Trustnet Magazine

TRUSTNET magazine Issue 5 / March 2015

LET BATTLE COMMENCE Experts clash on the fund vs trust debate

To buy or not to buy?

A new world order

Time to take stock

Experts on Woodford’s new trust

The global trusts that add real value

The merits and pitfalls of holding cash

TRUSTNET magazine Issue 5 / March 2015

LET BATTLE COMMENCE

EDITOR’S LETTER

Experts clash on the fund vs trust debate

T

To buy or not to buy?

A new world order

Time to take stock

Experts on Woodford’s new trust

The global trusts that add real value

The merits and pitfalls of holding cash

ISSUE 5

CREDITS TRUSTNET MAGAZINE (FORMERLY INVESTAZINE) IS PUBLISHED BY THE TEAM BEHIND FE TRUSTNET IN SOHO, LONDON. WEBSITE: WWW.TRUSTNET.COM EMAIL: EDITORIAL@FINANCIALEXPRESS.NET

CONTACTS: General Josh Ausden, Head of FE Trustnet Content T: 0207 534 7661 Art Direction & Design Javier Otero W: www.feedingcrows.co.uk Editorial Gary Jackson News editor (FE Trustnet) T: 0207 534 7680 Alex Paget Senior reporter T: 0207 0207 534 7697 Daniel Lanyon Reporter T: 0207 534 7640 Sales Richard Fletcher Head of publishing sales T: 0207 0207 534 7662 Richard Casemore Account manager T: 0207 534 7669 Jack Elia Account manager T: 0207 534 7698 Photos supplied by Thinkstock and Photoshot Cover Illustration: Javier Otero

here are a handful of investment topics that impassion even the most level-headed experts.

The active versus passive debate is certainly the highest profile – I’ve seen fund managers responsible for many billions of pounds almost lose their cool on behalf of their camp.

The investment trust versus fund debate is a little more niche, but advocates are equally committed to their cause. Some investors are attracted by the simplicity of open-ended funds, whereas others embrace the extra money that can be made through gearing and discount volatility of trusts.

I can see the points made by both sides, but historically tight discounts and the issue of charges have pushed me slightly towards open-ended funds for the time being. I hate having to pay up to £12 in broker fees every time I want to make a trade, and the introduction of clean share classes has closed the costs gap – in many cases, open-ended funds are now the cheaper option.

I am by no means anti-investment trusts however, and hold a couple in my ISA. Investors can always have a preference, but stubbornly defending one over the other can do more harm than good – as Rob Gleeson and Annabel Brodie-Smith both acknowledge in their duel on pages 8-10.

By ignoring trusts, for example, you deny yourself access to some of the best global equity managers on the planet. Neither Murray International’s Bruce Stout nor Scottish Mortgage’s James Anderson run open-ended funds. Both trusts are profiled in this edition. Likewise, there’s a much smaller pool of multi-asset options to choose from if you steer clear of open-ended funds.

Anyway, enough sitting on the fence. Without debate and disagreement there wouldn’t be a stockmarket in the first place, so flip to page 8 and make up your own mind.

What side are you on?

Josh Ausden.

Head of FE Trustnet Content

In association with:

IN THIS ISSUE A NEW WORLD ORDER Cherry Reynard looks at how global investment trusts have grown up in recent years.

P. 16-21

ALIBABA AND CHINESE LESSONS

James Anderson highlights a great company for anyone willing to look further afield than the FTSE 100.

P. 22-23

GLOBAL REAL ESTATE

Tom Walker and Hugo Machin ask if the sector can provide a buttress against rising interest rates.

P. 22-23

FAT CATS OR TOP DOGS? It is no secret that fund managers are paid handsomely, but do they deserve it?

P. 26-28

CAPTURING HEARTS AND MINDS

16

A NEW WORLD ORDER

HAVE A LITTLE PATIENCE

Adam Lewis asks what investors can expect from star manager Neil Woodford’s new investment trust.

P. 2-3

Keith Ashworth-Lord likens investing in brands that customers can’t do without to “legal drug dealing”.

P. 30

WHAT I BOUGHT LAST This month, BRI Wealth Management’s Dan BoardmanWeston reveals why he has bought Matthew Dobbs’ Schroder Asia Pacific investment trust.

P. 32

WHY YOU NEED TO TAKE STOCK The perception of cash ISAs as low-risk products doesn’t take into account the effect of inflation.

P. 5-6

LET BATTLE COMMENCE Annabel Brodie-Smith and Rob Gleeson fight it out over whether funds or investment trusts are the better product.

