Equity Sector

140% 120%

Performance %

100% 80% 60% 40% 20% 0% -20% Dec 13

Dec 14

Dec 15

Dec 16

IA Global Equity Income

MSCI World Growth

MSCI World Quality

MSCI World Value

Dec 17

Dec 18

MSCI World Momentum

Source: FE Analytics Data as at 31st December 2018

Fig 3

Absolute Yearly Distribution from £1000 invested on 31st December 2012

£70

4.5% 4.0%

£60

3.5% £50 Yearly Distribution (£)

Although it is a fairly diverse sector, nearly half of its assets sit within two funds. Both, in our opinion, are run by credible managers who we hold in high regard. The largest is the Newton Global Income Fund, which holds solid, blue-chip companies with strong records of paying dividends. It benefits from Newton's thematic investment approach and draws upon ideas from the broader group. The fund can take meaningful positions away from its FTSE World benchmark and as a consequence, performance over shorter time frames can be variable but we would expect this strategy to deliver attractive risk adjusted returns over the longer term.

The second largest is the Artemis Global Income Fund, which has a clear objective: to achieve around 5% dividend growth per annum and to outperform the MSCI AC World index on a total return basis over the long term. The managers aim to achieve this by picking financially sound and attractively valued businesses within the context of the broader economic backdrop. The resulting portfolio offers a blend of well-known, traditionally high-yielding stocks with those further down the market cap scale.

In contrast, a newer entrant into the market, but one that we believe has a promising future, is the TB Evenlode Global Income Fund. It seeks to deliver mid-to-high single digit absolute returns over the long term, while also growing its annual dividend distribution in real terms. In order to achieve this, the managers invest in companies that can deliver sustainable growth with limited need for capital reinvestment, and can therefore return cash back to shareholders by way of dividends.

The ongoing charge figure (OCF) in the sector ranges from 0.6% to 1.6%. We would highlight that at the more expensive end of the range there are funds that invest in specialist areas, such as infrastructure, and so a premium fee may be warranted. In addition, investors seeking yield should be mindful that fees could be taken from income which would result in a reduced level of distribution.

3.0%

£40

2.5% 2.0%

£30

Yield (%)

Broadly speaking, momentum, quality and growth investment styles have led global equity markets in recent years and more specifically, certain market sectors such as technology, where many of the underlying companies do not pay a dividend, have dominated returns. Therefore, global equity income strategies, given the yield requirement, have lagged as they tend to be more “value” orientated by their very nature.

Although some way further up the risk curve, the sector has also temporarily played host to bond investors in recent years, as yields available from fixed income markets have fallen shy of investor requirements.

Companies with more predictable earnings streams and lucrative dividend policies have therefore benefited from this trend.

Outside of this specific instance, global equity income funds generally tend to perform well in periods of market distress where they have historically offered both a superior level of downside protection and a reduced level of volatility, versus the mainstream Global Equity sector. For example, over the five-year period ending 31st December 2018, the Global Equity Income sector had a maximum drawdown of -14.4% versus -17.1% of the IA Global sector.

Yield %

RECENT SECTOR PERFORMANCE

1.5% £20 1.0% £100

0.5% 0.0%

£0 2013

2014

2015

2016

2017

2018

Artemis Global Income Distribution

Newton Global Income Distribution

Artemis Global Income Yield

Newton Global Income Yield

Source: FE Analytics Data as at 31st December 2018

For more information on Square Mile please visit squaremileresearch.com ADVISER-HUB.CO.UK 1 1

DRAWDOWN

IS IT TIME TO RETIRE THE 4% RULE? LGIM’s John Southall and Andrzej Pioch discuss whether the 4% rule is ripe for re-evaluation.

The 4% drawdown rule forms the basis of many advisers’ decumulation propositions. However, the results can often vary significantly depending on when you decide to start saving for your retirement and asset allocation decisions.

How much can a retired investor draw in income and yet not outlive their savings? This is the crucial question that aeronautical engineer turned financial adviser William ‘Bill’ Bengen set out to solve in the early 1990s.

Known as the 4% rule, Bengen argued that investors could safely set their annual withdrawal rate to 4% of their initial retirement pot and adjust it for inflation without running out of money over a 30-year time horizon.

The 4% rule, often referred to as the Bengen rule, is now commonly used by retiring investors and their financial planners. Where there was once complexity – and expensive portfolio analysis – the rule promises simplicity. Set, forget, and spend (if required). But is it as easy as all that?

Timing Is Everything: While it has not yet been 30 years since publication, we can run some ‘half-time’ analysis. Using Bengen’s original parameters, we assumed a static split between domestic equities and bonds. We looked at the value of a portfolio over discrete 15-year periods for a UK investor if they were drawing down their portfolio by 4% per year.

This assumes they are invested in a ‘naïve’ portfolio that is 50% invested in UK equities and 50% in gilts. For the lucky retiree who began drawing down in 1993, their capital has gained 46% in real value by 2008.

Begin saving a few years later in 1996 or 1997 and the capital has remained static or depreciated only a little. This level of remaining capital should be enough to support another 15 years of income.

Retirees who start between 1998 and 2001 are much less fortunate. In the first half of their 30-year retirement journey, their portfolios have suffered a 30-41% capital loss. The dot-com bubble and the global financial crisis have damaged the fragile starting capital. Where a 4% drawdown seemed like penny-pinching for the 1993 intake, it now looks like an extravagance which the investor can ill afford.

However, Bengen did his research on the basis of a ‘naïve’ portfolio for the average US investor and the results are broadly comparable. Retiring around the beginning of a bull market, such as 1993, means that retirees could have enjoyed a much higher withdrawal rate.

Dynamic, Not Dogmatic: So how serious is this for an investor? A 15-year real value decline of 41% is one thing on a portfolio statement; the effect it has on the potential level of income is quite another.

Imagine a 65 year-old retiree decides she wants to purchase an annuity at age 80, following a 15-year period of 4% drawdown. If she started retirement in 1993, from 2008 onwards she could enjoy monthly payments of around £1900 for the rest of her life. However, if she were to invest from 2000-2015, an annuity would only provide as little as £600 per month.

Investors need a more dynamic strategy when it comes to withdrawals at retirement.

Bill Bengen has himself returned to the subject, along with others, to perfect and adapt the rule in response to critiques along similar lines as ours. A key finding is the need for investors to embrace a more dynamic approach to two elements of their retirement journey: the importance of diversification and adjusting the level of income depending on the client requirements.

Bengen’s starting point – an equal portfolio split between equities and bonds – does not necessarily reflect the standard appetite for risk among retirees. At a specified risk level, spreading investments over different asset classes gives investors a better chance of preserving capital. In addition, 1 2 ADVISER-HUB.CO.UK

understanding the risk appetite for the investor is the most important step for any adviser in both the accumulation and decumulation phases of investment.

Suitability remains fundamental to the adviser process. Finding a fund range that can meet a wide range of risk appetites is therefore extremely important. Finally, investors can in certain circumstances now pass on their pension pots to their children without incurring inheritance tax; therefore portfolios that are income-focused, but not income-obsessed, may be more appropriate. Unlike yield-targeting funds, growing clients’ capital as part of a total return aim alongside generating a sensible yield can be better aligned to their needs.

There is one final omission from Bengen’s original paper – fees. While we cannot guarantee the direction of markets, what we can guarantee is that fees will detract from returns year after year, so it is important for any adviser to meet the objectives of investors in a cost-effective manner.

A Flexible Strategy Is A Prudent One: Income can play such an important role in an investor’s retirement and treating any strategy as dogma would be a mistake. Each investor’s situation differs along with their appetite for risk, their retirement spending goals or portfolio capital. Following a 4% withdrawal strategy blindly may lead to particularly volatile results. Indeed Bengen’s research did not suggest withdrawing this amount every year – just that it was safe to do so without running out of money.

Often other factors need to be considered in a dynamic withdrawal strategy, such as your age, the current level of interest rates and the current size of your pot relative to the future spending requirements. Protecting against the erosion of capital and the knock-on effect it might have on the future stream of income distributions should be an integral part of any retirement strategy. Investors should make use of specific tools to navigate their decumulation journey and manage downside risk through strategies including broad diversification.

Finally a dynamic withdrawal strategy, more closely linked to the amount of spending necessary per year rather than a fixed portfolio percentage, may significantly improve the investment outcomes. Investors and their financial advisers should constantly evaluate their portfolios to ensure the effectiveness of their chosen strategy.

