For today’s discerning financial and investment professional
Investment Spotlight Global Listed Infrastructure investing - Alex Araujo
The IFA Magazine ETF roundtable debate
October 2019
ANALYSIS
REVIEWS
The modern mutual – Julie Hansen
ISSUE 82
COMMENT
INSIGHT
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CONTE NTS
CONTRIBUTORS
October 2019
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Ed's Welcome
6 Brian Tora an Associate with investment managers JM Finn & Co.
Editor's Rant - Meanwhile, across the channel Michael Wilson turns the spotlight onto the EU ‘s view of Brexit and considers all the things which EU states have got to worry apart from when, how or whether the UK finally leaves the bloc
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Better Business
Richard Harvey a distinguished independent PR and media consultant.
Brett Davidson gives practical tips on how to set effective goals for your future success as a financial planning business
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Trade Wars Brian Tora reflects on concerns around trade wars and the potential impact on the investment outlook
Brett Davidson FP Advance
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The asset class we can’t live without Sue Whitbread talks to Alex Araujo of M&G Investments about global listed infrastructure and why he is so excited about the investment prospects it offers
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Deeper Thinking Needed
Michael Wilson Editor-in-Chief editor @ ifamagazine.com
Sue Whitbread Editor sue.whitbread@ ifamagazine.com
LGIM talks about why investors need to think more deeply about their index exposure
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The IFA Magazine ETF roundtable debate An expert panel explores the key details and discusses practical elements of the use of ETFs by investment professionals
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Robotics – the investment case We talk to John Gladwyn, Senior Investment Manager, Pictet-Robotics fund, about the considerable investment opportunities in this exciting sector
41 Alex Sullivan Publishing Director alex.sullivan @ ifamagazine.com
The key principles of multi-asset investing Patrick Norwood, Insight Consultant at Defaqto
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The Modern World We talk to Julie Hansen of Unity Mutual about why this “modern mutual” is ideally placed to meet advisers’ needs
Kim Wonnacott Technical Sales and Marketing kim.wonnacott@ifamagazine.com
Georgie Davey Designer georgie.davey@cliftonmedialab.com
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Paraplanning in practice The second feature in our series talking to members of the PFS Paraplanner Panel about the development of the paraplanner role
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Knowing me, knowing you? Richard Harvey with a light-hearted view on the potential threat of technology to the future of the advice profession
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Career Opportunities From Heat Recruitment
IFA Magazine is published by IFA Magazine Publications Ltd, Arcade Chambers, 8 Kings Road, Bristol BS8 4AB | Tel: +44 (0) 1173 258328 © 2019. All rights reserved ‘IFA Magazine’ is a trademark of IFA Magazine Publications Limited. No part of this publication may be reproduced or stored in any printed or electronic retrieval system without prior permission. All material has been carefully checked for accuracy, but no responsibility can be accepted for inaccuracies. Wherever appropriate, independent research and where necessary legal advice should be sought before acting on any information contained in this publication. The value of investments and the income from them can go down as well as up and you may not get back the amount originally invested. IFA Magazine is for professional advisers only. Full details and eligibility at: www.ifamagazine.com
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Pictet-Robotics is a compartment of the Luxembourg SICAV Pictet. The latest version of the fund’s prospectus, KIID (Key Investor Information Document), regulations, annual and semi-annual reports are available free of charge on assetmanagement.pictet or at the fund’s management company, Pictet Asset Management (Europe) S.A., 15, avenue J. F. Kennedy, L-1855 Luxembourg. Before making any investment decision, these documents must be read and potential investors are recommended to ascertain if this investment is suitable for them in light of their financial knowledge and experience, investment goals and financial situation, or to obtain specific advice from an industry professional. Any investment incurs risks, including the risk of capital loss. All risk factors are detailed in the prospectus.
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E D'S WE LCOM E
October 2019
CRISIS? WHAT CRISIS?
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here’s a lot going on in the world at the moment. Whether it is the ongoing uncertainty about Brexit, trade wars, concerns over instability in the Middle East or the increasing awareness of the impact that climate change is having on our environment, these are all defining issues of our time and ones that are all having an impact on investment decisions facing advisers and their teams. Here at IFA Magazine we can’t profess to have solutions to these problems, but we can help readers to explore some of the ramifications of these issues by looking at some of the detail. One thing that has been occupying Mike Wilson’s mind recently has been Europe’s view of Brexit. In his rant this month, aside from Brexit, he considers what other issues the EU has on its mind and has to deal with. In a similar vein, Brian Tora has been reflecting on concerns around trade wars and the potential impact these can have on the investment outlook. In other matters, we are pleased to bring you part two of our series on paraplanning in practice. This month, we’re grateful to Alan Gow and Martin Green for giving us their perspective on this dynamic sector of the financial planning profession. Our thanks also go to Julie Hansen of Unity Mutual who has been speaking to us about why and how this ‘modern mutual’ is ideally placed to help meet advisers’ needs. We’re also very grateful to Alex Araujo of M&G Investments for his time spent with us this month. In this edition you can read the full interview we did with Alex early in September. Our thanks also go to John Gladwyn,
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of Pictet Asset Management, who discusses the investment case for Robotics and to Patrick Norwood of Defaqto who considers the key principles behind multi-asset investing. There’s all this as well as regular features from Brett Davidson, Richard Harvey and others. ETF s IN FOCUS – THE IFA MAGAZINE ROUNDTABLE DISCUSSION Since the turn of the millennium, the growth in the use of Exchange Traded Funds (ETFs) by advisers and investment managers across the UK has been an increasingly powerful force. But with tens of thousands of ETFs available to choose from, how do you decide which fund to use within your clients’ portfolios? No doubt you’ll consider key elements such as costs, access to the ETF via platforms, tracking error, the reputation and service standards of the ETF provider and the volume of assets they have under management, but what other considerations are there? In this edition of IFA Magazine, we report on the discussions from an ETF roundtable discussion which we held back in June, to look at some of the detail around how, why and where advisers are using ETFs and explore any challenges they may face along the way. You’ll find coverage of the discussions on pages 24 to 36. As always, we hope that you will find this month’s edition of IFA Magazine of interest and of use to you in your financial planning business. Sue Whitbread Editor IFA Magazine
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MEANWHILE,
ACROSS THE CHANNEL… London calling, the fog is closing in fast. Berlin, do you still read me? Michael Wilson turns the spotlight onto the EU and considers all the things they’ve got to worry apart from when, how or whether the UK finally leaves the bloc
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omehow, I’m not particularly surprised by the news that British voters are turning off their TVs whenever Brexit comes on the evening news – or that street interviewers are finding people who are prepared to say “oh, I don’t know, it might be a disaster for the next fifty years but let’s just it over with”. Because there are times when I get just as overwhelmed as anybody else by the sheer complexity of the Brexit mess. As I write this, with the Westminster Parliament suspended, and with Boris Johnson angrily disputing the legality of the new law requiring him to request a Brexit extension if he can’t negotiate a deal with the 27 other member states (or perhaps go to prison), it all seems too bizarre to be really
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happening. And my mind simply boggles at the idea that a British PM might instigate a vote of no confidence in himself, so that he can be sacked and then reinstated after 31st October. As a political drama, it’s vaguely reminiscent of Mel Brooks’s classic The Producers –a film about a theatrical pair of frauds who set up a deliberate box-office failure, only to watch it failing to fail, which then ruins them both. (And which lands them both in prison, by the way.) So let’s hear at least half a groan of support for the 27 other EU members, who are having to put up with our complex constitutional crisis while also getting on with the urgent daily business of running their own economies and settling
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their own crises. It isn’t the continentals’ fault that we’ve put them in this situation with our time-wasting and our internal wrangling - and, although a no deal Brexit would severely damage London’s financial dominance and drive much banking business off to Paris or Amsterdam, we do need to take a bit of responsibility for having put our neighbours in this position. We also need to consider what would really happen if the EU27 declared that the camel’s back had been finally broken and that there was now no way back from a forced crash-out? There are, after all, 440 million people in the EU27, and only 66 million of us in Britain, of whom 4 million are EU nationals. TRADE Okay, we can very probably rule out the forced Brexit possibility – not least, because our European partners would stand to lose a huge amount of trade from a no-deal Brexit, and a concomitant drop in manufacturing output, particularly for Germany, which is already under the cosh from President Donald Trump over cars and engineering exports to the US.
Brexit isn’t the only cause of Europe’s economic unease at the moment. Far from it
It isn’t so very surprising that France’s President Emanuel Macron is currently making a fuss about the prospect of granting Britain another Brexit extension. On the one hand, he’s suffering a serious dose of the mid-term electoral blues (gilets jaunes protests, etcetera) and he needs to grandstand a little if he is to reinforce his flagging dominance in the domestic environment.
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There’s also the fact, as we’ve noted, that France stands to mop up a good deal of financial business if the no-deal should happen, so there’s a genuine vested interest there. But the counterbalancing impact on French exports might be severe: France scores an annual £10 billion surplus over the UK, of which the food sector earns £3 billion and the wine trade another £1.2 billion. Losses in those areas would cost Macron’s provincial constituencies heavily. GERMANY But not as heavily as Germany, whose manufacturing output fell by 5.3% year-on-year during the second quarter of 2019 because of the combined forces from Brexit, Donald Trump’s threatened trade tariffs, and a general slowing of global growth. Which is why Chancellor Angela Merkel will be leaning heavily on M. Macron to stop rocking the boat. That 5.3% manufacturing downturn in Q2 was significantly worse than the 2% average industrial downturn for the 19 Eurozone countries – and it probably reflected a Eurozone-wide 7.5% annual drop in car production, as well as a 3% drop in the group’s capital and intermediate goods. Overall, the Financial Times reckoned in mid-September, G7 countries have seen their investment levels dropping by half since the heady days of 2007. This is, of course, just another way of making the point that Brexit isn’t the only cause of Europe’s economic unease at the moment. Far from it. Yet, if that thought offers us a little bit of national consolation, it also underlines the fact that the EU has one or two bigger fish to fry than the UK these days. Suddenly, Boris Johnson’s confident assertions that Italian prosecco sellers and German car manufacturers would soon bend to Britain’s iron will seem both partially relevant, and partially not very relevant at all….. GROWTH, AND WHAT TO DO ABOUT IT What does seem apparent is that the EU would be cutting off a sizeable part of its own nose if it decided to spite Britain’s face with a forced no-deal Brexit while we were asking for more time. International Monetary Fund estimates seem to suggest that the EU might lose as much as $250 billion a year – close to 1.5% of its total
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gross domestic product – if a satisfactory Brexit transition couldn’t be arranged. And a loss of up to 1% of the bloc’s jobs. The impact will be variable, however. At present, Spain and (to a lesser extent) France are showing no great impact from either Brexit, or indeed from anything else – their overall economic output seems to be holding relatively firm compared with their industry-heavy contemporaries. The real loser is expected to be Ireland, which is projected to shed 7% of its expected growth between now and 2030 if no adequate settlement can be attained. But there I go again, focusing on the B-word. Sorry about that. What else is there to talk about?