P. 8-11

IN FOCUS M&G Episode Income, R&M UK Micro Cap Investment Trust and Scottish Mortgage are all under the spotlight this week.

P. 12-15

22

ALIBABA AND CHINESE LESSONS

MONEY

HAVE A LITTLE PATIENCE

Adam Lewis asks the experts what investors can expect from star manager Neil Woodford’s new investment trust

H

ot on the heels of his UK Equity Income fund, which took in a record £1.6bn at launch in June 2014, Neil Woodford is targeting £200m through an IPO for his second vehicle, the Patient Capital Trust.

Woodford has opted to go down the closed-ended path this time.

Don’t be confused by the ‘Patient’ bit though – this is not a healthcare fund. This is all about adopting patience with investments.

Unlike his equity income fund, the Patient Capital Trust is looking to invest in, and help drive, small quoted and unquoted innovative UK companies. Holding between 50 and 100 stocks, three-quarters of the portfolio will consist of early-stage companies with the 2

remainder in mature dividendpaying stocks whose distributions will fund the trust’s expenses.

These larger companies will mirror positions in Woodford’s UK Equity Income fund, so there will be crossover between the two.

That’s where the similarities end however.

Given Woodford’s reputation it is little wonder the trust has attracted a lot of attention. Investment platforms have been queueing up to promote the trust, and a number of industry professionals are planning on putting their own money in. However, the question remains, is this a vehicle private investors should be considering and when, if at all, is the best time to get invested?

CLUE’S IN THE NAME

Hargreaves Lansdown’s head of research Mark Dampier says the key is in the fund’s name: patience.

Given its closed-ended structure and the type of companies it will hold – university research spin-outs, biotech, disruptive technology and so on – this is only a trust for those willing to invest with a 10 year or more time horizon, he says.

“It is not suitable for those approaching retirement, but given Neil’s aim of nurturing the companies he invests it suits those thinking much longer term,” Dampier said.

“Indeed it could be a perfect addition to a Junior ISA” With the trust focusing on small and unquoted companies it has trustnet.com

INVESTMENT TRUSTS

“I CAN SEE WHY SOME HAVE SUGGESTED IT TO BE A GIMMICK, BUT THIS IS MORE OF A CASE OF RIGHT TIME, RIGHT VEHICLE”

drawn obvious comparisons with a VCT – minus the 30 per cent income tax relief. However Charles Stanley Direct’s head of investment research Ben Yearsley says the two are very different vehicles.

“This is nothing like a VCT,” he said. “It has no constraints on where it invests and has much greater overall flexibility. The only fund out there like it is the Artemis Alpha investment trust run by Adrian Paterson and John Dodd. It also invests in unquoted companies and is long-term in its thinking.”

The worry, however, is that the fund attracts an audience who wont be so long-term in their thinking.

UNQUOTED

“The danger is that people buy this fund expecting the same performance as the equity income fund, however this is a very different vehicle,” Yearsley said.

“Because the valuations of unquoted companies do not move in the short term there might be many investors who in six months time might be disappointed by performance and wonder why so much of the fund is sitting in cash.”

He expects the fund to move onto a premium at launch, but thinks

Neil Woodford trustnet.com

it could fall back onto a discount sixto-12 months down the line as some investors head to the exit door.

As headline grabbing as the announcement of the fund’s launch has been the focus on its fee structure.

Foregoing an annual management charge, the trust will instead levy a performance fee of 15 per cent over an annual hurdle of 10 per cent per year. Some have labeled this a gimmick while others have praised it.

Liontrust’s head of multi asset John Husselbee is in the latter camp.

“I can see why some have suggested it to be a gimmick, but this is more of a case of right time, right vehicle,” Husselbee said.

FEES

“Gimmick suggests that they need a teaser to pull investors in and this is not the case here. You are investing in Neil and his team’s ability to pick unlisted stocks, with the plan for them to become listed and make you money as a result.”

As such, he does not see this fee structure setting the standard for all investment trust launches to follow.

So if investors do want access should they be rushing in from the start or waiting for things to calm down?

For those who get in on day one, Husselbee says they will have to accept the fund will not be fully invested so it will take a while to see meaningful returns.

Waiting until after the initial launch period and buying something that is more fully invested and may have moved to a discount could be a better idea, he suggests.