John Southall is Head of Solutions Research in the Solutions Group. His responsibilities include financial modelling, investment strategy development and thought leadership.

Andrzej Pioch is a fund manager in the Multi-Asset Funds team with his responsibilities including portfolio management and ongoing development of a multi-factor equity strategy.

Important Notice This is not a consumer advertisement. It is intended for professional financial advisers and should not be relied upon by private investors or any other persons. The views expressed within this document are those of Legal & General Investment Management, who may or may not have acted upon them. Legal & General Investment Management is authorised and regulated by the Financial Conduct Authority and is the Investment Adviser to the UK Special Situations Trust, a UK authorised unit trust. Issued by Legal & General (Unit Trust Managers) Limited. This document should not be taken as an invitation to deal in Legal & General investments or any of the stated investments. Remember, the value of investments and any income may fall as well as rise and investors may get back less than they invest. Past performance is not a guide to future performance. Exchange rate changes may cause the value of any overseas investments to rise or fall Legal & General (Unit Trust Managers) Limited. Registered in England and Wales No. 1009418. Registered office: One Coleman Street, London EC2R 5AA. Authorised and regulated by the Financial Conduct Authority.

DRAWDOWN

ADVISER-HUB.CO.UK 1 3

MULTI-ASSET

1 6 ADVISER-HUB.CO.UK

MULTI-ASSET

HOLD ON TO YOUR HAT With the unwinding of supportive monetary policy and global growth forecasts weak, higher levels of financial market volatility remain likely.

Bill McQuaker, Portfolio Manager, Fidelity Multi Asset Open range, says investors will have to be highly discerning in 2019.

POLITICS, POLICY AND PERSEVERANCE I anticipate that the recent spate of volatility indicates more is to come this year, especially relative to the period of historically low volatility we have seen in recent years. Given recent growth downgrades by the OECD and IMF, policymakers may have to intervene once again to get global growth back on track, whether through fiscal or monetary policy. But this is a tall order.

On the fiscal side the US has led the way, but is beginning to realise it must fund its tax cuts, while on the monetary side, the European Central Bank (ECB) and Federal Reserve (Fed) are still unwinding the easy money that has supported markets for nearly a decade. The ECB must be hoping it hasn't left it too late.

Political uncertainty is likely to remain a feature in 2019, with President Trump’s unpredictability almost the only certain outcome for policy in the United States. In the run-up to the US midterms in November he was toying with the idea of further tax cuts, and announced he expects a “great deal” with China, but if no deal is reached he will impose more tariffs. In Europe, there is clearly a continued focus on Brexit but it is also important to recognise the risks on the continent such as Italian weakness and concerning signs even in Germany.

THE US COULD SURPRISE US There are possibilities of investors being surprised on either the upside or downside in 2019, and the risk of either a dramatic recovery or a further meaningful sell-off.

While not intuitively a positive for markets, a slowdown in the US economy may be welcomed warmly by markets outside the US. Such a development could usher in a slowdown in the Fed’s tightening cycle and result in lower US rates, a weaker US dollar, and perhaps even a lower oil price, which could all serve to alleviate the traditional headwinds for the rest of the world, especially the hardest-hit emerging markets.

A serious stimulus commitment out of China would also result in an upside surprise for investors.

In terms of downside risks, there is a danger that stubbornly high long rates suffocate risk appetite, and resilient corporate profits stumble creating a fall in asset prices. If the world’s central banks continue tightening we could see even further weakness in interest-rate-sensitive sectors.

Political surprises could also impact markets negatively or

positively; for example, the US President may be protectionist, or seek to burnish his “great dealmaker” credentials or even both simultaneously.

CAPTURING THE BEST OPPORTUNITIES IN 2019 As we are coming out of an extended period that rewarded investors for simply being exposed to markets, and volatility looks here to stay. We need to be much more selective in how we allocate in our portfolios in the year ahead.

In 2018 we made the contrarian call to reduce our exposure to the FANG (Facebook, Amazon, Netflix and Google) stocks and turn to value-rather than growth-oriented managers in the US. We believe this stance continues to be the appropriate one. In emerging markets, we see opportunities beginning to present themselves after a very rough 2018; however, we are focused here on value-biased rather than growth-oriented managers, and believe emerging market debt may offer as much potential as equities.

Currencies are another area where investors need to be selective, and we are looking at the Japanese yen as a potential area of strength, especially given the potentially overvalued US dollar. Getting hedges right will also be a key driver of performance. This year we think a healthy allocation to traditional hedges like gold will serve us well.

This information is for investment professionals only and should not be relied upon by private investors. The value of investments and the income from them can go down as well as up and clients may get back less than they invest. Past performance is not a reliable indicator of future returns. Investors should note that the views expressed may no longer be current and may have already been acted upon. These funds use financial derivative instruments for investment purposes, which may expose the funds to a higher degree of risk and can cause investments to experience larger than average price fluctuations. These funds invest in overseas markets and so the value of investments can be affected by changes in currency exchange rates. There is a risk that the issuers of bonds may not be able to repay the money they have borrowed or make interest payments. When interest rates rise, bonds may fall in value. Rising interest rates may. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. Issued by Financial Administration Services Limited, authorised and regulated by the Financial Conduct Authority. Fidelity, Fidelity International, the Fidelity International logo and F symbol are trademarks of FIL Limited.

ADVISER-HUB.CO.UK 1 7

Fidelity’s Multi Asset solutions

For investment professionals only

Because no two clients are the same, you need solutions that can help meet a variety of needs. Fidelity’s Multi Asset Allocator, Open and Income ranges offer something that could suit everyone.

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

Whether your clients are looking for income, total return or simply low-cost access to global markets, we can help you put the person into personal portfolios.

No such thing as

average.

Let’s talk how.

Visit professionals.fidelity.co.uk

Investments should be made on the basis of the current prospectus, which is available along with the Key Investor Inve Information Document and annual and semi-annual reports, free of charg ge on request by calling 0800 368 1732. Issued by Financial Administration Services Limited, authorised and regulated by the Fin nancial Conduct Authority. Fidelity, Fidelity International, the Fidelity International log go and F symb bolls are trad demarkks off FIL FIL Li Limiit ited d. UKM0818/22399/CSO8804/0219 UKM 0 818/2239 9/C SO8 8 04/0219

Why is stopping superbugs a job for an asset manager?

Because antibiotic resistance is a global human health threat.

Because we engage with companies to curb the use of these drugs in healthy farm animals.

Because engagement helped encourage a leading fast-food chain to announce plans to phase it out.

Because that way, we’ll help medicines stay effective.

Because responsibility influences outcomes – for investors and for everyone.

Read how we take responsibility every day at avivainvestors.com/engage

For today’s investor

For professional clients and advisers only.

Issued by Aviva Investors Global Services Limited. Registered in England No. 1151805. Registered Office: St Helen’s, 1 Undershaft, London EC3P 3DQ. Authorised and regulated by the Financial Conduct Authority. Firm Reference No. 119178.

RA19/0028/09012020

FX IXXXEXD I N C O M E

"THE ERA OF QUANTITATIVE EASING HAS DRIVEN YIELDS SIGNIFICANTLY LOWER AND ALLOWED DURATION AND RISK ASSETS TO DO WELL. NOW, THERE IS A REGIME SHIFT."

JANUARY JANUARY

2 0 ADVISER-HUB.CO.UK

FIXED INCOME

FIXED FOR THE YEAR AHEAD After a tough year for fixed income markets, James Vokins, Manager of the Aviva Investors Strategic Bond Fund, discusses his positioning for the year ahead.

2018 was a tough year for fixed income markets. Although the end of the year saw a late surge for safe-haven assets such as government bonds, for most fixed income assets it was a year to forget.

Many of the difficulties that characterised 2018 are still evident in 2019. The most important for wider fixed income markets is the move from quantitative easing to quantitative tightening. James Vokins, manager of the Aviva Investors Strategic Bond Fund, says: “The era of quantitative easing has driven yields significantly lower and allowed duration and risk assets to do well. Now, there is a regime shift.”

Although the US remains the only developed market to have seen meaningful rises in rates, there are moves elsewhere to tighten monetary policy. For Vokins, that means yields are likely to move higher and he remains cautiously positioned with around a quarter of the fund in short-dated government bonds. He believes there needs to be a greater risk premium in all asset classes as markets adapt to quantitative tightening.

