Cantab Asset Management - Private Client Briefing Notes by Cantab Asset Management

Laying quality foundations

Welcome Welcome to Cantab Asset Managementâ&#x20AC;&#x2122;s Briefing Notes. As you turn the pages, you will find information on a variety of topics which I hope you will find of interest. Please contact me if you would like further information. My email address is david.saunderson@cantabam.com Kind regards

David Saunderson Chief Executive

Cantab Asset Management Ltd 5th Floor, 8 Angel Court, London EC2R 7HP 020 3651 0570 cantabam.com

35 Hills Road, Cambridge CB2 1NT 01223 52 2000 advice@cantabam.com

Steering a course

Cantab Private Office Cantab Asset Managementâ&#x20AC;&#x2122;s Private Office looks after a select group of wealthy individuals and families in the UK and overseas. Absolute discretion and trust are the watchwords for our team. We work closely with you and your advisers to provide the advice and expertise required for your individual needs. We assist in the structuring of your investments, the cashflow planning to address your particular circumstances and the professional skills to tackle the wide diversity of business interests, family trusts and charitable activities with which you may be involved.

Investment Management We provide both advisory and discretionary investment management services. We will work with you to establish the levels of risk and return which you consider appropriate and develop a financial plan with you to facilitate the achievement of your objectives. We will discuss any particular investment preferences which you may have and incorporate these into the planning process. Our discretionary investment service will then work to implement the plan, report back regularly to you on the performance and provide guidance on the achievement of your desired objectives. The investment manager will create and maintain portfolios that are specifically designed for you and customised towards helping you achieve your objectives on a pre-agreed risk profile.

Succession Preparation of the next generation for wise stewardship of inherited resources is a key component to effective succession planning. Assets passed on without appropriate education, clear thought and tax planning can represent a huge burden which can be overwhelming for the recipients. In addition, some recipients may lose motivation and cease to pursue their lifeâ&#x20AC;&#x2122;s interests and aspirations. We will endeavour to assist you and your other professional advisers to ensure that your Wills are up to date, that any succession planning is robust and that the next generation is helped to take on the responsibilities envisaged.

Alternative approaches We are creative and flexible and can provide you with innovative solutions to challenges that you face as you consider your interests now and in the future. As you would expect from Cantab Asset Management, we will provide the professional skills and the business analysis and research that will assist you achieve your objectives. Please call David Saunderson on 020 3651 0570 or Jeremy Davis on 01223 52 2000 to discuss in more detail. 1 June 2016 Risk Warnings This document has been prepared based on our understanding of current UK law and HM Revenue and Customs practice as at 1 June 2016, both of which may be the subject of change in the future. The opinions expressed herein are those of Cantab Asset Management Ltd and should not be construed as investment advice. Cantab Asset Management Ltd is authorised and regulated by the Financial Conduct Authority. As with all equity-based and bond-based investments, the value and the income therefrom can fall as well as rise and you may not get back all the money that you invested. The value of overseas securities will be influenced by the exchange rate used to convert these to sterling. Investments in stocks and shares should therefore be viewed as a medium to longterm investment. Past performance is not a guide to the future.

Cantab Asset Management Ltd 5th Floor, 8 Angel Court, London EC2R 7HP 020 3651 0570 cantabam.com

35 Hills Road, Cambridge CB2 1NT 01223 52 2000 advice@cantabam.com

Offering direction

Our Advice Process Independent, Quality Advice The advice we provide is tailored to each individual client and their needs. We offer a comprehensive financial planning service, in addition to providing investment advice and portfolio management. As Independent Financial Advisers, we consider the whole of the market, both in terms of products and investments, thus ensuring that each client’s financial arrangements are the most appropriate ones available to them. We take pride in this personal approach and ensuring that our clients’ needs are at the heart of our recommendations. This document is designed to provide a summary of the services we offer, but it is not exhaustive, nor should it be relied upon as advice. The quality of our service is recognised by our Chartered Firm status awarded by the Chartered Insurance Institute.

Our Process We begin by assessing a client’s current position, and understand what they want to achieve. Where appropriate, we use sophisticated lifetime cashflow modelling tools, which allow us to confidently make plans that take into account future lifetime events, which may have a significant financial impact. We take into account a client’s attitude to risk and capacity for loss alongside their objectives and discuss options with clients before proceeding with our recommendations for a financial plan, supported by investment advice to ensure that expectations are realistic. Our experienced Investment Committee meets regularly to discuss economic conditions and provide guidance as to how this should impact on our advice. We use a suite of resources to monitor and research investment options. Our risk-rated model portfolios are structured and managed by our in-house investment team under the guidance of the Investment Committee to meet various core investment strategies. Current members of the Committee include David Saunderson (Chairman), Dr Jeremy Davis, Mark MacLean, Patrick Smyth and Dr Jonathan Middleton. Each Client Director, together with his/her team, follows our laid down financial advisory process and is responsible for the advice provided to clients. The investment team provides research and valuable insight into the investment markets which guide the recommendations to clients for their portfolios.

Preserving Capital There are many types of investment risk, and whilst effective financial planning may manage or minimise overall exposure to risks, they cannot be avoided completely. Indeed, it may be that trying to avoid or minimise certain types of risks leads to greater exposure to others. For example, one may avoid putting capital at risk by holding cash on deposit, but there is a real risk of high inflation and low interest rates eroding its purchasing power. There is a trade-off between risk and investment return. Therefore, it is important to understand that taking appropriate risks is a part of effective financial planning. One way in which we manage investment risk is via asset allocation. The asset allocation decisions on the model portfolios are formally made on a quarterly basis as a result of the deliberations of the Investment Committee and adjusted as appropriate in monthly reviews. Diversification within portfolios to include equities, fixed interest bonds, property and other asset classes reduces the risk of putting all one’s eggs in one basket. Holding a geographical spread of equities allows investors to benefit from exposure to developing markets around the world as well as more developed markets such as the UK and the US.