On 12th September the European Central Bank declared, from its Frankfurt headquarters, that it was taking action to restart the stalled motor of European growth
CHINA AND THE EURO Whisper it quietly, but the issue that the European Research Group hasn’t identified yet is that the continent’s trade with China is as important as with the US, and rapidly becoming more so. In 2018, according to Eurostat, the US imported 21% of the EU’s goods (including Britain’s, of course), and it supplied 13% of the EU’s imports. But, apart from a handful of non-UK states (including Ireland) which do more than half of their trade with Washington, the developing opportunity is with China. Beijing, according to Eurostat, is the EU’s second largest export customer, taking 11% of its non-EU exports, and its biggest supplier, accounting for a massive 20% of its
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non-EU imports. That’s half as much again as the United States. And the EU’s trade deficit with China has been ballooning – to 77 billion euros in the first five months of 2019, compared with 69 billion euros a year earlier. On the other hand, Europe’s trade surplus with the United States grew to 69 billion euros over the same five-month period, compared with 55 billion euros a year earlier. That suggests (to me, anyway) that there might conceivably be some debateable substance to President Trump’s complaint that Europe (by which he means mainly Germany) has been “unfairly” disadvantaging the US in some indefinable way. (The Prez says that Berlin is steering the euro downward, something which it patently can’t do since it’s only one of 19 Eurozone nations. But that’s another story.) What it does seem to mean, though, is that the recent growth slowdown in China can’t be easily ignored, any more than the freakishly strong expansion in the United States can. It’s too early to say for sure what all this means, but if China reduces its imports from the EU then the impact on EU economic growth is likely to be more serious than we tend to assume on this side of the English Channel. NATIONALISM Not so much an economic matter, unless you expect European states to go the way of Turkey, but the modern resurgence of populist nationalism is as much of a worry for the Eurozone as anything that Boris Johnson’s anglocentric cohort can throw at it. From Italy to Hungary, from the Baltics to Catalonia, the growth of simplistic “ethnic” tribalism is damaging European states in ways that would scarcely have seemed possible a decade ago. On the positive side, the rising dominance of a cultish autocrat with his roots in the 19th century (we’re looking at you, Viktor Orban) is unlikely to deflect foreign investment unless it becomes too poisonous, or antisemitic, or whatever, because production costs do matter to today’s manufacturers. But if the separatist chant becomes too loud, as in Ukraine or in parts of Spain, then economic development may be shaped in ways that may be hard to predict. If you’ve noticed Spain taking a hard line on issues like Gibraltar recently, it isn’t only protesting at Britain’s
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sovereignty over the rock. Spain’s government is petrified that nationalist regions such as Catalonia or the Basque country might follow the example of Scotland and press for a vote to secede from the Spanish state – with horrible results for the nation, since Catalonia happens to have one of the healthiest per capita incomes in the country. But we digress. (So what’s new?) A more pertinent approach would be to look at Italy, whose northern and nationalist minorities are cocking a governmental snook at both the voters and their European partners, especially the Germans. Or rather, it did until last month. September saw the defeat of Europe’s first truly nationalist/populist government, in a development that we’re still analysing. For two years, a populist right-wing movement driven by Northern League leader Matteo Salvini had been setting its face against every EU rule you could possibly imagine, including the need to run a balanced budget and to behave co-operatively toward the rest of the 27 (or 28). But it all ended after Salvini tried to topple the (relatively moderate) prime minister Giuseppe Conte, and fluffed it badly. Whereupon his populist allies, the 5 Star Party of comedian Beppe Grillo, promptly decamped to form a powerful coalition with the centre-left Democratic Party instead, and a new and more co-operative alignment with Europe was suddenly born. If all that sounds to you more like Puccini than proper politics, then you’re not alone. Italy is still railing against the indignity of being required to follow the same economic rules as prosperous Germany, but the gloves have been put back on, and there’s a prospect of harmony for the time being at least. It’s just another reason why Europe’s politicians have more on their agendas right now than dealing with whether or not Boris Johnson lied to the Queen.
October 2019
On the one hand, the ECB said, it was reducing the central bank deposit rate from minus 0.4% to minus 0.5% (yes, you heard that right), so that borrowers could, in theory, expect to get paid for taking on loans. On the other, it was restarting the €2.6tn quantitative easing programme that it had stopped last December, with a renewed commitment to buying back €20bn of bonds every month from November 2019. That, according to the departing ECB president Mario Draghi, was because the eurozone faced “more protracted weakness” than previously thought, mainly because of the aforementioned global trade slowdown. According to the Financial Times, the ECB had cut its 2019 forecast for growth in the 19-member single currency zone by 10 basis points to just 1.1 per cent, and by 20 bps to 1.2 per cent for 2020. Gosh, that almost makes the UK look good. It took President Trump all of half an hour to tweet that perfidious Europe was artificially reducing the value of the euro in yet another attempt to undermine America’s export potential. “And the Fed sits, and sits, and sits,” he added. “They get paid to borrow money, while we are paying interest!”. By the time you read this, we’ll know whether the ECB’s fairly modest QE process can reflate the sagging tyres of the European economy. (Negative interest rates and bond yields are still not familiar enough to have predictable consequences.) And it wouldn’t be surprising if the Prez took the opportunity now to start another round of the trade war with the Europe that Britain is planning to leave. But, if nothing else, it might alert us to the possibility that Brussels just might have more on its hands than our own little constitutional crisis over here on this side of the Channel…
STIMULUS FROM THE ECB And so to the hot news that was hitting the airwaves just as this review went to press. On 12th September the European Central Bank declared, from its Frankfurt headquarters, that it was taking action to restart the stalled motor of European growth.
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October 2019
THREE
IMPORTANT GOALS How you approach the goal-setting process in your financial planning business is fundamental to the success you will achieve as a result of it. But how can you ensure you are doing the right thing and taking the steps that will generate the results you strive for? Brett Davidson of FP Advance has sound practical tips on a process you can follow in order to boost success
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he outcomes we experience in our businesses are directly correlated to the decisions we make, and the actions we take, on a daily basis.
It’s accepted wisdom that setting goals in business is important. Yet I’ve seen a range of different approaches fail. Let me give you some insight into what works best. There are different types of goals. Who knew?
I find a lot of business owners are intimidated by the BHAG. Here’s my theory on why that is and what to do about it. Lots of financial planning firms I’m working with have just cracked £1m of annual revenue, and at times getting there has been pretty hard. However, at £1m of revenue I believe the next focus needs to be £3m and £5m of annual revenue; even though £2m might seem like the logical next step.
THE BHAG
However, when I suggest this to business owners this is what happens:
First of all, there’s your Big Hairy Audacious Goal (BHAG). The 10 or 15 years out version that needs to be a big stretch. By definition, this one needs to be about 20% believable.
When I say, let’s aim for £3m, they think to themselves, “If doing £1m of revenue hurts this much, doing £3m will hurt three times as much and I’ll die.” They don’t say this out loud, of course, but I know that’s what’s going through their mind.
Just to be clear, 20% believable is almost unbelievable. It’s barely believable. It’s almost inconceivable. That’s what I mean by 20% believable. If you find that your BHAG is 90% believable you haven’t set a BHAG.
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If you find yourself thinking or feeling something similar, at whatever level of revenue you are doing now, let me explain another way to think about it
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If you’re doing £1m of revenue, setting a goal to do £2m doesn’t force you to change, and change is what’s necessary to make your life more enjoyable.
If you’re doing £1m of revenue, setting a goal to do £2m doesn’t force you to change, and change is what ’s necessar y to make your life more enjoyable
A business that turns over £3m or £5m looks a lot different to one that turns over £1m. If you start creating the building blocks you need to get to that level, it will make your future business really perform and be a joy to work in. Building blocks you’ll need are: • Making sure you have the right team on board • Developing the skills of your existing team • Streamlining your business processes • Improving your client experience • Developing your next generation of leaders • Improving your own delegation and leadership skills • Institutionalising your marketing and lead generation • Improving adviser communication skills
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The millisecond that you set a BHAG that is larger than what feels comfortable to you, all of your necessary next steps become obvious. You can then get started on addressing them. This is when your business gets exciting again. Can I share something else with you that no one talks about? It doesn’t matter if you hit your BHAG or not in 10 to 15 years’ time. However, I still believe it’s important to have a BHAG that you are going after. It’s the thing that generates the excitement for you, your team and your business. Also, when you first set this goal it should scare you witless about 50% and excite you no end about 50%. Scared and excited in equal measure is about right. If it’s too scary, you won’t start. If it’s too easy, you won’t be motivated to take on the challenge. THE THREE-YEAR GOAL The second type of goal is your three-year goal. I much prefer three years to five years. Three years is like looking to the horizon. Five years feels like trying to look over the horizon, which is not really possible. The three-year goal should not be a massive stretch. Please re-read this; it should not be a massive stretch. A mistake which I believe that many business owners make is setting a big hairy three-year goal; a stretch goal for three years’ time. I don’t like it. What I see happen in 98% of cases is that six months in, everyone in the firm realises it’s a silly unreachable target. It loses its pull as a goal for the next two and a half years. That’s not ideal. My advice is to set a three-year goal that is about 90% believable. That is, you are almost certain you will hit this three-year target. That would make it a very small stretch.
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As with all goals, you are allowed to smash it if things go really well for you. However, if you have any setbacks along the way, and let’s be honest that’s what usually happens, you can still be close enough to play catch up to this threeyear goal.
you aim for 10-15 ideas for what the business will look like in three years’ time. When I review the business plan with clients in my consulting work, it’s the descriptors I’m most interested in measuring progress against; not so much the financial target. Why?
Nothing great ever got achieved in two minutes. Big goals take an extended commitment to doing the work required and learning along the way
In the business planning process we use at FP Advance, we recommend not only setting a financial target for three years, but also describing your future business in as much detail as you can muster. For example, you might say: • We have moved to new offices that fit our new branding and positioning • Our processes are slick and efficient • Every team member is skilled in their role • The team work brilliantly together • Our marketing process runs like clockwork and generates a flow of on-target leads for all advisers • Etc etc. You could go on and on with these descriptors for your business. The more of them you have the better. I’d suggest
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Because if these descriptors are being put in place, the results will also come along in due course. The descriptors are the inputs, and it’s the inputs you need to focus on to achieve your outputs or end goals. THE ONE-YEAR GOAL The third type of goal is your one-year goal. In this instance, I believe the financial target should be 100% achievable. I don’t mean setting a stupidly low target, I mean a genuine forecast number that, although moving you ahead, is achievable for your business. Some people think this is a bit lame or unambitious. I disagree. By setting a one-year financial goal that you can hit, you can trust your forecasts. Many smaller firms, having heard about BHAGs, apply the concept to their one-year goals. After 10 years of never ever hitting one of these targets, what do you think the internal dialogue is around next year’s target? That’s right: no one believes it to be real. By setting 100% achievable goals for one year, you start to build confidence and trust in the leadership team. That’s crucial in terms of your credibility as a leader. The same goes for other non-financial goals that you set for the year. They have to be things that you commit to and can achieve in 12 months.
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Discover alternative income opportunities As with all of these shorter-term goals you’re allowed to smash them out of the park. Your goals are not limits. By getting your various goals set correctly, you can really improve the enthusiasm within your business and get everyone on board with the direction of travel. This can be a powerful tool for improving your performance. You can also give yourself the time to hit the really big goals. Nothing great ever got achieved in two minutes. Big goals take an extended commitment to doing the work required and learning along the way.
bassetgold.co.uk/IFA 0800 249 4555
If you follow this goal-setting approach, you’ll be perfectly placed to achieve something amazing before your career is done. Let me know how you go.
About Brett Davidson Brett is the Founder of FP Advance, the boutique consulting firm that helps financial planning professionals to advise better and live better. He is recognised as one of the leading consultants to financial advisers in the UK. You can follow Brett online and via social media: You can follow Brett online and via social media: Twitter: @brettdavidson Facebook: www.facebook.com/FPAdvanceLtd LinkedIn: www.linkedin.com/in/davidsonbrett Website: www.fpadvance.com
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Risk Warning and Disclaimer
Your capital is at risk when investing in unlisted bonds and Bond repayments are not guaranteed under the Financial Services Compensation Scheme. Basset & Gold is a trading name of B&G Finance Ltd and Basset & Gold Plc., which are both companies in the Basset & Gold Group. Promotion of the bonds and arranging investment is through B&G Finance Ltd. and the bonds are issued by Basset & Gold Plc. Only B&G Finance is authorised and regulated by the Financial Conduct Authority (“FCA”) in the UK as FRN 788684. ISA rules apply.13
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TRADE WARS How concerned should we be about concerns around trade wars and the potential impact on the outlook for investment? What is the likely reaction of key central banks if no resolution if found? Brian Tora reflects on the current situation and expresses concerns that if a global recession ensues, then it could make the Great Depression of the 1930s look tame in comparison
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hile Brexit might be the most overused word at present, Trade will not be far behind. What both have in common is their ability to spread uncertainty throughout markets. Brexit uncertainty has certainly played its part in stimulating volatility in the sterling exchange rate, but has had comparatively little effect on stock markets – an indication of just how international leading companies have become. Trade, on the other hand, has spooked investors on more than one occasion and remains the biggest unknown for markets.
All this recent activity smacks of a growing propensity of governments to adopt protectionist policies and embrace increasing isolation in trade terms. In the case of the US, an isolationist approach extends far beyond trade, which simply adds to the concerns that trade wars will impact the global economy and bring to an end a decade of recovery and expansion. Certainly, the International Monetary Fund and other august bodies are pointing to a slowdown in global growth and are not ruling out recessionary conditions worldwide.
WHAT DO I MEAN BY TRADE?