A second consequence of the regime change is the idea of crowding out: “Investors can now park in cash with a positive return. That means cash is a real alternative for investors, which could crowd out other low-risk assets.” However, this is very much a US-only phenomenon because the cost of hedging makes this strategy uneconomic for sterling-based investors.

While these are undoubtedly headwinds for the bond market, there are some positive elements: yields are higher in general, which has helped arrest the outflows from bonds.

Corporate bonds have also seen spreads over government bonds widen. At the same time, default risk doesn’t appear elevated, says Vokins, especially as corporate earnings remain relatively robust. Yields could certainly go higher, but there are selected opportunities within fixed income.

Meanwhile, growth prospects are moderating, he believes.

Last year, tax cuts had a significant impact on earnings and were a major driver for the US stock market. With the Democrats in control of the House in the US, it is unlikely there will be more tax cuts. As such, the business cycle is unlikely to be extended by fiscal policy, however this should reduce the pressure on central banks to continue raising rates.

Key to taking advantage, says Vokins, is in-depth research on individual companies. His background is in credit analysis: “We meet everyone we lend money to. Understanding these individual credits means we can have a focused portfolio in a small number of issuers.” The fund currently has around 30% in high yield, neutral to its benchmark.

That said, given the environment, the fund remains focused on higher-quality credits. “We’re not in many CCC-rated credits – we’re in high quality rather than chasing after the highest yield. The downside to CCC credits is simply too great.”

The fund is sterling-denominated, so the team needs to be mindful of the impact of Brexit. However, Vokins makes the point that there is uncertainty everywhere, all across Europe.

It is something investors need to grapple with more and more.

The risk environment also argues against a significant weighting to emerging markets, he says. “It doesn’t tend to be a high core position for us, but we have held as much as 15%.

For the last 2 years, we have had zero and even at cheaper valuations we continue to be concerned with further policy tightening from the US. Emerging markets will continue to come under pressure, particularly the weakest emerging markets with high dollar-denominated debt. We would still prefer to lend to developed market corporates.”

The fund is also cautious on US high yield. While the yields look superficially attractive, the need to hedge dollar exposure makes the asset class less attractive. Vokins also sees risks inherent in a rising interest rate environment.

The fund is fully flexible and can go from very low risk to 100% high yield. It can invest across high-quality government bonds, emerging market bonds, UK high yield, European high yield and everything in between. The benchmark holds around 1/3rd government bonds, 1/3rd corporate bonds and 1/3rd high yield. As such, this is the neutral stance for the fund.

Vokins sits within the credit team but draws on expertise from across all Aviva Investors’ investment teams. This helps them pick the strongest securities in any market conditions, a strategy he believes will serve the fund well: “We are stock selective, thriving on markets with significant dispersion, particularly on the credit side. For some time, there hasn’t been much dispersion, but that is shifting. This provides an opportunity for stock selectors to win out. Our fund should do well in that scenario.”

The biggest risk ahead for fixed income markets is a significant move higher in inflation, which the market would take very negatively because central banks couldn’t pause on interest rate rises. For this reason, he holds some inflation protection in the fund. At the same time, with a potential slowdown in Europe, the region could be in significant trouble without the necessary monetary tools to respond. Vokins is closely monitoring both types of risk looking ahead into 2019.

ADVISER-HUB.CO.UK 2 1

DIVERSIFIED INCOME

WHERE NEXT FOR INVESTORS? Last year was a tough one for investors, says John Stopford, Portfolio Manager on the Investec Diversified Income Fund, and there isn’t a lot of clarity this year either. Investors need to do more than simply buy and hold.

Last year was a tough year for investors: a lot of assets went down and relatively few went up. This was in spite of significant optimism at the start of the year as synchronised global growth and US tax cuts buoyed investor sentiment. It concluded in one of the weakest Decembers in recorded history.

From here, says John Stopford, Co-Head of Multi-Asset Income at Investec Asset Management, his team is asking itself a number of questions: Was that it? Is the correction over and will markets resume their bull run?

Or is it the beginning of another bear market? In this scenario, any rally would be a selling opportunity rather than a buying opportunity. He says there are arguments on both sides.

There are plenty of reasons for caution, he suggests: “It is late in the business cycle and there does not appear to be a lot of upside for growth assets such as equities and corporate debt. Unemployment figures around the world are low; this is a late cycle phenomenon and suggests there is not a lot of spare capacity.”

On the other hand, Stopford argues, below-trend growth doesn’t equal a recession. The yield curve is showing a probability of recession by 2020, but it remains an outside possibility for 2019, which means growth can keep going through to the middle of next year.

Monetary policy is a major factor. Even though interest rates haven’t gone up a lot, Stopford says there is an argument that policy support is being removed too quickly. He says: “The central banks seem to be on autopilot and are much less inclined to respond to market weakness in this part of the cycle. As such, they are quite likely to continue to shrink their balance sheets and continue with quantitative tightening. The central banks don’t want to reignite debt growth and that means they can’t ease policy as aggressively as they have done in the past. It seems like things have to get worse before they will get material support from central banks.”

China is also a concern. The data is clearly weakening, with the country’s manufacturing tipping into contraction territory at the end of last year.

China is also held back by the trade war. He says: “There are reasons for both China and the US to get together and do a deal. However, their differences relate to economic power. The US has a legitimate concern that China has taken advantage of trade rules and helped itself to US intellectual property to push itself forward. This is about who will be the biggest dog in the pack for the next 30 years.” This is not a question that resolves itself overnight.

In the meantime, the Chinese government has announced some easing measures, but the government is still worried about the country’s debt burden and is unlikely to turn the taps on significantly. Elsewhere fiscal easing looks unlikely. The boost from the US tax cuts will fade this year and with the Democrats in control of the House, further cuts look unlikely.

Europe is constrained by the EU rules.

Corporate health, says Stopford, is also waning: “Earnings revisions are becoming more negative and buybacks are fading, particularly as bond yields have risen.”

2 2 ADVISER-HUB.CO.UK

On the other hand, it is plausible that earnings and growth will stabilise or the Federal Reserve will slow quantitative tightening. This would resolve some uncertainty and provide a boost for risk assets.

How is he managing this environment in his portfolios? “The way we think about the world is different: unlike a typical multi-asset manager, we believe it is difficult to get big-picture asset allocation calls right. The biggest opportunities lie in selecting individual securities. There are 25,000 individual securities, and we aim to build a portfolio of around 250.”

Stopford and his team look for those securities with certain characteristics aligned to the outcome of the Diversified Income Fund: “That is income with capital stability, low volatility and limited drawdowns.

We want the income to be sustainable and resilient. In this portfolio, income does the heavy lifting. We look for strong balance sheets and income in excess of what is necessary.”

Once he has found those securities, he looks at how they can be blended for resilience. “We make sure we’re properly diversified. Diversification by sensitivity to economic growth, for example, or interest rates. We are looking at behavioural characteristics not asset classes.” As such, the group’s asset allocation discussions are not the typical ‘bonds versus equities’. At the moment, for example, he is buying call options for the portfolio, which look cheap given the insurance they provide.

He adds: “Volatility is likely to be an important factor this year, both in economies and in markets. There are growing risks to the business cycle. That said, there will be opportunities as well. We want to make sure we capture both sides.”

Investment involves risks. Bond & Multi-Asset strategies may invest more than 35% of their assets in securities issued or guaranteed by an EEA state.

This communication is for institutional investors and financial advisors only. It is not to be distributed to the public or within a country where such distribution would be contrary to applicable law or regulations. Nothing herein should be construed as an offer to enter into any contract, investment advice, a recommendation of any kind, a solicitation of clients, or an offer to invest in any particular fund, product, investment vehicle or derivative. The information may discuss general market activity or industry trends and is not intended to be relied upon as a forecast, research or investment advice. The economic and market views presented herein reflect Investec Asset Management’s judgment as at the date shown and are subject to change without notice. There is no guarantee that views and opinions expressed will be correct, and Investec’s intentions to buy or sell particular securities in the future may change. The investment views, analysis and market opinions expressed may not reflect those of Investec as a whole, and different views may be expressed based on different investment objectives. English language copies of the Fund's Prospectus and Key Investor Information Documents are available from Investec Asset Management on request. Issued, January 2019.

DIVERSIFIED INCOME

ADVISER-HUB.CO.UK 2 3

EXPERTLY MIXED

For promotional purposes

Janus Henderson Multi-Asset Core Income Risk-targeted Lower cost Regular and attractive income Through a top-down, bottom-up, active investment approach, the funds are expertly mixed to provide investors with diversification across the full spectrum of asset classes.