Cantab Asset Management Ltd 5th Floor, 8 Angel Court, London EC2R 7HP 020 3651 0570 cantabam.com

35 Hills Road, Cambridge CB2 1NT 01223 52 2000 advice@cantabam.com

Furthermore, whilst blue chip FTSE 100 companies can provide a strong source of dividend income, mid cap and smaller companies - such as those listed on the FTSE 250 and their global equivalents - have historically offered greater growth potential. As with investments in general, asset allocation should be thought of as a long term strategy, with adjustments to take account of market conditions being made on a more gradual basis.

Investment Vehicles Our core approach, appropriate for most investors, is to use collective funds such as unit trusts and OEICs. However, we also advise on investment trusts and direct holdings, such as individual equities, bonds and gilts. Since investment trusts usually trade at discounts or premiums to their net asset value, these can be more volatile than open-ended funds, but this can also represent an opportunity to achieve a higher return. As such, investment trusts usually require more frequent reviews. Similarly, individual equities are more volatile than collective funds and require regular in-depth reviews. For these reasons, including investment trusts or direct equities would usually be more appropriate for larger investments.

Tax Efficiency Another major consideration is the structure of investments from a tax perspective. There is a variety of different tax wrappers, each of which has a different treatment for tax purposes. Depending on the wrapper, gains may be liable to income tax, capital gains tax, be tax-deferred until a later date, or tax-free. Furthermore, it can be advantageous from a tax point of view for spouses to consider whether to hold investments jointly or individually. Pension legislation remains complex, and further reductions to annual and lifetime limits may catch many people unaware. This highlights the value of conducting thorough financial planning reviews for individual clients on a regular basis.

Value for Money Costs are an increasingly highlighted component of investment returns. The requirement imposed by the regulator for greater clarity and transparency regarding charges has led to increased competition within the industry and pressure for the charges paid to fund managers and platforms to be reduced. One of the many benefits of our independence is to allow us to select the most appropriate solution available from the whole marketplace, bearing in mind both the level of service provided and its cost-effectiveness. Like many other professionals, our annual management costs are calculated based upon time expended, transaction speeds, complexity of work and the amounts invested. Regular reviews are important to ensure that investments remain appropriate, and to ensure that our understanding of each clientâ&#x20AC;&#x2122;s situation remains up to date. It is important to note that investment performance can result in many percentage point differences in returns but charges, in general, are measured in fractions of percentage points. Thus we encourage the focus for clients to be more on investment returns rather than on charges, albeit these should be carefully monitored.

1 June 2016

Risk Warnings This document has been prepared based on our understanding of current UK law and HM Revenue and Customs practice as at 1 June 2016, both of which may be the subject of change in the future. The opinions expressed herein are those of Cantab Asset Management Ltd and should not be construed as investment advice. Cantab Asset Management Ltd is authorised and regulated by the Financial Conduct Authority. As with all equity-based and bond-based investments, the value and the income therefrom can fall as well as rise and you may not get back all the money that you invested. The value of overseas securities will be influenced by the exchange rate used to convert these to sterling. Investments in stocks and shares should therefore be viewed as a medium to long-term investment. Past performance is not a guide to the future.

Cantab Asset Management Ltd 5th Floor, 8 Angel Court, London EC2R 7HP 020 3651 0570 cantabam.com

35 Hills Road, Cambridge CB2 1NT 01223 52 2000 advice@cantabam.com

Recommending a route

Independent or Restricted Advice? As from 1 January 2013, investment advisers have to state whether they provide ‘independent’ or ‘restricted’ advice. Cantab Asset Management Ltd is an ‘independent financial adviser’ providing advice on all areas of private client finance and providing access to all products from across the market. Independent advisers are the only category of adviser providing unbiased and unrestricted advice for a client based upon a comprehensive and fair analysis of the whole of the marketplace and all of the relevant tax wrappers. Our view is that it is in your best interest to appoint an independent adviser in order that your finances may be managed in a comprehensive and holistic manner with all options available and considered to arrive at the best solution. The Financial Conduct Authority writes on their website: “If you are getting advice about investing your money, you need to know there are two different types of financial advisers – ‘independent’ and ‘restricted’ – and this can affect the advice you are given. Some advisers can offer the full range of financial products and providers available, and are called ‘independent advisers’. But many advisers have chosen to offer ‘restricted advice’ and will focus on a limited selection of products and/or providers. All financial advisers have to be approved or authorised by us. Both independent and restricted advisers must pass the same qualifications and meet the same requirements to ensure they are providing suitable advice. An adviser or firm has to tell you in writing whether they offer independent or restricted advice, but if you are not sure which they offer you should ask for more information.”

Independent advisers An adviser or firm that provides independent advice is able to consider and recommend all types of retail investment products that could meet your needs and objectives. Independent advisers will also consider products from all firms across the market, and have to give unbiased and unrestricted advice. An independent adviser may also be called an ‘independent financial adviser’ or ‘IFA’.

Restricted advisers A restricted adviser or firm can only recommend certain products, product providers, or both. The adviser or firm has to clearly explain the nature of the restriction. If you are not sure you should ask for further information, but some examples of restricted advice are where: • The adviser works with one product provider and only considers products that company offers. • The adviser considers products from several – but not all – product providers.