But the central banks are on the case. The Federal Reserve Bank has already reversed the monetary tightening which had marked the end of quantitative easing. The US President had been arguing against Governor Jerome Powell’s decision to start winding back the balance sheet expansion of the Fed which the measures to combat the aftermath of the financial crisis had entailed. But then he has an election just around the corner and if he is to achieve his aim of securing a second term, he will want to ensure the economy is in good shape.
Well, it is not just about the failure of the United States and China to settle their differences over their trading relationship, with a seemingly unending escalation in tariff wars. Japan and South Korea are at loggerheads over aspects of trade, while there have been very real threats from President Trump that he will seek to challenge European Union exports to the US, most probably by imposing higher tariffs, in much the same way as he has done with China.
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THE RESPONSE OF CENTRAL BANKS
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levels, while sovereign bond yields are also depressingly low. Indeed, in some countries – Germany for example – they are negative, so lenders are paying for the privilege of allowing the government to borrow from them. This is not a healthy situation. Aside from anything else, indebtedness around the world has risen to scarily high levels. While low interest rates allow for the servicing of this debt to be manageable, repaying it could become a problem. In the end the buyers of last resort for these bonds must be the central banks, which implemented monetary easing in many cases through adopting a bond buying programme in order to free up capital in the banks, so damaged by the financial collapse of eleven years ago.
This is why many investors are relatively sanguine about the eventual outcome of the Sino/US trade talks and thus over the future for equities. While the tit for tat approach to hitting various exports on both sides shows no sign of abating, at least they are still talking. And while President Trump remains of the opinion that China has more to lose than the US, he will be conscious that the latest wave of tariff increases will start to affect American consumers.
Aside from anything else, indebtedness around the world has risen to scarily high levels. While low interest rates allow for the servicing of this debt to be manageable, repaying it could become a problem
WHAT ABOUT BOND YIELDS? A resolution could well encourage those other outbreaks of trade disputes to settle as well, but it is still too early to know what the final outcome might be. In the meantime, interest rates in the developed world remain at rock bottom
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And while we are on the subject of bonds, the UK government has at last announced it will be re-examining the measure used to determine interest and repayments for index- linked bonds. This move has been well signalled, but that did not stop these popular bonds from taking a big hit on the announcement. While the Consumer Price Index (CPI) has been adopted as the preferred measure for many inflation linked issues – such as the governments target for the Bank of England – the Retail Price Index (RPI) has remained the basis on which the value of index-linked securities are calculated. It has been reckoned that the RPI has been flawed for some years, costing the UK taxpayer many hundreds of millions of pounds as a result. A measure based on the CPI seems most likely to be adopted – most probably one that includes housing costs. These changes are unlikely to come in any time soon (it has been suggested that 2025 is the earliest at which they could be introduced and maybe not until 2030, but change is on the way. Aside from anything else, the need for these securities, introduced nearly four decades ago, has diminished with the decline of final salary pension schemes. INVESTMENT IMPLICATIONS So, what should investors and their advisers read into all of this? First, that a settlement of these trade disputes should spark renewed confidence in stock markets. Second, that bond markets look like remaining a tricky place in which to invest for some time. And third, that extreme caution will be needed if indeed a global recession ensues. It could make the Great Depression of the 1930s look tame in comparison. Brian Tora is a consultant to investment managers, JM Finn.
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I NVESTM BRIAN E NT TORA SPOTLIGHT
THE ASSET CLASS WE
CAN’T LIVE WITHOUT With its second anniversary coming up in October, M&G Investments’ Global Listed Infrastructure Fund is well placed to celebrate. We get down to detail as we interview the fund’s infectiously enthusiastic manager, Alex Araujo, exploring not only the reasons behind his passion for the sector but also the disciplined processes which he has put in place to ensure that the fund is well positioned for future success
IFAM: Alex, you’re clearly very passionate about investing in global listed infrastructure. Can you explain to us why you think it presents such attractive opportunities and why you believe it should be on advisers’ and investors’ radar? A A: Infrastructure as an asset class is well-established as a complement to multi-asset portfolios primarily in the private realm. We have observed huge amounts of private capital going into global infrastructure projects and assets over the years. These are investments being made by the likes of sovereign wealth funds, pension funds, endowments and insurance companies etc. where the investment focus is on meeting long term liabilities and with very long term investment horizons. One point of note is that the returns from this sector tend to complement and be generally uncorrelated to other investments held in their portfolios. But private infrastructure investment tends to be for a privileged few. So in a sense, with the launch of our fund in 2017 we have democratised this asset class, providing access to it for investors in a liquid format by way of listed infrastructure businesses with many of the same types of characteristics underlying them as you see in the private
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realm. It is an asset class which is increasingly gaining acceptance within the investment community. Of course, managers will express their exposure to the asset class in different ways and I think it is important to have a number of different infrastructure strategies for advisers and investment managers to choose from. Like any investment strategy, there is differentiation here and it is important to understand this and to embrace it. We ourselves aim to invest in businesses with real physical long life assets with reliable cashflow streams and growing dividends. The characteristics which come from these businesses and assets are incredibly complementary and attractive to investor portfolios. One of the prime characteristics demonstrated by the asset class – and our strategy too – has been its ability to protect capital in more difficult market environments thereby protecting against downside risk. At the same time, because of the way we’re investing and what we’re investing in, we also have the opportunity to capture and participate in any upside when markets move higher. Because of this, I’m sure that advisers can see that we’re not just about offering a defensive strategy here and we are certainly not a bond proxy – which is something of a perception amongst the investment community when looking at this asset class.
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IFAM: Infrastructure is a broad term for the investment opportunity set. How do you go about defining your investment universe? A A: There are a number of different global listed infrastructure strategies operating across the UK investment market place. I believe that these strategies all offer something slightly different and I have the fullest respect for my peer group. Increasingly we are dealing with clients who will initially make a commitment to the sector within their portfolios and then will have exposure to more than one – maybe two or three - different strategies. These can work in a very complementary way. Our own starting point is the more traditional sphere of listed infrastructure, it’s what we call ‘economic’ or ‘core’ listed infrastructure. This relates to utilities, energy infrastructure and transportation infrastructure; but we have added two additional categories to the definition for our strategy to bring the asset class to the modern age. The first of these additional categories is social infrastructure, which covers facilities required for the provision of health, education and civic services. This category of infrastructure offers similar defensive characteristics to the economic sphere albeit with a different asset base which provides diversification benefits. The third category in which we invest and the most exciting from a growth perspective is what we call evolving infrastructure, which is built around the structural growth in areas such as communications. We all like to talk about this virtual world in which we live but we have to accept that there would be no internet or mobile communications without the distinct physical infrastructure which makes these modern marvels possible. Whether it is the mobile phone towers or data centres for example, it all matters. We take a broader approach to infrastructure and focus on seeking out growing income streams from the businesses we invest in. We are not just about delivering a high yield for investors though. As an integrated part of our investment process, we also apply an ESG (environment, social and governance) approach to ensure the sustainability of businesses and assets. In broad terms, that’s how I’d summarise the way we define our investment universe.
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IFAM: When it comes to the M&G Global Listed Infrastructure fund, how do you and the team go about making asset allocation and stock selection decisions? What’s the investment strategy and process? A A: We run a concentrated strategy, holding generally between 40 and 50 companies within the portfolio. This means that we have to know and understand these businesses intimately well. We take a bottom-up approach to selecting the businesses in which we invest and only select those with high quality, sustainable, long-life assets that have some form of strategic advantage. Very often there may be a physical barrier to entry which allows us to determine the confidence level in the cashflow stream that we will get from those businesses and the contracts that are behind those streams. We will look for growing dividends, so that we can deliver a growing income stream for our investors. On top of this, the ESG filter is integrated into the approach to ensure sustainability lies at the heart of what we do. We have to ask ourselves what we’re paying for that sustainability and those cashflow streams – so looking at valuations is a critical element. Next, we ensure that we are properly diversified across each of the broad categories of infrastructure in which we invest. There are sub-industries in each category so in total we actually have nine subcategories. Because we operate a global strategy, we are also diversifying regionally. Interestingly, there are different types of dividend growth that we will get from different businesses. We will diversify across those types too. Some are rapidly growing – such as those in the evolving infrastructure space – others are more consistent but growing perhaps at a rate in line with inflation. Then from some we will get a GDP or GDP plus growth rate in the underlying income stream. We believe it's important that we diversify across a number of different considerations which ultimately link in with those characteristics we talked about earlier, such as downside protection and the ability to participate in rising markets as well. I should add just a word or two about liquidity. These are companies which are listed on mainstream exchanges
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throughout the world with full daily liquidity. Should it ever be needed, we could liquidate this fund completely to 100% cash and relatively easily within a matter of days. There are no privately held investments and no highly illiquid assets. IFAM: How does the team approach work within the fund? A A: I work within the income team at M&G. Our approach dictates that we be less focused on the absolute yield, with the emphasis is on the growth in the income stream. We have a number of fund managers who have wide experience in this style of investing and in this strategy. This also came out of the fact that our Global Dividend Fund has more than 11 years of history investing in these types of businesses from the outset. So we know what to look for and what is attractive in these types of business. In fact, there are a small number of overlapping holdings across the four strategies run by the income team. Looking more closely at the Global Listed Infrastructure fund however, I have a dedicated analyst on the strategy. Also, we have a deeper analyst team that covers companies on a sector by sector basis that we draw from and other embedded analysts in the team looking at these businesses too. We also interact quite closely with our private infrastructure group; interactions which are incredibly useful for sharing observations on the asset class, transactions and valuations on transactions etc. We also work with the credit analysts from the fixed income team and collaborate on the businesses we’re invested in. Overall, we feel incredibly well resourced in covering this asset class. When it comes to interaction with our ESG team here, we have regular meetings and ongoing dialogue with the group. They also assess our portfolios regularly, looking for existing or potential controversies, as well as each company’s direction of travel. Often when we meet with companies, members of our ESG team will join us at the meetings to more deeply engage with the management so that the working relationship is very close. Within our ESG process one thing we don’t do is to take third party rankings and ratings of businesses as a given. We do our own work from an ESG standpoint and we make sure that we are
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accountable for every holding. We don’t use a negative screening process either as we don’t believe it fully assesses the prospects for a business as it is quite prone to error. However, we do use third party providers as a source, as an input in the same way that we use research analysts who cover our companies. Ultimately though, we do the work ourselves. IFAM: Is it a constraint having twin objectives of delivering capital growth as well as an increasing income? Where does the emphasis lie? A A: This is an important question as it’s a both an academic and an ideological one. In fact, we resolutely believe that income growth and capital growth work hand in hand. When we invest in a business, we won’t know how the market will value it over time but we can get a handle on its ability to grow its income stream. If it can do so progressively and sustainably – for example without having to borrow money to pay an increasing income stream – then we believe that capital markets will reward that income value by increasing the equity value of the business. So our ideal investment is a company which consistently grows its dividend over time but that its dividend yield overall doesn’t really change or perhaps even declines – as a result of the capital value adjusting for the value of the sustainability of that income growth. We strongly believe that capital growth and increasing income absolutely are inextricably linked. IFAM: How do you manage risk in the portfolio and ensure that there is effective diversification for investors? A A: There are two parts to this. The first one is in the way that we established and built the strategy in the first place. Secondly, there’s the way that risk is monitored and addressed on an ongoing basis in co-operation with our risk team. So on the first point, we talked earlier about the three broad categories of listed infrastructure and each of the sub categories within those. When we built the framework
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for allocations to each category and sub-category, this was done following a rigorous assessment of the volatility versus return trade off of the underlying companies in the investible universe of each category. So we built a framework and allocation range to cover these which is embedded in the process. Broadly speaking, economic infrastructure is between two thirds and three quarters of total exposure, social infrastructure is between 10% and 20% and evolving infrastructure between 15% and 25%. These ranges were established to minimise risk and maximise return. The position size, weighting target etc. build up to that. Finally, there’s the regional element of diversifying via a global strategy and making sure that we have a mix of business and regulatory risk – as many of the businesses have some form of regulatory oversight whether it is moderate or comprehensive. IFAM: Looking ahead, where to do you see the most attractive investment opportunities within the sector? A A: I must admit that I’m very excited about all the opportunities we have right across the portfolio and that we have confidence in each of our holdings across all of the categories. That said, from time to time, the market throws up wonderful opportunities. At the moment, I see particular opportunities in energy infrastructure. The market can become concerned in the short term about the industry and sector, which creates buying opportunities which we can capitalise upon. We’ve been steadily increasing our allocation here and now have five holdings
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which amount to roughly 16% of the portfolio overall. The other area where we see particular ongoing opportunity is in transportation infrastructure where there is significant upside for capital investment for the companies underlying the exposure. Ultimately, this makes for strong return potential and for a growing income stream from these projects. We’ve been adding exposure here too. Finally, the structural growth which is inherent in communications infrastructure keeps us excited about this component of the strategy. We are getting very high rates of growth in cashflow streams from businesses associated with the digital economy which is increasingly pervading our lives. The investment case is compelling. IFAM: How has the asset class fared through the market’s ups and downs recently? Does it offer any particular characteristics that may appeal to investors? A A: Listed infrastructure’s outperformance during turbulent times is not just a reflection of market sentiment which can be fickle; the resilience of the asset class is justified by solid fundamentals and the operating performance of individual companies. There is empirical evidence to demonstrate the resilience of these business models, arising from the critical nature of underlying assets. History shows that the cashflows (illustrated in fig 1 by EBITDA) generated by listed infrastructure businesses and the dividends paid from them remained relatively stable during the financial crisis before resuming their upward trajectory.