0.75% OCF Janus Henderson fund

% Yield†

Janus Henderson Core 3 Income Fund

3.7

Janus Henderson Core 4 Income Fund

4.4

Janus Henderson Core 5 Income Fund

4.6

Janus Henderson Core 6 Income & Growth Fund

4.0

Historical 12 month yields as at 31 December 2018.

Based on ‘I Inc’ share class. Source: Janus Henderson Investors.

†

janushenderson.com/core

Source: Janus Henderson Investors as at 31 December 2018.

For professional advisers only. Investments can fall as well as rise. Past performance is not a guide to future performance. Nothing in this advert should be construed as advice. This is not a recommendation to sell or purchase any investment. Please read all scheme documents before investing.

Yield may vary and is not guaranteed. The Janus Henderson Multi-Asset Core Income funds should be bought in conjunction with an attitude to risk tool as part of the financial advice process. These funds are, therefore, designed to be bought by advised clients only.

Issued by Janus Henderson Investors. Janus Henderson Investors is the name under which investment products and services are provided by Henderson Investment Funds Limited (reg. no. 2678531) (each registered in England and Wales at 201 Bishopsgate, London EC2M 3AE and regulated by the Financial Conduct Authority). Janus Henderson is a trademark of Janus Henderson Group plc or one of its subsidiaries. © Janus Henderson Group plc.

YEAR AHEAD

PROFESSIONAL INVESTORS: FOR PROMOTIONAL PURPOSES

THE KEY THEMES SHAPING MARKETS IN 2019 These have been turbulent times in financial markets, as the geopolitical environment has looked increasingly uncertain. Paul O’Connor, Head of the Janus Henderson Investors UK based Multi-Asset team, discusses how events are likely to develop in 2019.

At face value, the global economic outlook for 2019 and beyond still looks fairly market-friendly. Consensus forecasts continue to project an unusually long economic expansion, with few signs of imminent recession, offering continued fundamental support to mature bull markets in risk assets.

However, given the unprecedented nature of some key aspects of the current macro environment, and the fact that both policy and political uncertainty look set to be unusually high in 2019, faith in the constructive long-cycle scenario is likely to be frequently tested during the year.

On the monetary policy front, concerns are likely to focus on whether the US Federal Reserve (Fed) can engineer a ‘soft landing’ and how financial markets will adjust to the ending of the decade-long era of global quantitative easing (QE). Away from central banks, the other big policy question overshadowing 2019 is whether global trade tensions will ease before economic confidence is damaged or some sort of financial accident is triggered in the emerging markets. On top of this, the year is likely to be punctuated by a number of political flare-ups, with developments in Italy and the UK looking most likely to generate headlines in the early months of the year (Fig 1).

WHERE DO YOU SEE THE MOST IMPORTANT OPPORTUNITIES AND RISKS WITHIN YOUR ASSET CLASS? We see equities offering the highest expected returns in 2019, although they will probably give quite a bumpy ride. We think 2018’s washout in high yield stocks has created some attractive entry points, particularly in the UK. Regionally, one of the big calls for the year will be whether 2018’s US outperformance in the equity and currency markets can continue. We feel that many of the fundamental drivers of these trends are now well priced-in and that the best phase of US outperformance is now behind us.

Gauging when to rebuild exposure to emerging markets will be another key decision in 2019. Value is emerging here but a sustained upswing will probably require significant good news from US-China trade talks or the belief that US interest rate expectations are peaking.

HOW HAVE YOUR EXPERIENCES IN 2018 SHIFTED YOUR APPROACH OR OUTLOOK FOR 2019?

We saw 2018 as being a key transition year for financial markets. The big theme here was the ending of QE and an unusually benign era in financial markets and the return to a more complicated and uncertain market environment. We expect that the uncertainty witnessed in 2018 may continue into 2019. If this is the case, lower and more variable returns and greater volatility than experienced during the QE era is likely. While 2 6 ADVISER-HUB.CO.UK

buy-and-hold investing worked well when markets were clearly trending higher, the choppier conditions that we expect for 2019 will demand a greater emphasis on volatility management and asset allocation. In this sort of environment, well diversified, actively managed multi-asset funds should have plenty to offer investors.

Rolling annual central bank asset purchases ($ billions)

Fig 1

WHAT ARE THE KEY THEMES LIKELY TO SHAPE MARKETS IN 2019?

2,500

BoE Fed BoJ ECB Total

2,000 1,500

2,500 2,000 1,500

1,000

1,000

500

500

0

0

-500

-500

-1,000 Dec-13

-1,000 Dec-14

Dec-15

Dec-16

Dec-17

Dec-18

Dec-19

Source: Bloomberg, TS Lombard, as at July 2018. Note: Projections after June 2018 US Federal Reserve (Fed), European Central Bank (ECB), Bank of Japan (BoJ), Bank of England (BoE)

These are the manager’s views at the time of writing and may differ from those of other Janus Henderson portfolio managers. The information should not be construed as investment advice. No forecasts can be guaranteed. This document is intended solely for the use of professionals, defined as Eligible Counterparties or Professional Clients, and is not for general public distribution. Past performance is not a guide to future performance. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested. Issued in Europe by Janus Henderson Investors. Janus Henderson Investors is the name under which investment products and services are provided by Janus Capital International Limited (reg no. 3594615), Henderson Global Investors Limited (reg. no. 906355), Henderson Investment Funds Limited (reg. no. 2678531), AlphaGen Capital Limited (reg. no. 962757), Henderson Equity Partners Limited (reg. no.2606646), (each registered in England and Wales at 201 Bishopsgate, London EC2M 3AE and regulated by the Financial Conduct Authority) and Henderson Management S.A. (reg no. B22848 at 2 Rue de Bitbourg, L-1273, Luxembourg and regulated by the Commission de Surveillance du Secteur Financier). Janus Henderson is trademarks of Janus Henderson Group plc or one of its subsidiaries. © Janus Henderson Group plc.

YEAR AHEAD

United Kingdom • Brexit dominated headlines; a number of key players resigned their posts and the EU rejected a deal proposal in September.

• Tentative agreement was reached in September, although Prime Minister Theresa May faced a vote of no confidence, which she won.

• The Bank of England voted to keep rates steady at its December meeting and lowered projections for Q4 growth.

• FTSE All-Share Index -11.0%.

Europe ex-UK • The ongoing disagreement between Italy and the European Commission surrounding the country’s budget took a toll on the euro.

• Problems in the Turkish banking system lead to fears of a knock-on effect throughout Europe.

• Exacerbated by Brexit, these concerns contributed to the feeblest growth rate in more than four years.

• The European Central Bank (ECB) maintained its 0% interest rate and confirmed that its bond-buying scheme would end in December.

• FTSE World Europe ex-UK Index -8.1%.

Japan • Japanese markets also fell as GDP expansion plummeted to -6% in Q3 2018, due partly to a run of natural disasters.

• US President Donald Trump threatened high tariffs on automobile exports to the US. • Shinzo Abe was re-elected as head of his party and the Bank of Japan left policy unchanged.

• FTSE World Japan Index -8.1%.

United States • Despite hitting record highs in the autumn, equity markets were brought low by a major sell-off in the technology sector and trade war rhetoric.

• Nevertheless, consumer confidence rose to 98.3 in December, although business confidence fell sharply to 54.1 that month, the largest monthly drop since October 2008.

• The Federal Reserve continued its tightening path, raising interest rates in both September and December.

• S&P500 Index –3.4%.

Emerging Markets • Emerging Markets also generally fell, with the exception being Brazil, whose Bovespa index surged to an all-time high in early December.

• Argentina’s central bank attempted to combat its currency crisis by raising interest rates to c. 60%.

• The Bank of Russia raised rates in September and again in December.

• MSCI Emerging Markets Index -4.9%.

Bonds & commodities • Core government bond markets were largely up, with yields falling in the US and Germany but rising slightly in the UK. • Yields fell in the US on trade war rhetoric and depressed oil prices.

• Worries surrounding a no-deal Brexit scenario sent 10-year gilts to their lowest level in the period on the day of the Conservative Party‘s vote of no confidence, rising later.

• Corporate bond markets faced losses as a result of steadily rising US interest rates.

• The price of Brent Crude oil spiked in October but fell swiftly by the end of the year as Saudi Arabia’s output increased significantly.

• Gold prices rose over the six months.

Asia ex Japan • Asian equity markets were down, with concerns over the China-US trade war the overarching theme.