Star fund managers turning their hand to running an investment trust is nothing new. The key is that private investors see through what Woodford has done in the past and look at this as a genuine long-term vehicle – the ultimate, buy, put away and forget investment. Whether they will is another story. 3

Deep experience in investment trusts Schroders launched its first investment trust in 1924 and our current range offers nine distinctive strategies. These target growth and income opportunities across UK equities, Japanese equities, Pan-Asian equities and property.

The funds are managed by Rosemary Banyard, Andy Brough, Matthew Dobbs, King Fuei Lee, Hugo Machin, Philip Matthews, Nick Montgomery, Sue Noffke, Robin Parbrook, Andrew Rose and Tom Walker. With an average of 23 years of industry experience, they are among our most experienced fund managers.

Please remember, the value of investments and the income from them may go down as well as up and investors may not get back the amount originally invested. Some trusts invest solely in the companies of, or in property located in, one country or region. This can carry more risk than investments spread over a number of countries or regions. Investors in the emerging markets and the Far East should be aware that this involves a high degree of risk and should be seen as long term in nature.

Less developed markets are generally less well regulated than the UK, they may be less liquid and may have less reliable arrangements for trading and settlement of the underlying holdings. Investors should note that exchange rates may cause the value of investments denominated in currencies other than sterling, and the income from them, to rise or fall.

Explore the depths of this talent at schroders.co.uk/its

Fund manager industry experience: Rosemary Banyard: 35 years, Andy Brough: 27 years, Matthew Dobbs: 33 years, King Fuei Lee: 15 years, Hugo Machin: 15 years, Philip Matthews: 16 years, Nick Montgomery: 17 years, Sue Noffke: 25 years, Robin Parbrook: 24 years, Andrew Rose: 33 years, Tom Walker: 15 years. The most up to date key features can be viewed on the UK Investor website via www.schroders.co.uk/investor.

Issued in February 2015 by Schroder Unit Trusts Limited, 31 Gresham Street, London EC2V 7QA. Registered No: 4191730 England. Authorised and regulated by the Financial Conduct Authority. UK08975

MONEY

ISAs

Cash ISA’s are still by far the most popular savings vehicle with private investors, but with interest rates so low and due to the eroding effect of inflation, Holly Thomas explains why it is increasingly important that savers take more risk within their tax wrappers

I

SAs are a simple tax give away from the Government that shouldn’t be ignored.

They offer tax free returns and are very flexible. Even more so as of last July when the rules changed allowing savers to put all the £15,000 (£15,240 from April 2015) in a cash ISA. As before, you can still opt to invest the whole lot in a stocks and shares ISA.

Official figures show cash ISAs are still far more popular with savers. Around 13.5 million ISA accounts were subscribed to in 2013-14, according to HM Revenue & Customs. The number of cash ISAs subscribed to fell by 1.2 million to just over 10 million, while the number subscribing to stocks and shares ISAs increased to 3 million.

While strong equity performance in 2013 is likely to have encouraged some savers to choose stocks and shares over cash, there is still a clear bias towards cash. Over three quarters, 78 per cent, of subscriptions were to cash ISAs. With the tax year drawing to a close, here’s what you need to know when choosing how to spend your ISA allowance: 5

ISAs

CASH ISAs

People who hold their money in cash are typically those too cautious to entertain risking their money in the stock market, or those who might want to draw on it in the near future.

A cash ISA is a straightforward account which pays a – tax-free – interest rate and is usually held in a bank or building society. There are many types of cash ISA to choose from, including an easy access account or for a better rate, a fixed rate account which means locking your money away for a set period.

There are also notice accounts, of say, 90 days.

Experts say because interest rates are expected to rise in the next two years, savers would be best placed looking for flexible and short dated fixed term cash ISA bonds – one or two years to remain able to benefit from interest rate rises.

One of the selling points of an ISA is the freedom to move the account around between providers. Banks and building societies compete with new accounts and better rates to get to the top of the best buy tables, especially around the new tax year.

If you have been saving in a cash ISA for a few years, you will want to stay on top of the rate you’re being paid as they do change, sometimes without you realising.

The top rates paid today on an easy access account are by the Post Office and National Savings & Investments at 1.5% and for a one-year fixed rate Julian Hodge Bank and Shawbrook Bank are paying 1.65%.

Some stocks and shares ISA providers may allow you to hold cash tax-free within your investment wrapper. But you’re free to open separate accounts, if you prefer.

IS CASH KING?

While cash ISAs are the most popular, they do not offer the best chance of decent returns.

Ignoring equities for long term savings could be a mistake as savers are risking serous erosion of its value because of the effects of inflation.