Cantab Asset Management Ltd 5th Floor, 8 Angel Court, London EC2R 7HP 020 3651 0570 cantabam.com

35 Hills Road, Cambridge CB2 1NT 01223 52 2000 advice@cantabam.com

• The adviser can recommend one or some types of products, but not all retail investment products. • T he adviser has chosen to focus on a particular market, such as pensions, and considers products from all providers within that market. Restricted advisers and firms cannot describe the advice they offer as ‘independent’.

Other types of ‘advice’ If you are only given general information about one or more investment products, or have products or related terms explained to you, you may have received ‘guidance’ rather than ‘advice’. This is sometimes also called an ‘information only’ or ‘non-advice’ service. The main difference between guidance and advice is that you decide which product to buy without having one or more recommended to you. Buying an investment product in this way might reduce the cost involved but it also means you will not have access to the Financial Ombudsman Service or Financial Services Compensation Scheme (FSCS) if things go wrong. If you are not sure whether you are receiving guidance or advice, and therefore how you would be protected, you should ask the adviser or firm to explain.

Independent and restricted advice: key differences Independent adviser

Restricted advisers

Will consider all retail investment products

Yes

Can focus only on a particular market

Yes

Can consider products only from certain product providers

Yes

Has to explain to you the type of advice they offer

Yes

Can use ‘independent’ to describe the advice they offer

Yes

Incentivised to recommend one product over another

Please call our Chief Executive, David Saunderson, on 020 3651 0570 to discuss your situation.

1 August 2016

Risk Warnings This document has been prepared based on our understanding of current UK law and HM Revenue and Customs practice as at 1 August 2016, both of which may be the subject of change in the future. The opinions expressed herein are those of Cantab Asset Management Ltd and should not be construed as investment advice. Cantab Asset Management Ltd is authorised and regulated by the Financial Conduct Authority. As with all equity-based and bond-based investments, the value and the income therefrom can fall as well as rise and you may not get back all the money that you invested. The value of overseas securities will be influenced by the exchange rate used to convert these to sterling. Investments in stocks and shares should therefore be viewed as a medium to long-term investment. Past performance is not a guide to the future.

Cantab Asset Management Ltd 5th Floor, 8 Angel Court, London EC2R 7HP 020 3651 0570 cantabam.com

35 Hills Road, Cambridge CB2 1NT 01223 52 2000 advice@cantabam.com

Cultivating assets

Discretionary Management Service Cantab Asset Management provides a Discretionary Management Service for clients as it strives to further improve portfolio performance, reduce administration time for clients and facilitate the integration of financial planning and investment management. The mission of the firm is to assist private clients, trusts and charities to create, preserve and protect capital to meet their needs and objectives. The investment philosophy of the firm is:

1) 2) 3) 4)

To achieve diversification through a range of asset classes. To manage the investment risk by proportionate use of the asset classes. To meet objectives through the selection of appropriate fund managers. To review investments regularly for acquisition and for sale.

As a firm, we seek to employ the best people, to use the best systems and to maintain the highest professional standards.

Bespoke Client Portfolios Each client portfolio is bespoke but with the nature of our research and investment process there is a high level of commonality between portfolios. We invest predominantly in collective investments including unit trusts, investment trusts, and ETFs. However, we do invest also in individual ordinary and preference shares, gilts and corporate bonds. We take on equity portfolios for management although we do this on the basis that over time these portfolios will be converted to include collectives to increase diversification and reduce risk unless specifically requested to do otherwise by a client. For existing portfolios, we rationalise holdings (tax permitting) focusing on larger capitalisation UK equities. We do manage portfolios to take advantage, where applicable, of the annual CGT allowance. We manage funds within pension fund wrappers such as Self Invested Personal Pensions and Small Self Administered Scheme portfolios. We also manage funds within ISA wrappers and offshore bonds. We use a range of indices to compare portfolio performance, many of which are considered industry standards. Within this range, we work with our clients to select the most appropriate indices for each individual portfolio. Each client has a Client Director in the firm and is introduced to the Directorâ&#x20AC;&#x2122;s staff team as appropriate. Client meetings are usually held at least once per year and formal valuations with our investment commentary are provided every six months. Ad hoc valuations are available online after client registration has been completed. A monthly investment note is posted on the website. We provide annual tax reports for both income and capital gains after the tax year end.

Investment Governance The firm has client teams with support services from Investment Research, Compliance and Operations. The Chief Investment Officer has worked at the firm (and its antecedent firm) since 2002 and has been working with the Investment Manager since 2006.

Cantab Asset Management Ltd 5th Floor, 8 Angel Court, London EC2R 7HP 020 3651 0570 cantabam.com

35 Hills Road, Cambridge CB2 1NT 01223 52 2000 advice@cantabam.com

Asset allocation is determined by the Investment Committee which meets formally every quarter. Equity valuations, bond pricing, interest and exchange rate outlook, unemployment and GDP outlook are among the factors that are considered during the meetings. The relative merits of each asset class and geographical region in relation to one another are reviewed in order to decide on the asset allocation strategy. In response to rapidly changing market conditions, ad hoc meetings are held as necessary. Meetings are chaired by the Chief Executive and membership comprises the Chief Investment Officer, all Client Directors, the Investment Manager and two senior analysts. Our risk approach is based upon asset allocation, diversification within portfolios and position sizing within portfolios.