• Chinese GDP growth was disappointing as year on year expansion in the three months to end September was lower than expected.

• South Korean stocks plummeted on global worries and a mass exodus of foreign investors.

• Australia’s benchmark index recorded its worst yearly performance since 2011.

• Despite raising its key interest rate to 6.5% earlier in the period, India’s economic data subsequently stalled on lower food and oil prices and mounting international trade tensions.

• FTSE World Asia Pacific ex-Japan Index -5.1%.

Source for all index performance: Thomson Reuters Datastream, 1 July 2018 to 31 December 2018, total return indices in sterling unless otherwise stated.

ADVISER-HUB.CO.UK 2 7

XXXX

Ewan Thompson Neptune Investment Management

BETTER SIGNS AHEAD FOR EMERGING MARKETS A SUBTLE SHIFT HAS OCCURRED AFTER A TURBULENT YEAR IN EMERGING MARKETS. INVESTORS SHOULD TAKE NOTE, ARGUES EWAN THOMPSON, MANAGER OF THE NEPTUNE EMERGING MARKETS FUND.

have said the fiscal stimulus doesn’t go far enough, but I would suggest that Emerging markets are usually seen as a risk asset. When investors are if the government accelerated growth in the short term, people would say optimistic, they are happy to invest, but then are prone to retreat at it was too quick. There is a balancing act. China needs to grow at a pace that times of instability. Unusually, during the market turbulence at the end of is good for its long-term stability.” Thompson also believes that China is not 2018, emerging markets have shown more resilience. The importance of this currently showing enough economic weakness to cause real distress for the shift should not be underestimated, says Ewan Thompson, manager of the corporate sector.

Neptune Emerging Markets Fund.

In the Neptune Emerging Markets Fund today, Thompson is positioned Emerging markets had a torrid year in 2018. Most markets, but with a cyclical tilt. He says: “There is an asymmetric outlook. There is huge particularly China, were buffeted by a high dollar, the trade war, US value in emerging markets and particularly in the ‘value’ area. As such, we protectionism and rising rates. However, a shift started to happen as are looking at cheaper and more cyclical areas. We are overweight materials, developed markets sold off from October – emerging markets started to energy and industrials, while being underweight staples. This positioning outperform. Thompson argues that this suggests far greater resilience did well in 2016/17 and was largely in line with the wider market than would normally be expected. in 2018.”

Why did this shift happen at a time when global markets He says that investors reaped little benefit from a look fragile? Thompson sees a number of factors: “Everything defensive position in 2018. Defensive companies didn’t has a price and emerging markets were trading at well “There is a balancing necessarily protect against market volatility. This supports below their average valuations. Not, perhaps, at the crisis act. China needs to his view that the risks to the downside are lower in more levels seen during the global recession, but there was real grow at a pace that is cyclical areas. weakness on price.” In contrast, the US market had started good for its long-term Only two major markets were positive in the year: Brazil to look very expensive relative to the rest of the world. stability.” was up 2%. While the global economy has stalled, Brazil’s, in There was also a sense that everything bad was in the contrast, has kept going. Thompson believes this growth can price. What more could go wrong that would merit current keep going and while Bolsonaro is a controversial figure, his valuations? Certainly, says Thompson, there might have been a potential reform agenda is winning over investors. global recession and emerging markets weren’t priced for that, but Russia was also positive. Thompson retains a significant overweight EM positioning among global funds was very light, among the lowest in position there: “It is a cheap market and under-owned. We have only got light a decade. exposure to the domestic economy; our primary exposure is on the He adds: “We also need to think what might go right. Trump wants to exporters. While Russia is not risk-free – sanctions uncertainty for example make a deal. If there is movement on trade, we are likely to see a back-up in – it has become a much lower beta market. Correlation is low to global the US dollar. Emerging markets are under-owned and cheap. They should markets and it performs very differently to the peer group.” be in a great position should there be a catalyst for change.”

After a tough year, the year ahead looks to be more positive for That said, he is watching China closely. He believes a lot of the recent emerging markets. It may even break the long-held view that it is only an weakness in manufacturing is intentional, part and parcel of the move to a asset class for risk-on markets. As they mature, emerging markets may be consumer-led economy. However, leverage is too high and the Chinese more resilient than many believe. government is trying to get it down, which ties its hands. He says: “People 2 8 ADVISER-HUB.CO.UK

1 2 3

3 0 ADVISER-HUB.CO.UK

ECONOMIC OUTLOOK

WHY 2019 MIGHT BE A BETTER YEAR FOR INVESTORS After the disappointment of 2018, Schroders' Chief Executive Peter Harrison rounds up the factors our fund managers think could lead to a brighter year ahead.

2018 has been a disappointing year for most investors. Almost all markets, both stocks and bonds, have fallen in value this year, under pressure from rising interest rates, political developments such as Brexit, and the trade dispute between the US and China.

With hindsight, markets were priced for perfection at the start of the year and were vulnerable to bad news – and there has been plenty of that.

It is easy to be influenced by the pessimism now affecting markets. We accept that there is likely to be more bad news in 2019 - and I would pick out the trade dispute between the US and China as showing no sign of resolution and with the potential to damage economic growth around the world. But there are signs that market returns may be more positive in 2019.

Greater realism has arrived with falls in stock markets, particularly since September. Markets are pricing in at least some of the risks we have identified.

Schroders’ economists expect a gradual slowdown in growth in the US in 2019 and 2020. The emphasis is on the word gradual: we do not see a recession as likely in 2019 (although not inconceivable in 2020) as many of the forces that led to a strong year in the US in 2018 are still in play. The slowdown, however, means that an end to the cycle of rising interest rates is in sight. If we are right that interest rates rise no further than 3%, that is a modest peak compared to past economic cycles.

"2018 WAS THE YEAR IN WHICH THE LONG-TERM SUSTAINABILITY OF BUSINESS MODELS STARTED TO INFLUENCE HOW THE MARKET PRICES COMPANIES." Our equity fund managers all point to slightly higher inflation next year as helpful to those companies that have strong market positions and the ability to raise prices. They also see more attractive valuations for many companies. Even in Europe and the UK, where growth has been disappointing, the income return from dividends alone looks more attractive compared to cash or bonds than for some time. Equities do, of course, carry greater risk along with potential for higher returns though.

Weaker growth in the US is also likely to lead to the US dollar losing ground against other currencies. This is good news for emerging stock and bond markets as a strong dollar sucks money away from these markets. Emerging markets, including China, have suffered particularly badly in 2018 and we would not be surprised to see them recover in 2019. Our multi-asset team describes their valuation as “provocatively low”.

Our bond managers are not so comfortable about the outlook, with the central banks, who have been huge buyers of government and other bonds, steadily departing the field. Corporate bonds, however, have become cheaper in recent months and, if we are right about a limited slowdown in the US next year, will be

supported by strong fundamentals.

2018 was the year in which the long-term sustainability of business models started to influence how the market prices companies. We have seen criticism of some practices of large technology companies leading to falls in their stock prices, and increasing physical damage caused by climate change; inequality between generations has led to political turmoil in several European countries. Across our investment decision-making, an eye on sustainability is becoming more and more critical.

We recently published a 10-year outlook for markets, Inescapable investment truths for the decade ahead. This highlighted the modest return prospects from public markets, given lower rates of economic growth than in the past and the low level of bond yields.

2019 will fit that pattern, with positive returns likely, but investors having to work hard – both through asset allocation and security selection – to augment low headline market returns.

I also continue to believe that private assets such as private equity and real estate will, as part of a diversified portfolio, help investors achieve their goals.

On this basis, 2019 should be a better year than 2018.

Important Information: Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested. Exchange rate changes may cause the value of any overseas investments to rise or fall. All investments involve risks including the risk of possible loss of principal. The forecasts included should not be relied upon, are not guaranteed and are provided only as at the date of issue. Our forecasts are based on our own assumptions which may change. We accept no responsibility for any errors of fact or opinion and assume no obligation to provide you with any changes to our assumptions or forecasts. Forecasts and assumptions may be affected by external economic or other factors.

The views and opinions contained herein are those of Schroders’ Economics team and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds and may change. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide and should not be relied on for accounting, legal or tax advice, or investment recommendations. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. Any data has been sourced by us and is provided without any warranties of any kind. It should be independently verified before further publication or use. Third party data is owned or licenced by the data provider and may not be reproduced, extracted or used for any other purpose without the data provider’s consent. Neither we, nor the data provider, will have any liability in connection with the third party data. Any references to securities, sectors, regions and/or countries are for illustrative purposes only. Issued by Schroder Investment Management Limited, 1 London Wall Place, London EC2Y 5AU. Registered No. 1893220 England. Authorised and regulated by the Financial Conduct Authority. CS00941.