With rates at ultra low levels - the Bank of England base rate has been rooted at 0.5 per cent since March 2009 - cash savings are losing value.

6

WHILE CASH ISAS ARE THE MOST POPULAR, THEY DO NOT OFFER THE BEST CHANCE OF DECENT RETURNS Indeed, the real value of cash in 2014 after inflation was -1.2 per cent according to the Barclays Equity Gilt Study 2015. It said that over 10 years cash has lost 0.7 per cent each year on average while shares have returned 4.1 per cent.

If you plan to save for five yearsplus, experts are unanimous that you should at least place a portion of your money in the stock market.

STOCKS AND SHARES

You can set up a regular ISA saving plan from as little as £25 a month, so even if you have a relatively small amount to save there are options.

By saving a monthly amount, or drip-feeding, into your equity ISA portfolio you can smooth out the highs and lows in share prices.

When they go up, the value of your stocks rise. When they go down your next contribution buys more.

Buying stocks at a lower price means you get a higher return when the market swings back up. This is

known as “pound-cost averaging”.

While cash ISAs are completely tax-free, equity ISAs do attract some tax charges.

If you have investments outside an ISA, any share dividends you receive are liable for tax. Dividends from equity income funds suffer a flat rate of 10 per cent tax at source no matter what earnings band you fall into, even within ISAs, but there is no further tax to pay.

Choosing the right funds to invest in is crucial. Fund supermarkets publish their own recommended lists of funds to help you build a balanced portfolio that uses a mix of investments across different sectors, asset classes, and regions.

MIX ‘N’ MATCH ISAs

You might want to split the allowance between cash and stocks and shares so that you have some accessible savings.

You can choose any split you feel comfortable with. The only rule is that, combined, your tax-free ISA savings in the 2014/15 tax year don’t exceed £15,000, or £15,240 for the following one.

Thanks to the flexibility of ISAs you can switch between cash and equities, but selling in and out of the market isn’t always wise so it’s a good idea to have a plan, and stick to it.

We strive to discover more.

Aberdeen’s Asian Investment Trusts ISA and Share Plan When you invest halfway around the world, it’s good to know someone is there aiming to locate what we believe to be the best investments for you.

At Aberdeen, we make a point of meeting every company in whose shares we might look to invest.

From Japan to Singapore, from China to Vietnam, we go wherever is required to get to know companies on-the-ground, face-to-face.

To steer your portfolio in the right direction, be with the fund manager who aims to discover more in Asia.

Please remember, the value of shares and the income from them can go down as well as up and you may get back less than the amount invested. Asian funds invest in emerging markets which may carry more risk than developed markets. No recommendation is made, positive or otherwise, regarding the ISA and Share Plan.

The value of tax benefits depends on individual circumstances and the favourable tax treatment for ISAs may not be maintained. We recommend you seek financial advice prior to making an investment decision.

Request a brochure: 0500 00 40 00 invtrusts.co.uk/asia

Issued by Aberdeen Asset Managers Limited, 10 Queen’s Terrace, Aberdeen AB10 1YG, which is authorised and regulated by the Financial Conduct Authority in the UK. Telephone calls may be recorded. aberdeen-asset.co.uk

Please quote A TNITM 02

MONEY

LET BATTLE COMMENCE Investment trusts and open-ended funds each have a number of advantages and disadvantages - but which is better? In the words of Harry Hill, there’s only one way to find out - fight! Anthony Luzio reports

8

trustnet.com

FUND VS TRUST

A

nnabel Brodie-Smith, director of communications at the AIC, is a long advocator of investment trusts; meanwhile, Rob Gleeson, head of FE Research, has a number of issues with the products and prefers funds.

The pair of them have decided to battle it out across a number of issues, arguing why their favoured product is the better option.

“THE WHOLE RAISON D’ETRE OF THE CLOSED-ENDED, LISTED INVESTMENT COMPANY STRUCTURE IS SHAREHOLDER INTERESTS”

DISCOUNTS

She points out discounts have less of an effect than they used to.

“The average discount is currently 4 per cent – close to a historical low. Over the long-term the differences in discounts tend to be smoothed out and we have seen less discount volatility in recent times as now around half of equityonly investment companies have introduced discount controls to put a floor to the level of discount.”

Brodie-Smith also says discounts/ premiums can be a useful way of gauging market sentiment for a particular investment company or sector.

Gleeson says his biggest problem with investment trusts is the movement in the discounts and premiums.