Investment Process Our investment process, based upon our philosophy, can be broken down into four component parts:

1) 2) 3) 4)

Macro strategy which leads to the asset allocation decisions Securities and fund research which leads to the fund, equity and bond selection decisions Assessment of client objectives, attitude to risk and tax implications which leads to portfolio construction decisions Review and monitoring of investments on an on-going basis

Our in-house research forms the cornerstone of our investment process and is the starting point for building client asset allocations and the eventual deployment of capital. In the fast-moving and volatile macro-economic environment of the twenty first century, it is crucial to stay on top of market-shaping events. The first stage of this process is the formation of a broad top-down macroeconomic view which we use to frame the relative attractiveness of a range of asset classes. The investment management team meet formally on a regular basis in order to discuss views on recent macro events and data, and to determine how these changes should be addressed within our asset allocation decisions. Once we have adjusted our asset allocation decisions, we are then able to fill out these allocations using the universe of funds that we have at our disposal. Our independent status and size means we have unfettered access to the full range of funds and other securities that are on the market. The process by which we choose funds from this point takes in a whole range of considerations: balancing factors such as risk/return calculations, liquidity constraints, manager track record, availability and fees. These processes are fluid and continuous, giving us the scope to make acquisitions and disposals in a pro-active, not reactive way, and we aim to be able to anticipate and benefit from important market turning points instead of being merely swept along by them.

Investment Monitoring Investments are monitored on an on-going basis. As the investment team spends the majority of its time researching fund managers and asset class opportunities the team is in a constant cycle of assessing and reviewing investments. The high levels of commonality amongst our portfolios mean that we are able to make changes quickly in response to changes in the economic environments or at the individual fund level. Within client portfolios, we do take some currency risk in that certain overseas holdings may be denominated in foreign currencies. However this is undertaken where we have strong views based upon our economic research. Ultimately, the majority of our clients have sterling based liabilities and it is unlikely that any more than 25% of a client portfolio would be invested in non-sterling denominated assets. Currency selection and the decision to hedge an investment is made during the asset allocation process, for example we may wish to expose a client to the US equity markets but not the US dollar. In this situation, we would buy a fund which actively hedges its holdings back into sterling. In the main, we manage portfolios whose base currency is sterling. The vast majority of our clients are UK-centric investors and as such we dedicate our time and resources to researching sterling assets which will best meet their needs. Please contact David Saunderson, Chief Executive, on 020 3651 0570 to discuss in more detail or email david.saunderson@cantabam.com.

1 June 2016

Cantab Asset Management Ltd 5th Floor, 8 Angel Court, London EC2R 7HP 020 3651 0570 cantabam.com

35 Hills Road, Cambridge CB2 1NT 01223 52 2000 advice@cantabam.com

Rosa Cantab: growing assets

FT Private Client Wealth Management Guide 2016 “Cantab Asset Management takes the honours over a five-year period for the average balanced portfolio…” Balanced Portfolio 1 Year

3 Years

5 Years

Cantab Asset Management

6.80%

33.07%

47.55%

Saunderson House

2.80%

23.60%

32.00%

Brooks Macdonald

3.55%

22.37%

28.17%

Quilter Cheviot

1.08%

18.79%

27.08%

Smith & Williamson

1.54%

16.79%

26.47%

Close Brothers

3.06%

19.13%

26.23%

Cazenove

1.40%

16.40%

26.00%

Barclays

2.80%

19.50%

23.80%

Ruffer

-0.10%

15.60%

22.50%

Standard Life Wealth

2.67%

12.09%

22.00%

Coutts

1.30%

16.30%

19.10%

Canaccord

0.37%

11.71%

14.54%

St.James's Place

0.12%

17.30%

The Financial Times publishes a guide to wealth management firms providing private client services. We were delighted to be singled out in the 2016 FT Private Client Wealth Management Guide for having the best performing average balanced portfolio over five years.

Asset Allocation The report considers the current asset allocation of a typical portfolio, giving us an opportunity to reflect on Cantab Asset Management’s investment approach. This reveals that the typical portfolio contains allocations to both hedge funds and private equity. This contrasts with Cantab Asset Management’s approach, which does not currently include these areas. The reasons for this are discussed in detail in our research notes; in summary, they are the lack of transparency and illiquidity of these funds, combined with the historical tendency of hedge funds to fail to act as a hedge. Cantab Asset Management’s preference for conventional assets (such as equities, bonds and commercial property) has proven to be valuable for clients.

Cantab Asset Management Ltd 5th Floor, 8 Angel Court, London EC2R 7HP 020 3651 0570 cantabam.com

35 Hills Road, Cambridge CB2 1NT 01223 52 2000 advice@cantabam.com

Cantab operates a series of risk-rated portfolios, which act as best ideas, but Cantab considers each client on an individual basis. Individual requirements may affect the most appropriate investment mix and fund selection. These may include considerations such as: expenditure needs; specific goals to distribute funds; whether a total return or ‘natural’ income policy is used; existing holdings; and the client’s wider asset position. Cantab’s ‘Balanced portfolio’ takes a diversified approach to asset allocation, investing in Open Ended Investment Companies, ‘OEICs’, across the major asset classes. The Balanced portfolio has a 55% exposure to equities, 25% to fixed income, 10% to property and 10% to alternatives. 10% 10%

25%

Equity - UK Equity - Global Fixed Interest

25%

Property 30%

Alternatives

Added Value Returns are important. However, Cantab believes that clients benefit from long term relationships with the firm. Towards the end of the report, the FT’s Hugo Greenhalgh discusses the unsettling process of losing an adviser. Clients can have confidence in the longevity of the firm and the commitment of its advisers. Cantab’s roots go back over 30 years. Increasingly, wealth management goes beyond investment management. Cantab Asset Management supports this philosophy and provides all clients with financial planning as well as the management of investments. Tax planning, retirement planning and intergenerational planning are all included. The FT’s report reveals that this continues to set Cantab apart from many of the traditional investment managers. By avoiding the additional ‘frills’ which are sometimes included (such as concierge service) Cantab has kept fees down, below the typical wealth management fee, whilst achieving outstanding results for clients. The report also indicated that choosing an independent adviser is of great benefit to clients. Independent advisers are those which look at all available options and are free from conflicts of interest. Cantab Asset Management is pleased to be independent under FCA rules.