Fig 1. The M&G Global Listed Infrastructure Fund: Investible Universe EBITDA and Dividend Growth 2000
1500
1000
500
0
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 EBITDA
Divided
(Rebased: 2001 = 100) Source: M&G Investments
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Over the last few years we’ve done some work breaking down the market’s returns into various episodes and looked at how the strategy has performed and why – and where the performance has come from – in each of those episodes. Broadly speaking, what we found was that when the wider equity market finds itself in a difficult period – for example in Q4 of 2018 or more recently the month of August this year – these are the environments where this asset class really shines. In the case of August, we saw the strategy increase capital whilst the overall market was down. Of course, that was only one month but it is an indicator that this asset class at the very least provides downside protection and preserves capital which is a great starting point for when markets start to recover. When this happens we aren’t left behind, we are able to participate as we are invested in businesses which have underlying growth characteristics and can grow their income streams. There are certain types of markets – what I call the ‘go-go markets’ - when there is much excitement in sectors such as technology which people get drawn to. We won’t necessarily keep up in these times, with those of course, but we can still participate in the upside. Over the long term, these characteristics of downside protection along with strong growth prospects on the upside, allows the strategy the potential to outperform and with lower volatility than the broader market.
About Alex Araujo Alex Araujo has been the manager of the M&G Global Listed Infrastructure Fund since it launched in October 2017, and was appointed manager of the M&G Global Themes Fund in January 2019. Alex initially joined M&G’s income team in July 2015 and became co-deputy manager of the M&G Global Dividend Fund in April 2016. Alex has 25 years of experience in financial markets. He graduated from the University of Toronto with an MA in economics and is a CFA charterholder.
In both scenarios, we’ve found that the contribution comes from different places at different times within the portfolio. This really emphasises the importance of diversification across the various categories in which we invest and helps us to offer a more robust solution for investors. Finally, we’re excited by the increasing interest we’re seeing from our clients. The strategy's assets overall are already well over £200m, having started from a very low base. I’m pleased to say that I was the first private investor in the fund because I want to be completely aligned with our investors in delivering on our objectives. I also want to enjoy the prospects for growth and rising income to help me to deliver on my own objectives for the future.
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October 2019
BRIAN LGI M TORA
DEEPER
THINKING NEEDED
LGIM talks about why investors need to think more deeply about their index exposure.Commodity ETFs exist, but ETFs are not a commoditised product. Due diligence on ETFs, even for seemingly straightforward exposures, can make a significant difference to an investor’s returns.
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TFs are passive. Index investing means the FTSE 100 or S&P 500. For many, picking an ETF can simply mean choosing the option with the lowest headline fees.
These are myths, stubbornly persistent ones. The rapid growth of the ETF industry makes it more important than ever to challenge and correct them. THE INVESTMENT ENVIRONMENT HAS CHANGED
The value of assets held within ETFs globally reached $5.5 trillion at the end of June this year, according to research firm ETFGI. Just 10 years ago, that figure was $1 trillion. The growth rate does not appear to have peaked; the industry began 2019 with assets under management of $4.7 trillion. The market rally has undoubtedly helped, but the point remains that an increasingly vast sum of money is allocated to ETFs. There are certainly a great many advantages for investors in this greater adoption of ETFs, but it is worth being aware that the sheer weight of these assets has the capacity to influence market behaviour. This is increasingly evident when you look at what happens around index rebalancing dates for popular indices.
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Index additions and deletions are generally announced before they are enacted, allowing some opportunistic traders to act in advance of the implementation date of the changes. The theory is that when a security joins a heavily owned index, price-insensitive investors like some tracker funds will have to buy it and so could push up its price if market timing is not considered. Those who can get into a security, between the confirmation of its promotion and the day such investors submit their bids, often have the opportunity to profit. When we investigated this arbitrage opportunity, we discovered that – over the course of 14 rebalances from February 2015 to May 2018 in a major global equity index – investors potentially lost up to 6.5 basis points of performance because prices moved between the index announcement and reconstitution. Those basis points may not sound like much, but they are equivalent to a year or more’s worth of fees for some index strategies. AN ACTIVE APPROACH TO INDEX DESIGN There is nothing that requires investors to accept these inefficiencies, however. That is why, when we designed our core ETF range, we built in mechanisms to avoid these
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crowded trading periods through alternative rebalancing dates for our own indices. Similarly, we understand that responsible investing is becoming increasingly important to our clients. For our core ETFs, then, we integrated Legal & General Investment Management’s Future World Protection List, which we believe helps ensure companies in the ETF portfolios meet minimum standards for best business practices in order to mitigate risks that may affect long-term investment performance. This approach should shield investors from the negative future outlook associated with controversial weapons manufacturers, pure coal companies, and consistent violators of the UN Global Compact.
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We focus on themes that: are disrupting and challenging traditional sectors and industries; have the potential to structurally change the economy; are still in the early stages of transforming our world and so may have immense growth potential; are currently experiencing increased adoption by delivering efficiencies or meeting evolving needs; and are enjoying high consensus growth forecasts. The second step is active research into defining the thematic universe of stocks, which we conduct by working with independent experts who undertake bottom-up analysis. Through this process, we can identify companies across different sectors that are genuine leaders in that theme. TRYING TO FUTURE PROOF AN INDEX
Put simply, we believe that index investing should not mean passive management. An experienced index management team should be able to capture opportunities and, as importantly, manage the risks associated with the increased usage of market-cap weighted benchmarks and the potentially adverse impact of unsustainable business practices over the long term.
This work is essential because thematic investing, as we understand it, cannot depend on traditional industry classifications. The robotics and automation theme is a good example: some investors may use industrials or even the technology sector as proxies, but they offer at best only partial exposure to the theme and, at worst, exposure to the companies that are going to be disrupted by the theme.
Fees certainly matter but the importance of value preservation through building better indices should not be overlooked either.
While traditional industry classification approaches work well for mature markets and sectors, they may not be able to accurately identify companies related to individual themes that are in their nascent stages of development. Indeed, we believe themes are the sectors of the future.
REMAINING RESPONSIVE TO CHANGE We hope our core ETFs demonstrate our commitment to intelligent index design, but it is perhaps our thematic range that most clearly epitomises our approach. Our clients have summarised this approach as ‘active research and systematic implementation’. Powerful, long-term forces – from artificial intelligence to healthcare breakthroughs – are shaping markets and the economy. Innovation lies at the heart of many of these forces, with technology changing our behaviour not only by helping people and businesses perform existing tasks more efficiently but by creating new solutions to longstanding challenges. The question is how to harness the potential of these forces within a portfolio. For us, the answer begins with active research. We first want to gain confidence that a theme addresses a wide opportunity set, has a high potential growth rate, and will endure through time. Several indicators help us do this.
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As investors come to recognise that themes and sectors are not equivalent, we expect them to demand better designed indices in the future. The final stage is systematic implementation. Combining this active research with a transparent and rules-based strategy implemented through an index of liquid securities helps to ensure that an investor’s exposure to a theme is not subject to behavioural biases or unintended risks. Starting with an equal-weighting methodology can furthermore embed diversification in the thematic index and guard against stock-specific risks. Taken together, we believe this commitment to intelligent index design – underpinned by active research and systematic implementation – sets a benchmark for the ETF industry. Not all ETFs are the same, and we are confident that investors will soon begin to favour propositions that can stand out from the pack.
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October 2019
ETF SPOTLIGHT
AN IFA MAGAZINE SPECIAL FOCUS
Exchange traded funds (ETFs) are certainly not newcomers to the range of asset classes which advisers and investment managers have to choose from when it comes to portfolio construction. But how popular are they with advisers today? And how is that set to change in years to come? These were some of the topics which underpinned the IFA Magazine ETF Roundtable discussion which was held in London in June and which forms the basis of our special focus in this month’s IFA Magazine.
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he use of ETFs has grown in popularity over the years with many investors attracted by their low cost nature amongst other factors. Over the following pages, we will highlight some of the discussions which took place during the IFA Magazine ETF roundtable which revealed some of the key issues facing advisers today and how the use of ETFs is becoming a more mainstream part of the asset allocation process. A GROWING TREND Ahead of that, if we take a look at the bigger picture, the growth in the use of ETFs looks like a positive trend which is set to continue. Morningstar research estimates that the amount held in ETFs by European investors could hit €1 trillion by 2020 and €2 trillion by 2024. Assets under management had already swelled to €760 billion at the end
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of March. According to BlackRock, the proportion of UK wealth portfolios invested in index funds and ETFs will grow by 50% over the next two years, driven by four factors encouraging businesses and investors to re-think old habits including business model evolution and the growing choice of wrappers.
Morningstar research estimates that the amount held in ETFs by European investors could hit €1 trillion by 2020 and €2 trillion by 2024
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POSITIVE CHANGE As our roundtable discussions highlighted, there is now a powerful momentum which is leading advisers and investment managers to increase their usage of ETFs within clients’ portfolios. However, there appears to be a greater need for information and analysis to make it even easier for advisers to carry out due diligence on ETFs and therefore assess their relevance for consideration and inclusion within portfolios.
The announcement in May this year that the Investment Association (IA) has given the green light for ETFs to join the IA sectors has certainly been warmly welcomed by the adviser community
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The ETFs will be placed within the existing IA sectors, which enable comparison between open ended funds by dividing them into groups of similar funds based on factors such as asset class, investment strategy and geographical region. According to the IA, over 200 ETFs are eligible to apply for their funds to be classified into the IA sectors. Consistent with the current approach, only ETFs that are either UK domiciled, or are EU UCITs with HMRC reporting fund status will be included. As Galina Dimitrova, Director of Investment and Capital Markets at the Investment Association commented: “We want to ensure that the IA sectors reflect the full range of products the asset management industry has to offer savers around the world. ETFs are a growing part of this market and their inclusion in the sectors will enable consumers to compare across a wider variety of products.” Only physical replication ETFs will be eligible for inclusion in the IA sectors. ETF providers were required to submit their applications by 14 August 2019 for inclusion in the initial batch of ETFs to be added to the IA sectors, after which they will be added on a rolling basis. THE TIME IS NOW
So, the announcement in May this year that the Investment Association (IA) has given the green light for ETFs to join the IA sectors has certainly been warmly welcomed by the adviser community. It also shows the extent to which ETFs are now becoming considered more mainstream alternatives. It seems likely that this move will increase the demand for ETFs as awareness grows. Investors and their advisers will be able to compare ETFs against the 3,500 funds already in the IA’s 37 fund sectors from the first quarter of next year.
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And if ever there was a time when ETFs usage should be gaining positive momentum it is now. The investment issues which have emerged following the suspension of the Woodford Equity Income Fund earlier this year have led to renewed awareness of the value of transparency, flexibility of trading and the cost of investing not only by investors but also by the adviser community. Whether you’re a user of ETFs or not, the discussion is aimed at highlighting what is happening at grass roots level when it comes to the use of ETFs. We hope you find it of interest.