“The performance of the trust is not solely based on the performance of listed shares. Changes to the discount or premium can be the biggest driver of performance. The performance of the share is not perfectly linked to the performance of the fund manager like it is with an open-ended fund. Even if a fund manager does an excellent job and makes a 15 per cent return on his assets, there is no guarantee I will make 15 per cent on my investment.”

On the contrary, Brodie-Smith says discounts are one of the biggest advantages of investment trusts, as the savvy investor can use them to boost both total return and even income.

“Of course, when a discount narrows this will give a boost to an investment company’s performance and conversely when it widens it can be a drag. Many investors like to invest on a wide discount with the hope that it will narrow and boost their performance,” she explained.

“Also, when buying at a discount, dividends are paid on the total assets so you may be getting extra income.

The long-term performance record of an investment company speaks for itself.” trustnet.com

ALIGNMENT OF INTERESTS

Gleeson believes that the structure of trusts means that the aims of investors who buy in after the initial offer period has closed may be different to those of the manager.

“Once the initial offering phase is complete, the trust has the assets it wants and doesn’t have to worry about inflows,” he said.

“While this has previously been regarded as a positive, it also means that the interests of those running the trust are not always aligned with investors’. AUM are often factored into the remuneration of fund managers. In a closed-ended fund, once the initial offer period is over, the AUM are fixed. The manager is focused on the performance of the net assets, while investors

experience the performance of the share price. There is naturally a disconnect here.”

Brodie-Smith is puzzled how anyone can think shareholders’ interests are more closely aligned with those of managers in openfunds, saying: “The whole raison d’etre of the closed-ended, listed investment company structure is shareholder interests.”

She added: “With a fixed number of shares in issue, the focus is not about creating more assets under management for the fund management group’s bottom line, but on performance for shareholders.”

“And with an independent board of directors to represent shareholder interests and monitor the fund manager, investment companies offer shareholders an additional layer of scrutiny and oversight. This is demonstrated time and again, from policy changes through, in more extreme circumstances, fund management group changes.”

She also says the fact that managers do not have to sell stock to meet redemptions in volatile markets but can position the portfolio for recovery is enormously helpful and is one of the reasons why investment companies tend to bounce back well after a correction.

TRANSPARENCY

Gleeson is also put off by what he sees as trusts’ lack of transparency.

He says that in order to make an informed investment decision, he likes to get a clear picture of what the fund manager is doing with the money in their care: what they are investing in and why.

He adds that this information is easy to come by with open-ended funds: “With open-ended funds, even the smallest one will produce a factsheet, usually monthly, 9

FUND VS TRUST

that will give a breakdown of the regions and sectors it is invested in, a list of the top holdings in the portfolio and a brief explanation of what it is trying to do.”

“While this information is available for some trusts, there are many that fall short. Often all you will be able to find is a copy of the annual report, which is less conducive for effective analysis” Brodie-Smith admits that although there is room for improvement in the investment companies sector, she has come across few mainstream trusts that don’t publish a monthly factsheet, available on the AIC’s website - wwwtheaic.co.uk.

She adds: “More to the point, given the breadth of data available, updated daily on the likes of FE Trustnet, Morningstar and the AIC’s own website, there’s plenty of information available for scrutiny and to allow investors to make an informed decision.”

COMPLEXITY

Gleeson says that all of the points he has identified add to the complexity of investment trusts

10

“ASSETS LIKE INFRASTRUCTURE AND RENEWABLE ENERGY CAN OFFER A HIGHER LEVEL OF INCOME” and makes analysing them a more time-consuming activity.

“While I’m pretty confident I will be able to get my head around the fund managers’ strategy and their ability to carry it off, I need to add in loads of additional work on capital structures, credit quality, interest coverage, debt covenants, smoothing policy and share buybacks; plus market analysis and timing considerations to figure out how the share might react,” he said.

“This work multiplies significantly for split caps, which have multiple share-types available.”

Brodie-Smith refutes Gleeson’s claim that there is “loads of additional work” involved with investment trusts, saying the process is exactly the same for funds, aside from the need to analyse two additional factors – gearing and discounts/premiums.

She adds that the smoothing policy Gleeson highlights is one of the biggest advantages of investment trusts: “They can retain some of the income they receive each year so they can boost dividends in more difficult years. This is known as ‘dividend smoothing’ and has meant that some investment trusts have been able to raise their dividend each

year for decades (almost 50 years in some cases).”

“They have the flexibility to pay income out of capital (with shareholder approval), and they have the ability to invest in a wider range of investments that can generate a higher income.