Conclusion In conclusion, the report provides an interesting discussion of some of the current issues in wealth management. As well as identifying Cantab Asset Management as providing top investment returns, the report points in the direction of some of the sources of those returns: asset allocation and independence. It also points towards the wider financial planning services as adding value for clients. These in-built advantages should continue to support the successful delivery of outstanding client service.

1 August 2016

Cantab Asset Management Ltd 5th Floor, 8 Angel Court, London EC2R 7HP 020 3651 0570 cantabam.com

35 Hills Road, Cambridge CB2 1NT 01223 52 2000 advice@cantabam.com

Diversifying assets

Comparing Asset Classes Background We, at Cantab Asset Management, believe that creativity and competition stimulate growth and excellence. We believe that wealth is created through innovation and enterprise. Taking the opportunity to participate in and support such wealth creation can be achieved through investing capital in equity (shares). In order to test the validity of investing in shares, we performed a long term analysis of the returns of various asset classes in the UK. We evaluated equities, property and fixed interest investments represented by gilts (government bonds).

Equities outperform Analysing data going back over sixty years, from 1953 onwards, when the House Price Index begins, it is clear that equities have performed much better than Gilts and well when compared with Housing. The chart below compares U.K. Equity and Gilt Indices1 with the U.K. House Price Index2. Equities rose approximately 84 times and houses almost 86 times, but gilts declined to 89% of their starting value. 10000 Equities

Housing

Gilts

8000 6000 4000 2000

2015

2013

2011

2009

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1953

Asset Allocation: increasing equities Leaving money in cash or bonds for long periods may be unwise, because inflation may erode value long term as the purchasing value of the pound decreases. Property prices will tend to be weaker in a rising interest rate environment, (such as 1940 to 1970) due to the dependency on mortgage rates. By contrast, higher yielding assets such as equities provide increasing returns in inflationary environments. Admittedly, few people have an investment horizon of over 60 years, even if they invest for future generations. Does a similar picture hold true for shorter investment horizons, such as 30 or 10 years?

Cantab Asset Management Ltd 5th Floor, 8 Angel Court, London EC2R 7HP 020 3651 0570 cantabam.com

35 Hills Road, Cambridge CB2 1NT 01223 52 2000 advice@cantabam.com

Thirty years after Thatcher It is important to remember that the housing market was given substantial impetus by Margaret Thatcherâ&#x20AC;&#x2122;s housing reforms. Yet, over the last 30 years, the compound annual growth rates in the U.K. were: equities, 5.4%; housing, 5.1%; gilts 2.3%. However all were substantially outperformed by medium-sized company shares3 which grew 8.4%. 1500 Equities

Housing

Gilts

FTSE 250

1000

500

2015

2014

2013

2012

2011

2010

2009

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1985

Ten year trends All four asset classes increased in price over the past decade. Once again, medium-sized company shares outperformed other asset classes, returning an average of 6.42% per year. Equities returned 1.74%, housing 2.02%, and gilts 1.87% over 10 years. 210 Equities

190

Housing

Gilts

FTSE 250

170 150 130 110 90 70 2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

Conclusion Some clients may prefer low return, low volatility investments, such as gilts. This analysis demonstrates that over the mid-term investment horizon, equities have generated higher returns, and may be preferable to residential property, once factors such as concentration risk, liquidity risk and drag (property maintenance costs) are properly evaluated. As independent advisers, we do consider all options for clients and seek to recommend that which is appropriate for individual clients and their particular circumstances and objectives. This paper should be read in conjunction with â&#x20AC;&#x2DC;Our Advice Processâ&#x20AC;&#x2122; client briefing note.

1 June 2016

1. Barclays Equity and Gilt Indices. 2. Nationwide U.K. House Price Index. Note all indices were rebased to 100 for the time series in question. 3. Represented by the FTSE 250 index. Data only available from 1985.

Risk Warnings This document has been prepared based on our understanding of current UK law and HM Revenue and Customs practice as at 1 June 2016, both of which may be the subject of change in the future. The opinions expressed herein are those of Cantab Asset Management Ltd and should not be construed as investment advice. Cantab Asset Management Ltd is authorised and regulated by the Financial Conduct Authority. As with all equity-based and bond-based investments, the value and the income therefrom can fall as well as rise and you may not get back all the money that you invested. The value of overseas securities will be influenced by the exchange rate used to convert these to sterling. Investments in stocks and shares should therefore be viewed as a medium to longterm investment. Past performance is not a guide to the future.