ADVISER-HUB.CO.UK 3 1

Changing Infrastructure As cities grow, so do their requirements.

BNY Mellon Global Infrastructure Income Fund Accessing investment in both traditional and non-traditional infrastructure, unlocks unique and inspiring opportunities. Covering the re-urbanisation of baby boomers, the increasing need for 5G and staples like water, our fund revolutionises infrastructure investing; taking advantage of how cities have a more diverse set of requirements than ever before. Infrastructure is just one of the ‘Agents of Change’ BNY Mellon has identified as redefining markets for the future.

To find out more visit: bnymellonim.com/aoc-uk

Managed by:

The value of investments can fall. Investors may not get back the amount invested.

Mellon was formed on 31 January 2018, through the merger of The Boston Company and Standish into Mellon Capital. Effective 2 January 2019, the combined firm was renamed Mellon Investments Corporation.

For Professional Clients only. For a full list of risks applicable to this fund, please refer to the Prospectus or other offering documents. Before subscribing, investors should read the most recent Prospectus and KIID for each fund in which they want to invest. Go to www.bnymellonim.co.uk. The Prospectus and KIID are available in English and in an official language of the jurisdictions in which the Fund is registered for public sale. This is a financial promotion and is not investment advice. Investments should not be regarded as short-term and should normally be held for at least five years. The Fund is a sub-fund of BNY Mellon Global Funds, plc, an open-ended investment company with variable capital (ICVC), with segregated liability between sub-funds. Incorporated with limited liability under the laws of Ireland and authorised by the Central Bank of Ireland as a UCITS Fund. The Management Company is BNY Mellon Global Management Limited (BNY MGM), approved and regulated by the Central Bank of Ireland. Registered address: 33 Sir John Rogerson’s Quay, Dublin 2, Ireland. BNY Mellon is the corporate brand of The Bank of New York Mellon Corporation and its subsidiaries. Mellon was formed on 31 January 2018, through the merger of The Boston Company and Standish into Mellon Capital. Effective 2 January 2019, the combined firm was renamed Mellon Investments Corporation. Issued in the UK by BNY Mellon Investment Management EMEA Limited, BNY Mellon Centre, 160 Queen Victoria Street, London EC4V 4LA. Registered in England No. 1118580. Authorised and regulated by the Financial Conduct Authority. AB00187, expires 31 October 2019. T7485 01/19.

DEMOGRAPHICS

Will Oulton First State Investments

MILLENNIALS: TOMORROW’S INVESTORS WILL OULTON, GLOBAL HEAD OF RESPONSIBLE INVESTMENT, FIRST STATE INVESTMENTS ASKS WHETHER THE INVESTMENT ECOSYSTEM IS READY TO MEET THE NEEDS OF THE NEXT GENERATION OF INVESTORS?

Much has been made of the demographic changes underway long-term returns. This applied almost equally for millennials in each generation but none more so than that of millennials as it did for all respondents including all age groups at 57% who may be far from being old enough to retire but have reached and 56% respectively. working age. They not only have a major influence on 7. We asked how many controversial company incidents over a consumption trends, particularly in the digital arena, but also 12-month period would cause an investor to change an disposable incomes that will grow with age and look set to have investment fund. The majority (58%) replied that it would only their own demands and characteristics in terms of financial take between two to five controversies to sway their choice. RI services. This applies equally to individuals’ savings and pension products may have a greater potential vulnerability around funding, which though maybe a distant concern for most perceived corporate controversies than is currently realised. millennials, are an important financial consideration of our 8. Almost half believed going digital could be a driver in current time. increasing uptake of RI products. This could be via easier access Last summer, First State Investments and Kepler Cheuvreux to investment platforms or a higher level of information on the undertook a joint research project of millennials and nonRI characteristics of a specific product. millennials to test the views and preferences of millennials regarding their understanding and attitudes towards Read the full report and our analysis of the RI views of the sustainable and responsible investment (RI) that next generation here: yielded interesting and thought-provoking results: go.firststateinvestments.com/millennial-research “The majority of both millennial and non-millennial 1. Over 80% of millennials in our survey that respondents (81%) want more don’t already invest in RI are either education on the topic of ‘interested’ or ‘very interested’.

Important Information: This document is not a financial responsible investment. This presents an opportunity for those in 2. The majority (79%) of millennial promotion and has been prepared for general information the industry to make responsible respondents thought friends/colleagues of purposes only and the views expressed are those of the investments as a whole more their age are more easily convinced than writer and may change over time. Unless otherwise stated, accessible and easily understood to a wider consumer market.” previous generations of the importance/reach/ the source of information contained in this document is First interest of responsible investments. There is State Investments and is believed to be reliable and accurate. significant potential for this drive for responsible References to “we” or “us” are references to First State Investments. purchasing to be applied to financial services.

First State Investments recommends that investors seek independent 3. The majority of both millennial and non-millennial respondents financial and professional advice prior to making investment decisions. In the (81%) want more education on the topic of RI. This presents United Kingdom, this document is issued by First State Investments (UK) Limited an opportunity for those in the industry to make responsible which is authorised and regulated in the UK by the Financial Conduct Authority investments as a whole more accessible and easily understood (registration number 143359). Registered office: Finsbury Circus House, 15 to a wider consumer market.

Finsbury Circus, London, EC2M 7EB, number 2294743. Outside the UK within the 4. Well-established specialisms in RI are a major factor in EEA, this document is issued by First State Investments International Limited which encouraging investment in a particular provider. The majority is authorised and regulated in the UK by the Financial Conduct Authority (78%) of respondents say that expertise in RI would be a (registration number 122512). Registered office 23 St. Andrew Square, reason for choosing an asset manager/financial services Edinburgh, EH2 1BB number SC079063. he Financial Conduct Authority provider over another. (registration number 143359). Registered office: Finsbury Circus House, 15 5. Environmental concerns still reign with over a third choosing Finsbury Circus, London, EC2M 7EB, number 2294743. Outside the UK within the this as the most important broad thematic in ESG EEA, this document is issued by First State Investments International Limited which (environmental, social and governance). is authorised and regulated in the UK by the Financial Conduct Authority 6. In our survey, a slight majority of respondents thought the (registration number 122512). Registered office 23 St. Andrew Square, application of ESG investment methodologies would boost Edinburgh, EH2 1BB number SC079063.

ADVISER-HUB.CO.UK 3 3

IMPACT INVESTING

IMPACT INVESTING: THE FUTURE OF ACTIVE MANAGEMENT? A recent study showed that more than half (55%) of investors say they would like their money to support companies that contribute to society and the environment.

Investment managers are taking note.

Investing for good is a fast growing trend – and one worth exploring for is home to Marmite, Dove soap and Magnum ice cream. The firm has cut any professional or private investor. Many savers feel passionate about packaging waste per consumer by 28% since 2010. It has targeted at least protecting the environment – in particular, reducing the amount of plastic 25% recycled plastic content in its packaging by 2025. This is just one waste. But investing for good goes much further than simply backing example of countless companies all over the world which have announced companies that promise to improve or preserve the environment. plans to behave in a more responsible manner. Instead of seeking out these Responsible investors pay particular attention to a company’s record on companies to add to an ISA or pension portfolio, investors can rely on a environmental, social, and governance (ESG) issues fund manager to undertake the search on their which can help measure just how responsible or behalf.

“MANY ASSET MANAGEMENT sustainable a company is.

One issue that comes up time and time again GROUPS REVEAL THAT THEY ARE A recent study showed that more than half (55%) in the report is the misconception that limiting the WORKING TO INTEGRATE ESG INTO of investors say they would like their money to companies in which you can invest could hinder THEIR ENTIRE BUSINESSES – SOME support companies that contribute to society and investment performance. As the report discusses, ARE ALREADY DOING IT. FUND the environment. there is growing evidence that suggests that funds MANAGERS AND ANALYSTS ARE Impact investing, where investments are made which adopt an ESG approach will see a boost in WORKING HARD TO FIND COMPANIES performance. with the aim of generating social and environmental THAT ARE COMMITTED TO A impact alongside a financial return, is also on the Impact Investing: An Industry View includes a SUSTAINABLE FUTURE.” rise. range of interviews with key industry figures about However, it’s not just investors that are keen to the growing demand for ESG and impact investing, embrace this kind of investing. There’s support why it’s important and the challenges faced. A from the Government, the regulator and crucially, asset management View from the Top features an exclusive roundtable with Euan Munro, Chief companies.