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October 2019
ETF ROUND TABLE LONDON
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PARTICIPANTS Howie Li
Samit Patel
Head of ETFs, Legal & General Investment Management
Financial Planner, The Fry Group
T: 0345 070 8684 E: fundsales@lgim.com W: lgimetf.com
T: 020 7592 1332
John Barrass (roundtable chair)
Zul Alladina
Deputy Chief Executive, Personal Investment Management & Financial Advice Association (PIMFA)
Head of Wealth UK, Goldstar Wealth
T: 020 7011 9862 E: JohnB@pimfa.co.uk A: 22 City Road, Finsbury Square, London, EC1Y 2AJ
T: 020 8684 1851 E: zul@goldstarins.co.uk A: 1E High Street, Purley, Surrey, CR8 2AF
Julian Barnard
Irene Bauer
Principal, Barnard Lee Associates
CIO, Twenty20 Investments
T: 0207 627 4791 / 07790021670 E: Julian@barnardlee.co.uk
Mike Mount
Tony Catt
Director Intermediary Solutions, JM Finn & Co
Freelance Compliance Consultant
T: 02920 558803 E: mike.mount@jmfinn.com
T: 07899 847338 E: info@tonycatt.co.uk
Neil Weston
Alex Sullivan
Director, IAS Financial Planning Ltd
Managing Partner, Clifton Media Lab
T: 01206 323854 E: n.a.weston@btinternet.com
T: 01173258328 E: alex.sullivan@ifamagazine.com
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October 2019
ETF ROU N D TABLE
A MATTER OF
CHOICE OEIC? Investment Company? Index fund? ETF? How do you decide which asset classes to use in order to gain appropriate exposure to a particular investment sector within a client’s portfolio?
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iven the increasing popularity of ETFs, roundtable chair John Barrass kicked off proceedings at the IFA Magazine ETF roundtable event held in London in June. He began by asking participants for their views on whether ETFs are taking over or simply becoming more mainstream when it comes to portfolio construction? The low cost of ETFs relative to other asset classes has traditionally been seen as a significant driver behind their growing popularity. Whilst the cost of index funds has been falling in recent years, there is still an increasing demand for ETFs. Alex Sullivan commented that “we are seeing a lot more interest and uptake in ETFs from our progressive readers.” When it comes to investment management Mike Mount stressed the need for detailed analysis and research across all sectors and asset classes including ETFs, commenting “You need to research the whole universe, you need to look at everything. Where we find ETFs particularly valuable is if you want to make a short-term return. The trading
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flexibility they provide allows you to do that. If you want short-term exposure, do you want to use an open-ended fund to get that exposure? It doesn’t cater to the short term. Whereas with the ETF, it’s quick exposure to the underlying sector, it’s a very flexible tool.” But are there complexities within the structures that advisers need help to understand? Neil Weston of IAS Financial Planning suspected that there were. He commented: “The mutual fund world is simpler and easier from our perspective”. Taking this concept of complexity forward a step, Howie Li of L&G ETF was interested to find out how participants see the layers of complexity in a FTSE 100 ETF as compared to those of a FTSE 100 tracker fund? Weston responded by explaining his thoughts in more detail: “There’s such a huge array of those vehicles that, from a research viewpoint, understanding what you’re getting and what’s involved is an added risk. It’s like with investment trusts, where there’s an added layer of complexity in terms of gearing the asset values.”
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INCREASED TRANSPARENCY Compliance consultant Tony Catt suggested that ETFs offer great clarity and transparency than other fund structures: he commented “ETFs are better badged than mutual funds because you can see what they’re trying to achieve, follow, and what it contains. If a particular ETF is geared towards technology, it will say. Using a managed fund, it’s not badged that way, so you wouldn’t know. ETFs are easier than the other funds to identify and use.” Of course, advisers and investment managers need to carry out effective due diligence on whichever fund or investment structures they are considering for use within clients’ portfolios and to weigh up the advantages and disadvantages. Howie Li took a step back with a personal take on the challenges which such research and analysis presents. “I have been on an ETF journey for well over 10 years,” he said. “We only see ETFs as delivery vehicle for an investment strategy. What we’ve seen over the past decade is a migration towards lower cost investments and passive investments. One reason why ETFs are getting more attention is the broader huge push towards passive investment – at Legal & General, we also have traditional index funds – and ETFs are just one more vehicle driving in that direction. Due diligence is still hugely important, of course. We can’t make the assumption that index funds don’t do stock lending or that ETFs only are synthetic, because you can structure an index fund and an ETF in the exact same way. They’re governed by the same rules and are both essentially traded as open-ended funds; it just so happens that ETFs offer a lot more transparency. So take a step back and look at how the fund is structured. You can easily structure a synthetic strategy in a traditional mutual fund and say that’s a normal OEIC. It’s not the ETF that
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adds risk; it’s the underlying strategy. The ETF wrapper may be an extra layer to explain, but ultimately what really matters is how, as an investor, you want to access that investment strategy.” MEETING CLIENTS’ NEEDS But do clients tend to have specific demands about investing in ETFs? The discussion made it quite clear that this wasn’t exactly an everyday occurrence. Many clients will simply not have sufficiently detailed knowledge about investment fund structures and options which is part of the reason they will have taken the step to seek professional advice - in order to obtain the most appropriate portfolio to meet their needs. Julian Barnard of Barnard Lee Associates commented “In terms of client demand for ETFs, I have a relatively high footfall of new clients coming through. The amount of times anybody has ever asked for an ETF, or even knows what it is, is about once. There probably is more demand where you’re dealing with high net worth clients, but not for the average client.” A final but salient point was added by Tony Catt who was going one step forward when considering adviser choices commenting “That’s where you prove your value as an adviser - that you know all about ETFs. Clearly, the adviser’s remit is to consider the full range of assets and where they might be most effectively employed within portfolio construction. However, ultimately the crucial element of suitability is driven by the needs of individual clients ensuring that the individual components meet cost, transparency and risk requirements.”
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ETF ROU N D TABLE
WHERE AND WHY MIGHT ETFs BE USED IN CLIENT PORTFOLIOS? Alex Sullivan of IFA Magazine opened up this section of the discussion to find out where and why participants use ETFs as part of the asset allocation and investment decisions they make on behalf of clients.
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o help meet clients’ investment goals, advisers have a wide choice of sectors and fund structures at their disposal. This includes ETFs and the various different types of ETFs which exist. At J.M. Finn, Mike Mount began by confirming that ETFs are used as part of a client’s overall diversified portfolio. Given the nature of their business, Mount explained that J.M. Finn focuses very much on looking after the relationship with professional intermediaries as well as looking after the needs of the underlying client. The flexibility provided by the intra-day trading of ETFs is clearly an important factor. Julian Barnard of Barnard Lee also uses ETFs within his clients’ portfolios and gave an example of where he felt that they worked well, commenting “I might put in a volatility traded one to even it out a bit and keep costs down, so the bread and butter element of the portfolio is relatively cheap, and it’s the satellite elements you’re paying a bit more for.”
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RISK MANAGEMENT Managing risk and controlling volatility within portfolios is a crucial element for investment managers and advisers. This is especially true in today’s environment as the crisis at Woodford has highlighted the need for - and importance of – transparency as well as having pragmatic risk management controls in place. Once Howie Li of L&G ETF had opened up the discussion about risk, Mike Mount gave his view about comparing ETFs with active funds in this regard. He comments “I think it’s a bit of a myth that an ETF is riskier than active funds. I think it was the Bank for International Settlements who did a survey, and said that in times of volatility, it’s more likely to be active managers who are selling.” Julian Barnard of Barnard Lee had a slight counterpoint to that, reminding the participants that there are two different elements to risk. As he comments: “There’s the risk to the
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client, and the risk to me as an adviser. If I put my client in an index tracker fund or ETF, I’ve got to do more justification on the ETF. I’ve got more risk.” In such situations when risk is up for discussion, it was clearly just a matter of time before the subject of the ombudsman would emerge for consideration. This point was raised by Irene Bauer, Co-founder and CIO of Twenty20 investments. She asked for clarification about whether the extra level of justification was to the ombudsman or to the client and suggested that when it comes to the ombudsman, that they need education in this particular area. Julian Barnard was not going to dispute that commenting “I’m not saying it is reality, my perception is that I’m always going to justify an ETF more broadly than I am a tracker, because I feel there’s more inherent risk to me.” CLIENT SUITABILITY Samit Patel, a Financial Planner at The Fry Group SP outlined his firm’s approach which is to combine both active and passive funds in a core-satellite approach. He explained “We use advisory models and discretionary models. We use ETFs in the larger part of our portfolio, in areas such as the UK and Japanese markets. In satellite areas, we might use more active funds. For our advisory portfolio, we research all the funds and model portfolios, but we also pick and choose funds we put into client portfolios, so we do use ETFs there.” When it boils down to individual fund decisions, the client’s needs are clearly the key drivers in order to determine which solution is most appropriate to their needs, objectives and risk tolerance. Different client needs require different solutions. Zul Alladina is Head of Wealth UK at Goldstar Wealth. He was firmly of this view and commented to remind panellists that “everyone’s clients are different.” At Goldstar, we deal with a wide range of clients.. It’s very rare that they
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come in with a mandate stating that they specifically want ETFs.. What they’re looking for are solutions to a bigger problem, so they need the background story as to why they should be investing and how we create the solution to these problems. I don’t think they want to drill down into the details.” Alladina then brought up the matter of cost, stressing that “people are looking for value.” He went on to explain in more detail the firm’s approach commenting “how we build the value solution will include a number of different factors, actives, passives, ETFs. Our firm delivers multiasset solutions for clients and as part of this we are looking for long-term investment strategies. We’re not promising that our fund recommendations will be top performers, as long as it’s within a reasonable expectation and there is a reasonable benchmark set for the client. ETFs are important. If we consider the US market, ETFs account for a big take in terms of investment monies, but that's largely because of marketing differences. People do act also because of the 401k retirement plan situation which they have in the US. They have more knowledge. In the UK, knowledge is vastly lacking, and people don’t like paying for professional financial advice. As individuals, when we see that something is free, we react quicker to it than when there is the obstacle of a fee or cost to consider. When it comes to education, it’s not just about the ombudsman, but we can all benefit as discussed earlier.” In relation to Alladina’s point, Julian Barnard was keen to drill down into the specific nature of client portfolios in relation to that individual’s attitude to risk. He commented “You’ve got to explain to the client the risk and reward of any investment recommendation. They’re looking for returns yet if you offer them a mixture of core and satellite approaches with groupings of products which are passive and have active products around that, is that meeting client needs and expectations when they’re not very knowledgeable about investments. Obviously they can lose money as well as make it?”
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A LONG TERM APPROACH Alladina took it a step further again, with his view that a different set of risk principles apply, responding to Barnard’s point as follows “I think what’s missing is the time horizon. We tend to talk to clients about time horizons, which are 5-10 years plus. If they’re investing money, it should be money they won’t think about accessing unless it’s a last resort scenario. The capacity for loss bears heavily on the whole process and it's part of our due diligence that the adviser would apply that capacity for loss for that client. I agree with Howie, I don’t think risk is amplified when you employ an ETF, but you’ve got to put everything into context. If you put everything on red, you’ve got a 50:50 chance. As part of a diversified portfolio, I think that ETFs play a vital part as a diversifier.” Like all the panellists, Mike Mount was firmly of the view that client needs and requirements will be the driver of the investment process. As he commented “The investment return for the client over the long-term is going to come from the risk profile adopted. We’re not even talking about how we implement asset allocation at that point. How that is implemented, whether you’re building an advisory portfolio, is secondary to the client. It might be important from your perspective because you’re thinking, ‘How can I keep the costs down?’, because the client isn’t interested. It’s the asset allocation that matters, then implementation.” ATTITUDES ARE CHANGING
today, most multi-asset investors will look at ETFs and funds interchangeably. I think it’s about education. That’s our job, from an initiator’s perspective, to continue to provide that education to the market. In 5 years’ time – and it’s happening in the US - active ETFs will be coming into the market. It just so happens that you’re choosing the ETF wrapper. It might be because of the transparency, or because that’s where clients like to access it. We start to appreciate that it’s the asset allocation or underlying assets which really determine investment returns and the corresponding level of risk. Whether it’s an ETF or a traditional fund, it doesn’t matter. We should supply the investment strategy using the tool the client wants. I think that ETFs represent an improvement in technology that gives more transparency compared to an investment fund. People look at ETFs because they can see more detailed information and more data. It’s important for a lot of investment models that this transparency is there.” Whilst the discussion was generally very positive around the growing impact of ETFs within investment portfolios and the considerable value that they can bring, the conclusion that it is client needs and attitudes which drive the process will not come as any particular surprise to IFA Magazine readers. However, for this momentum towards the use of ETFs to continue, greater education and awareness is still needed, supported by the underlying organic development and growth in the range of ETFs which is already making such a positive difference to portfolio management.