Cantab Asset Management Ltd 5th Floor, 8 Angel Court, London EC2R 7HP 020 3651 0570 cantabam.com

35 Hills Road, Cambridge CB2 1NT 01223 52 2000 advice@cantabam.com

Striving for excellence

Active versus Passive approaches to Fund Management Background We, at Cantab Asset Management, believe in creativity and competition as stimulants to growth and excellence. We are believers in the creation of wealth through innovation and enterprise and taking the opportunity to participate in and support such wealth creation through the investment of capital in equity shares in limited liability companies. There will, naturally, be considerable variation in the performance of companies because of factors such as product success, management competence, market timing and the state of the broader economy. Assessment of these factors and others is important to the fund managers who manage the investment selections for clients. These fund managers are experienced in assessing risk and potential reward and they take their investment decisions after ‘top-down’ and/ or ‘bottom-up’ analysis. Our strategy is to employ leading fund managers in order to optimise performance over the medium to long term without exposing our clients to unnecessary risk.

Active and Passive funds Some academic research has suggested that buying ‘passive’ index tracker funds would enable clients to beat the average active manager by saving fees. We believe that this approach is not necessarily going to produce optimal results for clients because:

• Tracker funds under-perform the index after fees and trading expenses (the iShares FTSE 100 ETF tracker has fallen behind the index by 8% over 10 years compared to the FTSE 100 index over 10 years) and • Good choices by active managers can result in above ‘average’ performance.

The performance of the ‘average’ active fund manager is calculated by using a large universe of funds which inevitably includes ‘dog’ funds as well as the better performing funds. Our research and expertise is focused on selecting the better performing funds and avoiding the ‘dogs’.

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

iShares Core FTSE 100 UCITS ETF Inc GBP TR in GB

Lindsell Train CF Lindsell Train UK Equity Acc in GB

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01/08/12

01/06/12

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01/06/11

-20%

Europe 80% 60% 40% 20% 0% -20%

01/10/15

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01/02/15

01/12/14

01/10/14

01/08/14

01/06/14

01/04/14

01/02/14

01/12/13

01/10/13

01/08/13

01/06/13

01/04/13

01/02/13

01/12/12

01/10/12

01/08/12

01/06/12

01/04/12

01/02/12

01/12/11

01/10/11

01/08/11

01/06/11

-40%

Jupiter European I Acc TR in GB

iShares MSCI Europe ex-UK UCITS ETF GBP TR in GB

Asia 60% 50% 40% 30% 20% 10% 0% -10% -20%

iShares MSCI Pacific Ex Japan Index TR in GB

01/08/15

01/06/15

01/04/15

01/02/15

01/12/14

01/10/14

01/08/14

01/06/14

01/04/14

01/02/14

01/12/13

01/10/13

01/08/13

01/06/13

01/04/13

01/02/13

01/12/12

01/10/12

01/08/12

01/06/12

01/04/12

01/02/12

01/12/11

01/10/11

01/08/11

01/06/11

-30%

Stewart Investors Asia Pacific Leaders B GBP Acc in GB

In addition, we show the performance of three actively managed funds which have been recommended to clients by Cantab Asset Management – Jupiter European with average annual growth of 11.51%, Lindsell Train UK Equity with average annual growth of 13.99% and Steward Investors Asia Pacific Leaders with average annual growth of 9.06%. These funds do not necessarily have similar levels of risk as the ETF Tracker. These funds have out-performed the relevant iShares ETF trackers by 6.68%, 8.64% and 4.87% pa respectively over this five year period.

Conclusion There may be instances where a passive tracker fund is of interest for a client, but our own analysis lends weight to our preference for active management in our model portfolios. As independent advisers, we do consider all options for clients and seek to recommend that which is appropriate for individual clients and their particular circumstances and objectives. This note should be read in conjunction with ‘Our Advice Process’ client briefing note.

1 June 2016

Cantab Asset Management Ltd 5th Floor, 8 Angel Court, London EC2R 7HP 020 3651 0570 cantabam.com

35 Hills Road, Cambridge CB2 1NT 01223 52 2000 advice@cantabam.com

Illuminating design

Investment Structures CANTAB ASSET MANAGEMENT

CLIENT

PLATFORM / CUSTODIAN

OPEN-ENDED INVESTMENT COMPANIES

INVESTMENT TRUSTS

STOCKS & SHARES

Cantab Asset Management (‘Cantab’) Cantab advises on asset allocation, fund manager and stock selection. Cantab can implement this advice for clients through either advisory or discretionary management arrangements. Additionally, Cantab provides support services such as financial planning, custodian selection and consolidated reporting across all investment portfolios. Cantab is ‘independent’ in regulatory terms as defined by the Financial Conduct Authority. This means that Cantab considers the whole of the market for clients. Cantab’s advice is unbiased and conflict-free.

Custodian & Platform The custodian selected by Cantab in discussion with the client, holds the investments and often provides stockbroking services. This structure facilitates efficient execution of trades and client assets are segregated from Cantab’s own assets.

Cantab Asset Management Ltd 5th Floor, 8 Angel Court, London EC2R 7HP 020 3651 0570 cantabam.com

35 Hills Road, Cambridge CB2 1NT 01223 52 2000 advice@cantabam.com

Investments – Fund Managers Cantab may recommend fund managers for stock and bond selection where a manager’s specialist expertise is considered to be of value. Fund structures may include Open-Ended Investment Companies (OEICs), Investment Trusts and Exchange Traded Funds (ETFs). Cantab researches over 3000 collective funds, 300 Investment Trusts and 700 ETFs.

Investments – Direct Investments Cantab may select individual equities and bonds using investment research from in-house and external resources. Cantab researches over 2000 shares using its own proprietary ‘CAMBRIDGE’ method for analysing individual shares.