Executive Officer of Aviva Investors, Peter Harrison, Group Chief Executive The report, Impact Investing: An Industry View was compiled for the of Schroders and Richard Wilson, Chief Executive Officer of BMO Global London Active Summit, and unveils the progress being made in this space.

Asset Management. Leading independent investment experts including It explores how asset managers are increasingly focusing on providing more Richard Romer-Lee, managing director of Square Mile Investment Consulting investment opportunities, taking ESG factors into consideration. & Research and Will Goodhart, chief executive of the CFA Society UK, shed The report highlights the wave of sustainable and impact fund launches in light on the challenges faced. the last 12 months alone – adding to the existing ranges of funds that serve The verdict by industry figureheads is that impact and ESG investing this sector. As well as running specific ESG funds, many asset management looks set to be the future. As Jamie Jenkins, Head of Responsible Global groups reveal that they are working to integrate ESG into their entire Equities at BMO Global Asset Management told me: “Investing for good is businesses – some are already doing it. Fund managers and analysts are not a nice-to-have in a portfolio – it’s a must-have.” working hard to find companies that are committed to a sustainable future.

Holly Thomas - Financial journalist and author of Impact Investing These include household names such as Unilever, the consumer giant that 3 4 ADVISER-HUB.CO.UK

JOIN THE CASCAID TEAM AT THE ROYAL PARKS HALF MARATHON! We have a number of places available to be part of the CASCAID team running the Royal Parks Half Marathon on Sunday 13th October 2019 which is taking place in central London!

It promises to be a fabulous event and a great excuse to get fit whilst supporting a fantastic cause – CASCAID is all about ordinary people rolling their sleeves up, giving their time and effort for great causes.

All abilities are welcome, first-time runners to seasoned professionals! We will aim to start together and then go at our own pace, meeting up again at the finish line for some well earned refreshments. Friends and families are welcome too – the more the merrier!

For more information and details of how to secure your place along with a discounted sign up fee (available for a limited time only!) please email jade.collison@mipagency.com.

We hope you can join us!

CASCAIDCHARITY.COM

SUSTAINABLE INVESTMENT

ACCENTUATING THE POSITIVE John William Olsen, Fund Manager of the M&G Positive Impact Fund, discusses how the fund measures impact, where it invests and what makes it different.

What is the background to the M&G Positive Impact Fund?

The concept of impact investing is not new, but until recently, it was largely confined to the private equity and private debt areas.

This meant it was the preserve of institutional and high-net-worth investors. Impact investing has now expanded into the listed equity space, with institutions such as the Global Impact Investor Network making a concerted effort to draw money from a broader investment pool. With this fund we seek to open up impact investment to a wider audience.

How are you defining ‘impact’ for this fund?

The impact needs to be fully aligned with the company strategy. It needs to be the majority of what a company does and make a material difference to the company’s fortunes. In other words, it is about materiality and measurability.

There are six different areas we target in the fund: three relate to the environment – climate solutions, clean air, water and land, and the circular economy, which is about reducing waste, re-using and recycling. Three have a social purpose – better health, better work conditions and social equality. It can be more difficult to find investments here, but we are looking at areas such as technology to promote financial inclusion, as one example.

It is worth noting that, in the impact world, investors used to only consider the investment impact – that is, the specific impact achieved as a result of a specific investment – but increasingly they also want to consider whether a company has a positive social or environmental impact. The two are not incompatible, and we think companies whose products and services meet some of these acute social or environmental needs are set to exhibit strong growth characteristics.

What is the purpose of the fund?

We want to beat the MSCI All Countries World Index over a rolling five-year period and to invest in companies that aim to have a positive societal impact. We believe that companies able to generate an impact alongside an equity return have a significant tailwind.

How do you research companies for inclusion in the portfolio?

We have developed a three ‘i’ methodology to analyse companies for inclusion in our watch-list: this examines investment, intention and impact. For stocks to be considered they must score above average in all three areas. The investment case has to be sound and the company’s intention is vital. What is its culture? Its mission statement? How does it intend to deliver positive impact? It can’t be an accidental outcome. The impact is assessed, in part, through a ‘results chain’ framework – this is the same framework used by the Gates Foundation and World Health Organisation. We also map companies’ intentions to the UN Sustainable Development Goals.

Our impact team considers the three ‘i’s of every potential 3 6 ADVISER-HUB.CO.UK

investment, and we require full consensus from the team before a company makes it on to our watch-list. If one person disagrees then it doesn’t make the list.

Does this lead you to certain areas of investment?

The fund tends to have a growth bias, while this type of investing also generally lends itself to smaller companies. Large companies are often conglomerates and can have a lot of negative impact elsewhere in their businesses – it is easier to find impactful smaller companies.

It is also easier to find companies in emerging markets that provide solutions for these environmental and social issues, simply because there are more issues to solve. The opportunities across different geographies can be very different. Banks in emerging markets have an important social purpose, facilitating micro-lending, for example, in a way that they don’t in developed markets. But it is easier to find sophisticated technology companies in the US. However, we don’t seek to generate returns as a result of our geographic allocation; this is only through stock-picking.

This is a long-term strategy, with the intention of holding an investment for five years or longer. We think this gives companies time to generate impact, and they know that we are long-term shareholders, providing committed capital. And we are focussed, holding fewer than 40 stocks in the portfolio.

What would make you change your mind about a company?

On the impact side, it would be if a company’s positive intentions changed, if it was not delivering the impact we expected or if part of the business began to generate negative impact. On the investment side, it would be if our investment thesis for the company did not pan out as expected, or if the company’s shares became unjustifiably expensive.

Is the universe of impact stocks likely to expand?

We believe it will grow significantly. Having run a model portfolio for a year before the fund officially launched in November, we have seen that this is already the case.

Of course, for listed equities, it remains challenging to measure impact. On the surface it is tough to say which companies are the most impactful and that is why we have to have such rigorous internal analysis and discussion. There may be two companies in very different sectors, with very different types of impact, and we have to find a meaningful way to compare them.

At the same time, we have a responsibility to create a financial return, so we have to look at a company’s business model and whether it is run by a good management team with integrity. It is complex work and it takes a lot of research, including meeting management teams, to ensure we are making sound investment decisions.

XXXX

THE FUND TENDS TO HAVE A GROWTH BIAS, WHILE THIS TYPE OF INVESTING ALSO GENERALLY LENDS ITSELF TO SMALLER COMPANIES. LARGE COMPANIES ARE OFTEN CONGLOMERATES AND CAN HAVE A LOT OF NEGATIVE IMPACT ELSEWHERE IN THEIR BUSINESSES – IT IS EASIER TO FIND IMPACTFUL SMALLER COMPANIES.

ADVISER-HUB.CO.UK 3 7

INVEST

IN A FUTURE POWERED BY

EXPERTS IN ACTIVE FUND MANAGEMENT

This financial promotion is issued by M&G Securities Limited which is authorised and regulated by the Financial Conduct Authority in the UK and provides ISAs and other investment products. The company’s registered office is Laurence Pountney Hill, London EC4R 0HH. Registered in England No. 90776. DEC 18 / 332921

FOR PROFESSIONAL CLIENTS AND QUALIFIED INVESTORS ONLY

TAKE ADVANTAGE OF HUMAN AND MACHINE The BlackRock Advantage range of six new equity funds harness the power of human insight and machine intelligence.

Building on over 30 years’ experience, we use advanced tools to unlock one of the world’s most valuable untapped resources: big data.

Utilising innovative systems, proprietary models and advanced analytics we can quickly uncover emerging trends and patterns on a global scale.

These can be used to inform investment oppor tunities within our range of funds.

Take advantage of the power of human and machine.

Capital at risk: The value of investments and the income from them can fall as well as rise and are not guaranteed. You may not get back the amount originally invested.

Search ‘BlackRock Advantage’

Issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. © 2018 BlackRock, Inc. All Rights Reserved. 561685

XXXX

4 0 ADVISER-HUB.CO.UK

"WE ADVOCATE TARGETED RISK-TAKING IN ASSETS WHERE THE RISK/REWARD LOOKS MOST APPEALING. WE STILL PREFER EQUITIES OVER BONDS, ALTHOUGH WITH REDUCED CONVICTION AMID RISING RISKS. THIS UNDERPINS OUR PREFERENCE FOR QUALITY COMPANIES."