When it comes to the implementation of investment strategies, things change over time. Howie Li gave some examples about how attitudes towards the use of ETFs have changed in recent years. “At LGIM, we believe we’re supplying tools for asset allocators. If we wind the clock back 5 or 6 years and look at how the market reacted to ETFs, they used to say they didn’t have a strategy, but now,
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October 2019
SUSTAINABLE AND THEMATIC INVESTING USING ETFs How important is investing sustainably or getting access to thematic funds as part of your clients’ portfolios? In such cases, do ETFs provide an effective means of obtaining that exposure to these sectors? These are the questions which formed the basis of the final session at our roundtable discussion
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hen it comes to investment matters, it is inescapable that the relevance of sustainability and impact investing has become an increasingly important criteria for consideration by asset allocators and investment managers as well as financial planners. No longer are clients simply concerned about the performance of their investment portfolio or the risks that they need to take to achieve that return. It goes beyond that. As well as being appropriate for their needs and risk tolerance, an investment needs to sit comfortably with the client’s ethics, values and their moral compass. And the emphasis on this is set to grow significantly in the years to come. This was a theme which roundtable Chairman John Barrass was keen to discuss with the participants during this third session, asking whether sustainability was reflected in the ETF arena. It was certainly a theme which all participants were keen to pursue.
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Getting detailed information and analysis about products is an important element for professional advisers and this includes ETFs. Commenting on his experience in this regard, Neil Weston of IAS Financial Planning felt that more information would be welcomed commenting “We don’t get huge amounts of information or support from investment groups offering ETFs.” Clearly this would have implications of more responsibility and time considerations for advisers to carry out the necessary research into how they could achieve required exposure to particular sectors such as sustainable or thematic investing using ETFs. Howie Li, of L&G ETF, commented that in the drive towards sustainable investing, it is likely that clients will be more forthcoming; that they will say that they care about the environment and want their portfolio to be “greener”. He explained that “this is something that is a primary focus at L&G ETF. We think the future of investing will integrate a lot of these considerations because the next generation care.” In consequence, he pointed out that more investment managers are entering the ETF space and it was his view
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that investment in new asset classes or products such as sustainable or thematic areas are going to find themselves in the ETF structure. A key driver for him and his team is to understand exactly what it is that clients want to see and to deliver just that.
So, is adapting to change more difficult for an adviser in a small firm, where time and pressure on resources might be more of a constraint than it would be for a large DFM? That was the next question asked by Chairman, John Barrass.
He then went into more detail explaining that “Most of our clients don’t really care if it’s an ETF or a fund structure which is used. We spend most of our time explaining how we design investment strategies and taking active steps to redesign our investment strategies. We’ve got feedback that investors are saying they don’t want investments to include controversial weapons and coal mining, so we’ve started excluding some of those things.”
Alladina responded first and agreed that the roles are totally different. He commented “As a DFM, your remit is to generate returns and to find proper and appropriate investment strategies from the investment universe. Clients come to us not just for asset allocation, investment advice and a particular return on capital, they’re looking for a more holistic , overall financial planning solution and to build a relationship on faith and trust. It starts with a generic holistic view. If this is the asset allocation model based on what the client has today, we’ll start with a wider discussion around what they are trying to achieve and then we’ll be looking for the research tools and asking, ‘how do we build this solution?’ There are many different factors involved.”
TRANSPARENCY AND EMBRACING CHANGE In the light of the recent Woodford crisis, the consequences of which have had an impact on the wider investment sector, it has become clear that transparency is becoming increasingly important when it comes to investment selection. This is an area where ETFs have traditionally scored well. As Li explains “We reveal our holdings every single day. The expectation on the ETF market is that much higher. The regulator wants to step in and say, 'Is that riskier?' It’s amazing. I feel that over the last 10 years ETFs have got a much higher amount of scrutiny than traditional investment funds. People want transparency.” So what about the bigger picture? Zul Alladina of Goldstar Wealth. summarised it by saying “Change is what we’re talking about, changing people’s thinking, concepts, and ideas.” He went on to cite an analogy of the car industry and the move towards electric vehicles. “It’s new and different” he says, “I think the same thing is happening with strategies like ETFs. They’re another tool in a toolbox where there are many strategies. Change is coming, and it’s not going to stop. We have to embrace it, or we’ll become relics.”
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With his compliance hat on, Tony Catt made the point that the role and responsibilities of an adviser are wide. “There’s a client sitting in front of you, and once the plan is agreed you’ve then got to decide on which providers to recommend to get the appropriate products in place as part of the implementation process. Your time is precious. It leads us back to the education piece where you are more at ease advising on something you’re confident about. ETFs are tiny bit of that universe”. In this context there was consensus that it is important for all professional advisers to make sure they have all the information needed to properly consider all relevant alternatives and choices and that there is a strong case for ETF providers to up their game when it comes to providing such information to advisers.
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THE FINANCIAL PLANNING FOCUS The financial planning process was then brought into the spotlight. Mike Mount of J.M. Finn made an interesting point commenting “I think the reason that DFMs have taken up ETFs more is that we’re one step removed from the distributor. We might have close relationships with adviser firms and will be much closer to the manufacturing hub in terms of what’s coming out there. We’re not focused on financial planning, which takes up lot of time. As an example, in one mandate we run for a firm where a 15-page document is given to the client, we get one paragraph. That summarises it, it’s the financial planning piece that really matters for the client, how they can achieve their objectives and what return will they get to help them to get there. How it’s implemented is secondary.” Irene Bauer of Twenty20 Investments agreed. “To me, an ETF is just a fund, and it trades on an exchange. They’re much more transparent, especially in fixed income. Mutual funds, I don’t know what they do. They might change the duration and not even tell me. You don’t seem to have the control, whereas with ETFs they become more and more granular. I think that’s the beauty of it. They might not be cheaper than some mutual funds, but they’re not more expensive either. I don’t need anything else. We are a DFM, removed from the end client. Coming back to sustainability, I think that’s the one big thing that’s coming down the line. Is there still the perception that sustainability means accepting a lower return on average? I think that it was in the beginning, but I don’t think it’s true now. “ When it comes to the use of independent research, Alladina said that he and his firm use Defaqto. “For us, they deliver a well-rounded and balanced service which includes the investment market as well as protected solutions. It’s sufficiently in-depth, but everyone will have different needs and budget they’re working towards, and different understanding. What we sell is not products. Products are
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a tool, one of the various tools in our toolbox. But clients need to buy into you and what you can do for them, that's what I've always believed. If they don’t, they won’t buy anything from you.” WHAT ABOUT THEMATIC INVESTING? The development of precisely focused thematic ETFs allows investors and advisers to calibrate their asset-allocation process more finely, whether using themes for core growth exposure or for portfolio diversification. This is a particular strength at L&G ETF which is well known in the market for the approach of giving exposure to a particular investment or theme. So how do they go about it? Howie Li outlines the process commenting “First of all, we work with experts to understand, say for example, that we think that artificial intelligence (AI) will be a big driver for our society and over the next 10 years that this will change how we live. How do we invest in that? Then we try to access the database to find companies that are specifically positioned there. We’re selecting companies based on how they’re going to change for the future. Then we put that portfolio together, not trying to pick winners, and we package it and give a diversified broad exposure within the portfolio. It just so happens that this is within an ETF structure.” Julian Barnard of Barnard Lee found that point interesting on two fronts, commenting: “Increasingly, you look at it and the differentiation between an ETF and an open-ended fund is blurring. The demarcation between the two is becoming a Venn diagram. My perception is always that if you take an ETF, it’s effectively a driverless train, whereas a managed fund has a driver in it. I’d sooner have a driver in there, but Howie, you’re saying you can have an ETF with a driver in there? In the broadest context, if you want exposure to the S&P 500, then have an ETF. If you’re in the smaller company space, that’s where I want the driver.”
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Li responded “We want to give exposure to small-cap companies. Our job is to go through what’s underlying in each of these companies. Do they have sustainable income, sales growth and can they sustain this type of pricing? We build that into the investment strategy, and then structure the fund as part of an ETF. Would you call that driverless, or is that driven?” Mike Mount agreed with Barnard commenting “The more specific the sector or area you want exposure to, the more you want a driver there, because it is specialist, you’re playing a theme, is it going to play out or not?” He also asked Li whether the analysis being carried out at L&G ETF is more quantitative or qualitative commenting “If you tell me the way you construct this thematic ETF is more quantitative, I’m reassured.” Li offered that reassurance. “It’s quantitative in the way we construct the portfolio. We need to use some qualitative measures as these industries are specialist. Once it’s restricted, then it’s all quantitative. The last thing you want is concentration risk. We’re trying to aim for specialised and unique exposure so it can sit alongside other portfolio holdings. Our investment approach is different from other thematic funds or ETFs.” When using thematic ETFs it is important for advisers to understand the underlying positions in that ETF. Funds
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that take too broad an approach to a theme can create a high degree of overlap with other holdings and lead to unintended concentration risk – a point which Li was keen to make. Having an effective combination of long-term secular growth themes, active research, and systematic, transparent, and rules-based implementation is a powerful investment proposition. Overall, the growing importance and relevance of ETF structures was seen as a positive development and one which is here to stay. However, a greater focus on more detailed communications and information from providers in general was felt to be likely to underpin the support for advisers and investment managers. This would help them to feel even more comfortable having a greater understanding of the funds and being in a position to recommend them as a part of a diversified portfolio for clients, but also to keep up to date with changes over the long term so that they can continue to reassess their relevance as an ongoing part of that balanced portfolio as part of the review process. And finally, we hope that IFA Magazine readers will be pleased to hear that we will be following up with more coverage on ETFs in future editions of the magazine.
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ACQUISITION AND SALES
O F I FA BUSINESSES Retirement? Time for a change? There are countless reasons to sell your IFA business, just as there are countless reasons to get hold of one.
W E A RE A SPECIA LIST F I NANC IAL S A L E S , CO N S U LTA N CY A N D BR O KE R AGE BUS I N ES S . Gunner & Co.’s mission is to work directly with you, whether you are looking to realise the capital in your business, or you are looking for growth through a merger or acquisition. We consider every business to be unique, and therefore finding the right solution for you starts with a thorough understanding of your business operations and your wish list. Only from here can we make valuable introductions which align to both party’s needs. If you would like to discuss options to sell, exit or retire, or acquire IFA businesses, please get in touch for a confidential discussion.
louise.jeffreys@gunnerandco.com
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October 2019
ROBOTICS
ROBOTICS – THE INVESTMENT CASE IFA Magazine talks to John Gladwyn CFA, Senior Investment Manager, Pictet-Robotics fund, about the significant opportunities for growth which the robotics, automation and AI sectors present for investors
We invest in companies benefiting from the rise of robotics, automation and AI, including the entire value chain of these markets. We build our portfolio as a result of bottom-up fundamental research, investing where we see the greatest potential for returns. We aim to benefit from the secular trends that underpin the growth of robotics as a whole, such as Moore’s Law (and the slowing of Moore’s Law), the growth of the cloud computing, edge computing, autonomous driving, electric vehicles, precision medicine. We believe that companies which take advantage of these trends and execute well will continue to deliver attractive returns over the medium term. WHICH INDUSTRIES INVEST MOST IN ROBOTS? Industries that need precision, repeatability and cost efficiency in production have all heavily invested in robotics/automation. Automotive, industrial, semiconductors and information technology are all large end markets for our companies. Med-tech is another sector that is rapidly adopting robotics, for instance in robotassisted surgery, diagnostics and precision medicine.
WHEN DID ROBOTICS BECOME MAINSTREAM? The modern robotics market began in the auto sector in the 1960s. Since then it has been on a long-term growth path. While parts of the industrial robotics market are more mature today, robotics as a whole is far from mainstream. Cobots (collaborative robots) are a good example of a market with great long-term potential that is just beginning to enter the mainstream. Cobots are smaller, cheaper, easier to control and program and work side-by-side with humans. Cobot functionality is rapidly advancing and will further improve as they are equipped with new technologies such as 3D machine vision. Other large markets such as autonomous driving are even earlier in their potential adoption curve. Worldwide annual supply of industrial robots (2008-2020E) 600 500 000 of units
WHAT ARE THE KEY DRIVERS FOR ROBOTICS AS AN INVESTMENT THEME?