Investments Research Cantab has a team of analysts who conduct internal research and also access material from third parties. The analysts report to the section Heads for Funds, Investment Trusts and Equities. Reports are prepared each month for the Investment Committee and decisions on asset allocation, fund and stock selection are made by the Committee. There are provisions for interim decision making between meetings where applicable. The Investment Committee is chaired by Cantab’s Chief Executive and comprises the Chief Investment Officer, four Directors and the Investment Sector Heads.

1 November 2016

Risk Warnings This document has been prepared based on our understanding of current UK law and HM Revenue and Customs practice as at 1 November 2016, both of which may be the subject of change in the future. The opinions expressed herein are those of Cantab Asset Management Ltd and should not be construed as investment advice. Cantab Asset Management Ltd is authorised and regulated by the Financial Conduct Authority. As with all equity-based and bond-based investments, the value and the income therefrom can fall as well as rise and you may not get back all the money that you invested. The value of overseas securities will be influenced by the exchange rate used to convert these to sterling. Investments in stocks and shares should therefore be viewed as a medium to longterm investment. Past performance is not a guide to the future.

Cantab Asset Management Ltd 5th Floor, 8 Angel Court, London EC2R 7HP 020 3651 0570 cantabam.com

35 Hills Road, Cambridge CB2 1NT 01223 52 2000 advice@cantabam.com

Discerning the times

Timing the Market – or Time in the Market? Many investors want to know where markets are heading. Buying when markets are low and selling when they are high is ideal in theory, but can this be done in practice? We found it useful to consider some historical perspectives to highlight some of the potential advantages and dangers of trying to time the markets:

“Buy Low and Sell High” or “Buy High and Sell Low”? Opinion remains divided about the viability of market timing strategies. Independent reviews of different strategies over 30 years generally conclude that their ability to predict the markets is no better than chance, with very few exceptions 1. Outspoken fund manager Terry Smith has said “there are only two types of investors – those who know they can’t make money from market timing, and those who don’t know they can’t”. In practice, history suggests that flows of money into and out of the market tend to follow, rather than lead, the level of the markets investors exhibit a tendency to be overconfident when markets are doing well and panic when markets fall. This is highlighted in the chart below from BlackRock, comparing fund flows in the US with the performance of the S&P500 index:

S&P 500 Index Performance vs. 12-month Equity Mutual Fund Flows $400

$25,000

$300

$20,000

$200

$15,000

$100

$10,000

$0 -$100 Jan-00

$5,000 $0 Jan-02

Jan-04

Jan-06

Jan-08

Net Equity Mutual Fund Flows (bn)

Jan-10

Jan-12

Jan-14

Jan-16

Growth of $10,000 in S&P 500 Index

Sources: BlackRock; Informa Investment Solutions; DB US Equity Strategy; Investment Company Institute (US mutual funds and ETFs). The S&P 500 Index is an unmanaged index that consists of the common stock of 500 large-capitalisation companies, within various industrial sectors, most of which are listed on the New York Stock Exchange. Returns assume reinvestment of dividends. It is not possible to invest directly in an index. The information provided is for illustrative purposes only and is not meant to represent the performance of any particular investment.

Of course, investor demand affects prices, so there ought to be a degree of correlation. Nevertheless, in both 2000/01 and 2007/08, money only started to flow out of funds once the S&P had suffered most of its falls. The chart also highlights the bravery needed to “sell high” in 2007 or “buy low” in December 2008. In the long run, the evidence suggests that timing works against investors, who end up buying high and selling low. 1 e.g. R Bauer and J Dahlquist:“Market Timing and Roulette Wheels”: Financial Analysts Journal vol 57 no 1 (2001) pp 28-40 and “Market Timing and Roulette Wheels Revisited”: Investment Risk and Performance Feature Articles (2012).

Cantab Asset Management Ltd 5th Floor, 8 Angel Court, London EC2R 7HP 020 3651 0570 cantabam.com

35 Hills Road, Cambridge CB2 1NT 01223 52 2000 advice@cantabam.com

Omitting The Bad Days Or The Good? Some recent comments have compared the returns for a buy and hold investor with the results of missing the best or worst days of returns. The results appear striking, but the reality is that the best and the worst days roughly cancel each other out, and without the ability to predict which days will be good or bad, these calculations are slightly academic. The chance that you miss a bad day is cancelled out by the risk that you miss a good day. More importantly, focussing only on the extreme days misses the main driver of returns; compound returns from small but steady gains. If we consider the S&P500 from 1 January 1995 to 31 December 2014, over 71% of daily capital returns in this period fell in the range -1% to +1%. For an investor in the index, the frequency of these â&#x20AC;&#x153;normalâ&#x20AC;? days and the compounding of their returns over time provided the bulk of their return at the end of the twenty years, contributing over 432% in capital growth. Include the compounded dividend yield and the total return rises to over 550%. Once aggregated together, the other 29% of days (those with returns of greater than 1% or less than -1%) make almost no difference to the overall return, contributing a small capital loss of 13%. Our conclusion is that time in the market is the most important factor in returns for a long term investor. The risk of missing out on compounded growth over time is much more important than potential gains from trying to time the markets.

Distribution of Returns What happens if we turn our attention closer to home and consider the performance of the FTSE100 in each quarter between 1 January 1986 and 30 September 2015 2? The split between quarterly periods with positive and negative returns is almost exactly 2:1. One might question whether returns were higher in the quarter following a negative period - i.e. is there a recovery bounce after a fall? In fact, the distribution of returns was remarkably similar; the positive/negative split remained at exactly 2:1, and the average quarterly return was only slightly higher (2.39% compared to 2.19%). So, picking a quarterly period at random, there is twice as much chance of losing out by being out of the market, compared to being invested. This gives further weight to the suggestion that time in the market is most important for an investor with long term objectives.