MACRO STRATEGY

THREE PORTFOLIO IDEAS FOR 2019 2019 is off to a bumpy start, and the volatility is likely to persist. Against this backdrop, Richard Turnill, Global Chief Investment Strategist, for BlackRock, shares three ideas for building portfolio resilience.

Late-2018 volatility looks likely to persist for both stock and bond markets, reflecting greater risk as 2019 gets underway.

We expect a slowdown in global growth and corporate earnings this year, though not an end to the ongoing expansion. Yet markets are still vulnerable to earnings – and growth-related fears.

Uncertainty around US-China trade frictions, a possible pause in Federal Reserve rate hikes and European political risks are also likely to cause bouts of investor anxiety as key March dates near.

Our base case is for low, positive returns for fixed income and equities in the year ahead, with stocks modestly outperforming bonds. Cheaper asset valuations heading into 2019 lower the bar for positive performance, but rising risks argue for caution. Against this backdrop, we advocate that investors build more resilience into their portfolios, as we write in our 2019 Global investment outlook. Here are three ideas for how to potentially do that.

Think barbell. Building resilient portfolios is about more than just dialling down risk. Overly defensive positioning can undermine investors’ long-term goals.

The positive correlation between equity and bond returns in 2018 can be explained, at least in part, by rising uncertainty and tighter financial conditions, we believe. These risks look more priced into assets now and we expect growth to reassert itself as a driver of returns. This suggests to us that bonds should be more effective as offsets to equity risk in 2019 — and calls for a barbelled approach: exposures to government debt as a portfolio buffer, coupled with highconviction allocations to assets that offer attractive risk/return prospects. See point three.

1.

Consider allocations to quality bonds.

We see US government bonds as a key source of income and portfolio ballast.

Rising rates have made shorter-term US bonds an attractive source of income.

Short-term Treasuries now offer almost as much yield as the 10-year Treasury. That’s with one-fifth the duration risk, we calculate. We prefer short- to medium-term US government bonds, but we are also warming up to longer-term debt as an offset to equity risk. US government bonds overall can potentially help cushion portfolios amid late-cycle selloffs and risk-off events. Consider December’s market performance, when US stocks posted their worst month since February 2009, while 10-year Treasury yields fell to the lowest levels since early 2018 (as prices rallied).

In addition, we see the Fed likely pausing its quarterly pace of rate hikes to assess the effects of slowing economic growth and tightening

2.

financial conditions, potentially creating a relatively benign environment for Treasuries.

Our base case calls for two Fed rate increases in 2019, one in each half with a pause in March looking increasingly likely.

Target risk-taking. We advocate targeted risk-taking in assets where the risk/reward looks most appealing.

We still prefer equities over bonds, although with reduced conviction amid rising risks. This underpins our preference for quality companies with free cash flow, sustainable growth and clean balance sheets. Quality has historically outperformed other equity style factors in economic slowdowns, our analysis shows. One sector where we find these quality characteristics: health care. The sector also shows low sensitivity to global growth, which historically has provided resilience in late cycle.

Our view is supported by positive demographic and innovation trends, and a strong earnings outlook among defensive sectors. We favour pharmaceuticals, managed care and medical technology.

The US remains a favoured region. Valuations are high but we find prospects for earnings growth stronger than in other regions. We also see emerging market (EM) equities as good candidates for the other end of the barbell.

Lowered EM valuations open an attractive entry point amid a solid earnings outlook and China’s focus on economic stabilisation.

What to avoid? Assets with more downside than upside potential. We see many credit and European assets falling into this category.

European stocks are an underweight given political risks and a fragile economy vulnerable

3.

to the effects of any recession; financials would be most at risk. Europe’s equity market is also heavy on lower-quality, cyclical companies that tend to lag in late cycle.

Bottom line: Increasing uncertainty points to the need for quality assets in portfolios — but also potential for upside should market fears ebb in 2019. Read more in our full 2019 Global investment outlook.

This material is for distribution to Professional Clients (as defined by the Financial Conduct Authority or MiFID Rules) and Qualified Investors only and should not be relied upon by any other persons. Issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel: 020 7743 3000.

Registered in England No. 2020394. For your protection telephone calls are usually recorded. BlackRock is a trading name of BlackRock Investment Management (UK) Limited.

Capital at risk. The value of investments and the income from them can fall as well as rise and is not guaranteed. You may not get back the amount originally invested. Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy. Changes in the rates of exchange between currencies may cause the value of investments to diminish or increase. Fluctuation may be particularly marked in the case of a higher volatility fund and the value of an investment may fall suddenly and substantially. Levels and basis of taxation may change from time to time. Any research in this document has been procured and may have been acted on by BlackRock for its own purpose. The results of such research are being made available only incidentally. The views expressed do not constitute investment or any other advice and are subject to change. They do not necessarily reflect the views of any company in the BlackRock Group or any part thereof and no assurances are made as to their accuracy. This document is for information purposes only and does not constitute an offer or invitation to anyone to invest in any BlackRock funds and has not been prepared in connection with any such offer. © 2019 Blackrock, inc. All rights reserved. Blackrock, BlackRock solutions, ishares, build on BlackRock and so what do i do with my money are registered and unregistered trademarks of BlackRock, inc. Or its subsidiaries in the united states and elsewhere. All other trademarks are those of their respective owners.

ADVISER-HUB.CO.UK 4 1

MAKE SURE YOU'RE LINKED IN FOR THE LATEST NEWS FOR FINANCIAL ADVISERS!

PROFILE

WWW.LINKEDIN.COM/IN/ ADVISER-HUB-UK SEARCH

ADVISER-HUB UK

PARTNER DETAILS AVIVA INVESTORS t: 020 7809 6521 e: avivaciss@avivainvestors.com avivainvestors.com/en-gb/adviser.html

JANUS HENDERSON INVESTORS t: 020 7818 2839 e: Sales.support@janushenderson.com janushenderson.com/ukpa

BAILLIE GIFFORD t: 0800 917 4752 e: trustenquiries@bailliegifford.com bailliegifford.com

LEGAL & GENERAL INVESTMENT MANAGEMENT t: 0345 070 8684 e: fundsales@lgim.com lgim.com/uk/ad

BLACKROCK t: 0800 445522 e: broker.services@blackrock.com blackrock.co.uk

M&G INVESTMENTS t: 0845 600 4125 e: info@mandg.co.uk mandg.co.uk/adviser

FIDELITY INTERNATIONAL t: 0800 368 1732 professionals.fidelity.co.uk

SCHRODERS t: 0207 658 3894 e: advisorysalesdesk@schroders.com schroders.co.uk/adviser

GOLDMAN SACHS ASSET MANAGEMENT t: 020 7774 7779 e: fundinfo-uk@gs.com gsamfunds.com

SQUARE MILE RESEARCH t: 020 3700 7397 e: info@squaremileresearch.com squaremileresearch.com

INVESCO t: 0800 085 8677 e: enquiry@invesco.com invesco.co.uk/uk INVESTEC ASSET MANAGEMENT t: 020 7597 2000 e: enquiries@investecmail.com investecassetmanagement.com

SPONSOR DETAILS AXA INVESTMENT MANAGERS t: 0345 777 5511 e: axa-im@uk.dstsystems.com axa-im.co.uk

JUPITER ASSET MANAGEMENT t: 020 3817 1063 e: Intermediary-sales-support@jupiteram.com www.jupiteram.com

BNY MELLON ASSET MANAGEMENT t: 020 7163 8888 e: www.bnymellonim.co.uk salessupport@bnymellon.com

NEPTUNE INVESTMENT MANAGEMENT t: 020 3249 0100 e: enquiries@neptune-im-co.uk www.neptunefunds.com

FIRST STATE INVESTMENTS t: 020 7332 6500 e: enquiries@firststate.co.uk www.firststateinvestments.com

We would love to hear your feedback on this issue of Hub News. If you would like to contact us on this or any other matter, our details are below.

Tel: 020 3004 4479 Email: enquiries@adviser-hub.co.uk Adviser-Hub 4th Floor, 33 Sun Street London, EC2M 2PY ADVISER-HUB IS FOR FINANCIAL ADVISERS ONLY AND IS SUBJECT TO TERMS AND CONDITIONS. FOR FULL DETAILS, SEE WWW.ADVISER-HUB.CO.UK OR EMAIL ENQUIRIES@ADVISER-HUB.CO.UK