400 300 200 100 0
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017E 2018E 2019E 2020E
Source: IFR, 2017
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HOW HAS THE SUPPLY OF INDUSTRIAL ROBOTS GROWN OVER THE LAST 10 YEARS?
HOW DO YOU INCORPORATE ESG IN YOUR INVESTMENT PROCESS?
The best data on this comes from a company called IFR. They believe that industrial robot shipments have grown at a compound rate of c. 13% since 2007. Perhaps more importantly they continue to have a positive outlook for the coming years.
We use a combination of custom work and off-the-shelf tools to integrate ESG into our investments. We have a hard limit excluding companies from our portfolio which have material exposure to offensive military activities. We proactively engage with the management of companies that we invest in on important corporate/ESG issues. We also use third-party screens for Governance and ESG factors.
IN WHICH COUNTRIES DO WE CURRENTLY SEE THE HIGHEST ROBOT DENSITY AND WHY? DO YOU EXPECT THIS TO CHANGE? Take the automobile market as an example. Industrial robot density is c. 4x higher at Korean auto manufacturers than Chinese OEMs, and almost 2x higher than German OEMs. These differences are even more stark outside the auto sector. This makes us optimistic- we see a long runway for growth based on the high robot density in an advanced economy like Korea. Anecdotally we see other signals for the potential growth of robotics & automation. We invest in some companies with an extremely high level of automation (90% or greater) at their production plants. They are quite close to achieving a fully-automated ‘lights out’ factory. Where these companies lead, we think others will follow.
CAN YOU EXPLAIN IN ONE SENTENCE WHY PEOPLE SHOULD INVEST IN ROBOTICS? Robotics, automation & AI are rapidly gaining in potential, as a result of secular technology and societal trends; we aim to use bottom up, fundamental analysis to take advantage of these long-term trends and deliver the growth of robotics as a theme to our investors.
ARE ROBOTS A THREAT TO PEOPLE, E.G. TAKING OVER THEIR WORK/JOBS? It is hard to know the answer to this question- there are different views from experts in Robotics/ Technology/ AI. We certainly think that robotic & automation technologies will continue with their rapid gains in capability and will therefore continue to displace jobs. This is the continuation of a very long-term trend towards automating routine work. However, as technologies like AI are advancing so quickly, we think that the level of job displacement in the coming years may be material. As a society we need to put in place structures to support people and help them retrain into areas of the economy where their skills are most needed.
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About John Gladwyn, CFA John is Senior Investment Manager, Pictet-Robotics fund. He joined Pictet Asset Management in August 2017 to co-manage the Pictet Robotics Fund. Before joining Pictet Asset Management John worked at Polar Capital on the specialist Technology investment team. Prior to joining Polar, John worked on a Global Equity investment team at Blackrock, which he joined in 2008. John completed his BA at Oxford University and has a Masters in Finance (Distinction) from London Business School. He is a CFA Charterholder.
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Keeping expertise at the core of your business Our Adviser Support Programme gives you our best in technical and business development support, so your clients can always benefit from your professional expertise. Visit our Knowledge and Literature hub for tools and resources pruadviser.co.uk/knowledge-literature This is just for UK advisers – it’s not for use with clients.
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BETTE DERFAQTO BUSI N ESS
October 2019
THE KEY PRINCIPLES OF MULTI-ASSET INVESTING With all the uncertainty facing today’s investors, the rising popularity of multi-asset funds looks set to continue. But how can advisers and paraplanners compare and contrast the different multi-asset fund approaches? Patrick Norwood, Insight Consultant at Defaqto, summarises the key principles involved
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ulti-asset funds, as their name suggests, contain investments across several different asset classes - equities, bonds, cash, real estate and possibly other ‘alternative’ asset classes - with the fund manager deciding on the proportion and type of investment going into each. At one end of the spectrum, those multi-asset funds investing mainly in equities, in particular with a significant Emerging Market component, would be expected to deliver higher returns over the medium to long term but also to come with greater volatility (risk). At the other end of the spectrum, multi-asset funds containing mostly bonds and cash should be less risky but will probably give less return in the long run. The latter would likely be more suitable for investors in or close to retirement and/or those uncomfortable taking risk. While the former will probably be used for clients with a long time to retirement and able to tolerate higher volatility in order to achieve greater returns. At Defaqto we believe the multi-asset universe can be divided along four different lines: 1. Multi-manager verses direct investing
1. MULTI-MANAGER VERSES DIRECT INVESTING Some managers of multi-asset funds will invest in other funds specialising in the relevant asset class - known as multi-manager - while others invest directly in securities themselves. The rationale for multi-manager investing is that no one manager can be the best across every single asset class and instead, one should seek out a specialist manager for each different area. The disadvantage of this approach is that by employing other managers, an extra layer of fees will be introduced, making multi-managers more expensive on average.
The rationale for multi-manager investing is that no one manager can be the best across ever y single asset class and instead, one should seek out a specialist manager for each different area
2. Risk-targeted or return-focused funds 3. Active or passive investing or a combination of the two 4. Using just ‘traditional’ asset classes or using traditional and alternative asset classes
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Multi-manager funds can be either fettered or unfettered. In the case of fettered, the multi-manager can only select funds from elsewhere within their organisation. The
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advantages of this approach are, firstly, costs will usually be lower, helping to mitigate the above disadvantage of higher fees, and secondly the multi-manager will have constant and more detailed access to the underlying managers often they will be sitting just a few desks away from each other! Also, fewer managers to concentrate on allows for greater focus. With the unfettered approach, the manager can select funds they believe to be the best from any organisation. The big advantage here is that the opportunity set is much larger, not only in terms of funds but also investment styles and strategies, with the result that the manager should be able to achieve greater diversification and therefore lower volatility for the same level of return (or greater return for the same level of volatility). Defaqto, together with much of the fund management industry generally, do not believe that one approach is better than the other. In fact, we’ve seen many recently launched ranges offering a combination of the two - fettered funds for some asset classes where the organisation believes they have strong expertise in-house - and unfettered for others. 2. RISK-TARGETED OR RETURNFOCUSED FUNDS Some multi-asset funds will directly target the volatility of the fund, usually aiming to keep it within pre-defined bands, with return being the secondary consideration. Others, meanwhile, will aim to achieve a certain amount of return, although they will usually still be bound by risk in some way e.g. through the Investment Association (IA) sector they sit in. In the case of those targeting risk, this will be achieved mainly through varying the asset allocation; for example, if the fund’s risk level becomes too
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high then the equity proportion will be decreased and the amount in bonds and cash increased. Risk can also be varied by changing the weights of the underlying funds, where applicable - putting more in ‘core’ funds (those that are highly diversified and following mainstream indices) and less in ‘satellite’ funds (funds with less holdings, higher performance targets and possibly more specialist in nature) in order to reduce risk. 3. ACTIVE OR PASSIVE INVESTING OR A COMBINATION OF THE TWO The investment method of multi-asset funds may be active, passive or a combination of the two. With active
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BETTE DERFAQTO BUSI N ESS management, there is the chance to outperform the respective index, but also the risk of underperforming it. Passive funds, meanwhile, simply track the index and will normally be much less expensive. It is often the case that the multi-asset manager will use active investments for the asset classes where the market is believed to be less efficient and researched, such as Emerging Market equities and high yield bonds, but passive investments where the market is seen as very efficient e.g. US equities and sovereign bonds. In terms of overall asset allocation, however, the management method will be active i.e. the multi-asset manager must still make an ‘active’ decision when allocating between the different asset classes.
October 2019
4. USING JUST ‘TRADITIONAL’ ASSET CLASSES OR USING TRADITIONAL AND ALTERNATIVE ASSET CLASSES Multi-asset funds may invest in just ‘traditional’ asset classes (equities, bonds and cash) or traditional and ‘alternative’ assets (such as private equity, hedge funds, commodities and infrastructure). The latter type offer greater potential for higher returns and diversification; however, they can also be more risky and expensive and less transparent. In conclusion, multi-asset funds take the asset-allocation and fund/security selection decisions from the adviser, leaving the latter with the task of selecting the ‘right’ fund for the client. However, there are many different types of multi-asset fund on the market. As seen above, the various ways they can be constructed have For investment professionals only different advantages and disadvantages and the final choice will often depend on the adviser’s and client’s preferences, investment beliefs and tolerance of risk.
No o such thing as
rrage.
About Patrick Norwood Patrick joined Defaqto in May 2013. His key responsibilities include producing, reviewing and developing Defaqto’s Diamond Ratings and Risk Mappings for funds, writing publications and commentary on key issues within the fund management sector and working on bespoke case studies and consultancy projects. Patrick also represents Defaqto at industry forums and events. Patrick has over 20 years’ experience in researching and selecting funds and fund managers, across multiple asset classes, and is a Chartered Financial Analyst.
annual and semi-annual reports, free of charge on request by calling 0800 368 1732. Issued by Financial Administration Services Limited, trademarks of FIL Limited. UKM08819/24711/SSO/0220
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October 2019
U N ITY M UTUAL
THE MODERN
WORLD
In today’s changing world, the traditional appeal of a mutual society remains a powerful force. IFA Magazine talks to Julie Hansen of Unity Mutual about working with advisers and why as the “modern mutual” the business is ideally placed to support advisers’ needs
IFAM: The Unity Mutual brand is now over a year old but it may not be one that is entirely familiar to financial advisers and paraplanners. Can you give us some background to the organisation? JH: Unity Mutual is the trading name of the Financial Services division of The Oddfellows, a Society that has over 200 years of experience, assets of £500 million and a high solvency ratio. Being owned by its members, for its members, the Society has a fantastic proposition for its member base, aiming to improve the quality of people’s lives through friendship, care and charitable support. Unity Mutual is positioned as the ‘modern mutual’, offering a wide range of family-friendly financial products. We feel that our product range will appeal to those clients wanting sound investments to safeguard theirs and their families futures, with market leading interest rates* and all the benefits of working with a truly modern mutual. IFAM: How do you see Unity Mutual’s roots as a not-for-profit friendly society underpinning its relevance today to meet clients’ needs? JH: Being part of the Society offers our customers and the advisers who deal with us the peace of mind from knowing that we’ve been in existence for a long time and have successfully navigated our way through the changing
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landscape of the financial services industry. We are financially strong, having also made four acquisitions over the last twelve years. Our financial strength is displayed in our products and the peace of mind that we offer to the customer. As a mutual, there are no shareholders to consider, we are owned by our members for the benefit of the members. IFAM: As well as being a mutual, what other aspects of your business make you different from other financial services product providers? JH: We are big enough to offer the appropriate financial security to customers and yet small enough to offer a bespoke service to advisers. We welcome working with IFAs and listening to their feedback, particularly around any gaps in the market that we have the ability and flexibility to address. IFAM: Do you believe that your underlying principles and values are important in developing trusting and long term client relationships? JH: I’m sure that as they hear more from us, advisers will learn that we have already been successful for a very long time. We remain very true to our values and have no plans to change. We feel that working with IFAs is key to
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our future growth strategy and we strive to give them the confidence in our products and services. We would ask that if paraplanners and advisers see a product of ours which meets their particular client’s needs – please keep us in mind and give us a try. We are certain that we will also deliver that same great service to them that we currently offer to our customers directly. IFAM: Can you give us a brief summary of your range of products – in particular those which you believe are of most interest and relevance to financial advisers and their clients? JH: At Unity Mutual, we believe that the ‘family friendly finance’ phrase is extremely important and as such, we offer savings for the whole family. We’re one of a few providers that offer the Lifetime ISA and ours has the market-leading interest rate* of 1.5% in addition to the Government bonus! The unique LISA that we offer protects the client’s capital investment and we guarantee the interest rate on a tax-year basis unlike cash providers who can change the rate with only 30 days’ notice. This gives the investor peace of mind. We also offer a Guaranteed Investment Bond that offers a compound growth rate of 11.76% over a five year period, so if IFAs have clients who have money to put away for this length of time and for whose risk tolerance it is in line then this is a great option for them. Investors have access to their money at any time **for any reason at all. Again, the capital is protected and the return is guaranteed plus there are the FSCS guarantees. Our Stocks and Shares Junior ISA is perfect if clients are looking to save for their child, grandchild, niece or nephew. Savings start from as little as £10 per month. We remain true to our Friendly Society roots by offering traditional ten year tax-exempt savings policies (as to where customers can invest £25 per month or £270 per year tax free) IFAM: How impor tant is it for you to develop intermediary relationships and work with independent advisers and what resources and communications channels are available for them to get the information they need?