To Phase or not to Phase? The theory of phasing is that investing over several tranches at different times helps to smooth returns and reduce risk. Since markets fluctuate, the likelihood is that part of the investment will be made at peaks, and part at troughs, avoiding the risk of investing all at once into a peak, and accepting missing out on the opportunity that everything might be invested at a trough. If we accept that it is better for long term investors to be fully invested at all times and that we should not try to time the market, why discuss phasing? The answer is that returns should not be viewed in isolation from risk. This is illustrated by the table below, which compares the returns since 1 January 1986 from investing in the FTSE100 via a lump sum with phasing the investment over three tranches over successive quarters or years 3: Average Return Maximum Return Minimum Return Standard Deviation

Lump Sum 6.03% 10.87% 2.61% 1.84%

Quarterly Phasing 5.89% 9.38% 2.80% 1.74%

Annual Phasing 5.53% 8.03% 3.03% 1.41%

On the positive side, phasing an investment over three separate tranches reduces the variation in returns and the dependency of the outcome on the timing of entering the market. On the downside, phasing over successive quarters would have left investors worse off on 2 in 3 occasions. Split the phasing over successive years, and that rises to more than 3 in 4. Again, the conclusion from history is that time in the market is most important for an investor with long term objectives.

Summary In theory, successful market timing could add hugely to investment returns. In practice, the available historical evidence suggests that investors have been unable to consistently time the markets and that a long term investor would have been better off remaining fully invested. Whilst the past is no guarantee of the future, and market timing strategies may be able to consistently deliver outperformance in the future, we are yet to see evidence to support this. In addition, trading costs should not be ignored, as they can be a significant detractor for returns. Our conclusion is that investors with long term aims are better off remaining fully invested. For new investors, historical evidence also suggests that phasing an initial investment over the short term can reduce risk, for a small cost in returns. However, the longer the process is spread out, the longer the investor is out of the market, and the greater the chance of hurting returns.

Disclaimer This analysis is based on historical returns and is no guarantee of the future. 1 June 2016 Data from FE Analytics. 3 Analysis covers periods beginning at each quarter end from 1 January 1986 until 30 September 2010, and assumes investment is held until 30 September 2015 (i.e. a minimum 5 year period). Data taken from FE Analytics.

Risk Warnings. This document has been prepared based on our understanding of current UK law and HM Revenue and Customs practice as at 1 June 2016, both of which may be the subject of change in the future. The opinions expressed herein are those of Cantab Asset Management Ltd and should not be construed as investment advice. As with all equity-based and bond-based investments, the value and the income therefrom can fall as well as rise and you may not get back all the money that you invested. The value of overseas securities will be influenced by the exchange rate used to convert these to sterling. Investments in stocks and shares should therefore be viewed as a medium to long-term investment. Past performance is not a guide to the future. Cantab Asset Management Ltd is authorised and regulated by the Financial Conduct Authority.

Serving City Partners

Cantab Service for City Partners Cantab Asset Management has experience of working with Partners in the leading legal and accountancy firms in London. Partners are busy and their time is precious. Cantab understands how to work with Partners in an efficient and compliant manner. Cantab seeks to be a ‘trusted adviser’, helping clients optimise their existing portfolios whilst assisting with the planning for future requirements.

Service Cantab aims to serve Partners holistically taking into account individual needs and objectives. Cantab’s services include: • • • • • • •

Astute financial planning and thorough investment research Portfolio management keeping Partner administration time to a minimum Regular reporting on portfolio performance The latest technology and platforms for investments Portfolio performance which would place Cantab in the top quartile of the FT Wealth Managers Report Meetings in clients’ offices Competitive fees.

Independence As from 1 January 2013, investment advisers have to state whether they provide ‘independent’ or ‘restricted’ advice. Cantab is ‘independent’ providing advice on all areas of private client investment and providing access to products from across the whole market. Independent advisers are the only category of adviser providing unbiased and unrestricted advice for a client based upon a comprehensive and fair analysis of the whole of the marketplace and all of the relevant tax wrappers. Cantab’s view is that it is in every Partner’s best interest to appoint an independent adviser in order that finances may be managed in a comprehensive and holistic manner with all options available and considered.

Compliance Cantab creates portfolios for Partners that meet with firms’ compliance requirements. Where required, investments are first screened with the Partner Independence team. Only approved investments are made available for Partner investment. Please contact David Saunderson, Chief Executive, or Jeremy Davis, Managing Director, on 020 3651 0570 or advice@cantabam.com for further information and/or to discuss your situation. 1 June 2016 Risk Warnings This document has been prepared based on our understanding of current UK law and HM Revenue and Customs practice as at 1 June 2016, both of which may be the subject of change in the future. The opinions expressed herein are those of Cantab Asset Management Ltd and should not be construed as investment advice. Cantab Asset Management Ltd is authorised and regulated by the Financial Conduct Authority. As with all equity-based and bond-based investments, the value and the income therefrom can fall as well as rise and you may not get back all the money that you invested. The value of overseas securities will be influenced by the exchange rate used to convert these to sterling. Investments in stocks and shares should therefore be viewed as a medium to long-term investment. Past performance is not a guide to the future.

Cantab Asset Management Ltd 5th Floor, 8 Angel Court, London EC2R 7HP 020 3651 0570 cantabam.com

35 Hills Road, Cambridge CB2 1NT 01223 52 2000 advice@cantabam.com