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JH: We always strive to make the experience of dealing with us easy and enjoyable for all our customers - and advisers are no exception. Working with advisers is always a pleasure for us and developing those relationships is extremely important for our business. We hope the range of investment products along with the guarantees we give, will be a very appealing proposition for the IFA community and their clients. Having worked together previously, Dean Brandreth re-joined me here at Unity Mutual at the beginning of the year to further our Business Development function. Dean has enjoyed some great partnerships with advisers over the years and I know that he is looking forward to reconnecting with advisers and developing new partnerships. IFA Magazine readers can contact him by email dean. brandreth@unitymutual.co.uk and he is more than happy to help with any questions or queries. Last but not least, our team are always on hand to help and is available by email, phone or face-to-face appointments can be arranged if that’s the adviser’s preference. If an adviser has any particular query about the products, the suitability of them for their clients or just fancy a chat with the team, we want to make this as easy as possible for them and look forward to working with them in years to come. The team can be contacted on 01612144652. About Julie Hansen Julie is Director of Distribution at Unity Mutual and has over 20 years of experience in Financial Services including building sales teams, developing products and new distribution channels. She joined Unity Mutual 12 months ago to open up new distribution channels and expand the product range. Having started out as an adviser, she appreciates what a difficult but rewarding job it is that advisers have. She also understands advisers’ interest in market developments and unique products that they can offer their clients to meet their changing needs. julie.hansen@unitymutual.co.uk
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October 2019
PARAPLAN N I NG I N PRACTICE
PARAPLANNING IN PRACTICE
Increasingly, paraplanning is being seen by large numbers of professionals across the UK as a career choice in its own right. Given its growing importance within the financial planning profession, we’re delighted to bring you the second in our three part series of articles where we talk to paraplanners from the PFS Paraplanner Panel about what paraplanning means to them and why they have chosen this dynamic and challenging career path
1. ALAN GOW - ARGONAUT PARAPLANNING
job that paid more than £4 an hour (this was 1998!) The biggest employer in Reading at the time was Prudential. I took an admin role in the complaints department there, progressed to being a case reviewer, and then moved to a company that did the same thing on an outsourced basis for big banks and insurance companies. Most of my colleagues were contractors, who spent the week away from home, working wherever they were needed. A few of us were employed staff and when we were made redundant, I knew that contracting away from home wasn’t for me. THE LIGHTBULB MOMENT
Like a lot of people in the paraplanner community, I fell into paraplanning by accident. At school I’d enjoyed science and so, when I went to University, I didn’t think twice about taking a science course. But before I’d finished my degree, I’d realised I really wanted to work in an environment which was more fast-moving. After graduating I worked in shops for a while, before finally deciding to find a desk
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By this point in my career I’d realised that there were roles where my analytical mind-set and slightly pedantic nature were actually valued! I investigated paraplanning and underwriting as options, eventually taking a role as a paraplanner working for one adviser in a small firm. I felt like I’d finally found what I was ‘meant to be doing’, that paraplanning is a natural fit for how my brain works. I really enjoy reviewing a client’s details and working out how to help them live the lives they want, especially for people retiring after many years of work. I get a lot of job satisfaction from writing up a financial plan, explaining complex issues to people in a way they can understand and showing them how they can meet their goals.
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PARAPLAN N I NG I N PRACTICE
2. MARTIN GREEN - CHADNEY BULGIN CHARTERED FINANCIAL PLANNING Having joined the profession as a junior administrator, with the original aim of showcasing my skillset in software and technology, hoping for an opportunity to arise in the I.T department, I instead discovered a passion for financial services. My initial paraplanning experience didn’t arise until I started in a role as a pensions’ analyst. With my pure focus on pre and post retirement, pensions became an area of expertise, which has continued to serve me well for many years. Slowly increasing my knowledge and experience by working with financial planners and taking professional exams, I was able to combine my software skills with my knowledge of financial planning processes, thereby increasing my efficiency. Since joining Chadney Bulgin as their first paraplanner recruit, I have developed the role, making paraplanning an integral part of the business which has led to an immediate improvement in business levels, efficiency and client outcomes. THE BIGGER PICTURE – GETTING INVOLVED Having influenced Chadney Bulgin to see that the benefits of building a paraplanning department and function for the company would be the best way forward, I can honestly say it has been both an exciting and rewarding journey seeing the department grow and for paraplanning to be recognised as a core part of the business today. I have been fortunate in having been given great support and encouragement during my career to date. Having experienced this, nurturing others and giving back to the profession is a continuing aim of mine. It’s all about getting involved with the wider paraplanning community, encouraging others to share their ‘knowledge’
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and ‘best practice’. For me this has been enthralling and a real game changer was representing the PFS, helping them to provide support to their paraplanning members. It’s great to be part of this committee and striving to encourage a new age of paraplanners to fuel the growth and development of the financial planning profession.
The efficient integration of technology can free up valuable time for us to focus on the huge benefits which paraplanners bring to the whole financial planning process and to help us deliver even more effective client and business solutions
Paraplanning truly is a fulfilling role. Every day is different, whether helping others, creating spreadsheets/reports or discussing various solutions with financial planners for their clients. THE BIG CHALLENGES So what’s next? How do we take paraplanning to the next level? Looking ahead, my view is that technology will play an increasingly big part in enhancing the paraplanning role and its impact on business in future. This is not something which should be feared but embraced by financial planning professionals and businesses alike. The benefits it brings are considerable. The efficient integration of technology can free up valuable time for us to focus on the huge benefits which paraplanners bring to the whole financial planning process and to help us deliver even more effective client and business solutions.
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October 2019
RICHARD BRIAN TORA HARVEY
KNOWING ME,
KNOWING YOU? How worried should the financial advice profession be about the threat posed by technology and artificial intelligence? Richard Harvey takes the view that the human element of the planning process will see off the robots – for now at least
W
e all know that much of the research into investment funds is down to a sympatico relationship between you and your computer, and how much you’re prepared to spend on specialist software. You key in the client’s financial objectives, run it through any one of a bewildering array of online tools and bingo – there (apparently) is your answer. Package up the info into your shiny corporate folder, present it to the client, and off to the pub. Large ones all round! Simplistic, inaccurate and unfair? Of course (but it did get your attention), although what is not in doubt is the increasing facility of IT to support the job of an IFA. THERE IS NOTHING WE CAN DO? Or is there? With the inexorable advance of Artificial Intelligence, you have to ask yourself – when exactly will technology do me out of a job, and what happens to me after that? A cardboard box and a bottle of White Lightning cider under London Bridge?
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Jim Al-Khalili, the president of the British Science Association, has warned that AI is a greater concern than antibiotic resistance, climate change or terrorism for the future of Britain. Cripes, Bonzo - pass the tin hat!
Well, if that is your mindset, be comforted by the words of Roger Bootle, one of the nation’s leading economists, Daily Telegraph columnist, and formerly one of the Three Wise Men panel of independent advisers to the Chancellor. Giving an after-lunch speech to the Executives’ Association of Great Britain, Roger recounted some of the doom-laden predictions from those who believe the rapid advance of AI will make us slaves to robots, chucking us all on the scrapheap.
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RICHARD BRIAN TORA HARVEY
For instance, Jim Al-Khalili, the president of the British Science Association, has warned that AI is a greater concern than antibiotic resistance, climate change or terrorism for the future of Britain. Cripes, Bonzo - pass the tin hat! The gloomy professor added that the advance of AI was happening too quickly, without proper scrutiny or regulation, and that the government should act urgently (with Brexit on the agenda? Fat chance). Indeed, Roger – whose new book ‘The AI Economy’ is due out shortly – was pithy. He described the prediction as “bunk”. THE APPLIANCE OF SCIENCE Now given our natural tendency to give weight to the forecasts of scientists, and a less respectful view of economists, you might think we should listen to Jim rather than Roger. Personally speaking, I favour the latter rather than the former, not least because cheerful Roger wrote the widelyacclaimed book Making A Success of Brexit. Anything that alleviates the national mood of impending Euro-disaster is OK by me. For instance, he persuasively argued there is a whole range of activities that robots cannot do and, in any event, reaching AI’s potential is an awful long way into the future. And while it will undoubtedly impact education, productivity, inflation and the distribution of wealth and power, it will also mean the inevitable dawning of the four day week, and who’s going to complain about that? HUMAN TOUCH However, it seems to me there is one simple and bleedin’ obvious reason why AI will never supplant an IFA. Is a robot going to visit people’s homes and compliment them on their splendid summer garden? Compare golf handicaps? Or meet up over a
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leisurely lunch, and debate the relative merits of the wine which is lubricating the conviviality? This is all rather tongue in cheek of course, but the sentiment is true. The strong personal relationship which clients build with their financial advisers is built on trust as a result of the detailed financial planning process the professional adviser will undertake. It is this planning which takes clients from a place full of uncertainty and doubt to having real clarity about their life goals, priorities and the peace of mind that comes with knowing that their finances have been properly organised in order to help them meet those goals in life. Robo-advice? Sorry chaps, you simply can’t compete with that. On the other hand, best not mention the golf scores. If a robot called Deep Blue can beat world chess champion Gary Kasparov, how long can it be before a four-foot plastic chap with aerials sticking out of its head is programmed to beat Tiger Woods?
CAREER OPPORTUNITIES Position: Paraplanner Job Ref: 54310 Location: CHATHAM Salary: £40,000-£55,000 per annum A superb opportunity for an experienced and Technical Paraplanner to join a bespoke Wealth Management firm based in North Kent. The firm provides a holistic, independent and personal approach boasting several awards.
The opportunity: During a period of key expansion, our client is looking for a paraplanner to support the on-going success of the successful financial planners of the business. You will be required to write high quality suitability reports, providing a bespoke and holistic Wealth Management service, provider liaison and conduct research whilst being supported by Junior Paraplanners and Administrators.
What’s needed for me to be considered? • • • • • •
Level 4 Diploma in financial planning, Chartered desirable Previous experience working within a fast-paced IFA The ability to produce professional and technical reports. Prioritise own workload and the workload of the wider Paraplanning team. High level of Investment and Pension knowledge Self-driven, results-orientated with a positive outlook.
Position: Financial Planner Job Ref: 55013 Location: DERBY Salary: £40,000-£60,000 per annum A leading national financial services firm who offer full holistic financial planning to their wide client base are looking for an experienced financial planner to join their team, to operate in the Derby region. They have a strong financial well-being. You will be expected to provide a top-class service and grow and develop a loyal client base that you can provide a diverse and tailored service to. There will be leads provided and you will also be given full paraplanning and administrative support and work for a well-known, growing firm, with offices nationally.
Duties include: • • •
Carry out a comprehensive fact-find, gain a full understanding of the aspirations, needs and investment objectives of the individual. Produce a comprehensive Investment and pension planning service Full financial planning duties, as would be expected from any high level financial planning position.
Skills • • • •
Understand and explain in non-jargon fashion the merits and detractions of all investment types Explain effectively the benefits of discretionary portfolio management against other investment options available Good knowledge of personal taxation in particular, income tax, capital gains tax and inheritance tax Understand and assess suitability of available pension income options including annuities, phased retirement and income drawdown
Qualifications: • • •
Competent Adviser Status SPS held including specialism in Packaged Products JO5, AF3 or G60 would be advantageous
Position: Paraplanner Job Ref: 54569 Location: LEAMINGTON SPA Salary: £30,000-£35,000 per annum A brand-new opportunity has arisen for an enthusiastic and experienced paraplanner to join a thriving, friendly and growing financial planning practice.
The opportunity: The role will involve working closely with the existing team to support the company directors and advisers in looking after a portfolio of clients. The successful candidate will be provided with a broad exposure to financial planning matters, a competitive salary and good benefits package that includes free parking and exam support.
What’s needed for me to be considered? • • • •
Experience as a Paraplanner within an IFA firm is essential Good knowledge of writing suitability reports A broad base of compliance knowledge Level 4 Diploma qualification desirable but not essential
What’s next? If you are interested in any of the above opportunities, please contact us directly. If suitable, one of our specialist consultants will be in contact with you to discuss the opportunity in detail prior to submitting your Curriculum Vitae to the client. During this discussion, we will aim to identify your specific skills and motivations and, where appropriate, can also recommend other relevant opportunities to you that match your requirements.
And finally… If these specific vacancies are not exactly what you are looking for, please contact us to discuss other opportunities we may be recruiting for that aren’t necessarily advertised.
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