Assets like infrastructure and renewable energy can offer a higher level of income and being illiquid are better suited to being held in an investment company.”

She also points out that splits make up just £6bn of assets of a £124bn sector – 5 per cent of the industry.

SOMETHING THEY CAN BOTH AGREE ON

Brodie Smith says it is important that investors have balanced portfolios containing both investment companies and openended funds.

Despite his preference for funds, Gleeson says he has nothing against trusts. “I have even just added one to my own personal portfolio – the Woodford Patient Capital Trust.”

trustnet.com

THE SCOTTISH AMERICAN INVESTMENT COMPANY

SAINTS’ CORE BELIEF IS THAT INCOME, GROWTH AND DEPENDABILITY MAKE A POWERFUL COMBINATION.

Time after time.

SAINTS (The Scottish American Investment Company P.L.C.) was founded way back in 1873 to invest in American railways but these days aims to deliver dividend growth ahead of any rise in inflation, mainly from a portfolio of global equities, though investments are also made in bonds and property. The Trust seeks out attractive, quality companies which offer long-term growth potential rather than merely providing a high yield. SAINTS pays out a regular dividend every quarter. It has successfully grown its dividend every year for more than 30 years – over the last 10 years SAINTS has increased its dividend by 75% compared to a 29% rise in the Consumer Price Index.*

Past performance is not a guide to future returns.

SAINTS is an investment trust managed by Baillie Gifford and is available through Baillie Gifford as a Share Plan and as an ISA. It is also available through a range of investment platforms.

Please remember that changing stock market conditions and currency exchange rates will affect the value of your investment in the fund and any income from it. You may not get back the amount invested.

Open an ISA to receive a £10 Amazon gift card††.

For an investment that aims to beat inflation over the medium to long term, call 0800 917 2112 or visit www.saints-it.com Baillie Gifford – long-term investment partners For a limited period and new eligible ISA clients only. Terms and Conditions and minimum investment amounts apply. *Source Baillie Gifford & Co, data as at 31 December 2014. Your call may be recorded for training or monitoring purposes. Baillie Gifford Savings Management Limited (BGSM) is the manager of the Baillie Gifford Investment Trust Share Plan and the Investment Trust ISA. BGSM is an affiliate of Baillie Gifford & Co Limited, which is the manager and secretary of The Scottish American Investment Company P.L.C. Your personal data is held and used by BGSM in accordance with data protection legislation. We may use your information to send you information about Baillie Gifford products, funds or special offers and to contact you for business research purposes. We will only disclose your information to other companies within the Baillie Gifford group and to agents appointed by us for these purposes. You can withdraw your consent to receiving further marketing communications from us and to being contacted for business research purposes at any time. You also have the right to review and amend your data at any time.

††

IN FOCUS FUNDS

M&G EPISODE INCOME

As stocks reach record highs and bonds lose their “safety net” reputation, multi-asset funds have been tipped as a big growth area by experts

T

he FTSE 100 reaching an alltime high left some investors jumping for joy. However, as stocks become increasingly expensive and election worries bite, more cautious investors could turn to multi-asset funds for added security.

Steven Andrew’s M&G Episode Income fund is one such offering, which stands out from its peers for its risk-adjusted returns. FE Analytics shows the fund has a Sharpe ratio of 0.97 since inception, placing it is sixth out of 110 in the IA Mixed Investment 20%-60% sector. This suggests the manager has achieved his returns without taking excessive risks.

The £308.8m fund aims to deliver an attractive level of income by investing globally in a diverse range of assets, with FE Alpha Manager Andrew adopting a flexible approach and allocating capital between various asset classes based on economic changes and valuation of assets.

Between launch in November 2010 and the end of January 2015, the fund returned a top decile 47.75 per cent – compared with a 28.93 per cent gain by its average peer. This has come with slightly more volatility than the sector, but

a significantly lower maximum drawdown.

When it comes to positioning, Andrew is steering clear of mainstream government bonds as he believes them to be a risky prospect at very low levels of yield – with some areas of the market facing the risk of outright losses. An exception is 30-year US treasuries, where the portfolio has a 5.7 per cent weighting as a form of “catastrophe insurance”.

However, Andrew is still finding reasonable real yields in nonmainstream government bonds, holding South African, Mexican and Australian issues. These investments are particularly attractive when taking sterling cash rates into account.

The fund also holds some corporate debt, with 11.62 per cent allocated to investment grade bonds and 6.13 per cent in high yield across the US, UK and Europe.

The largest chunk of M&G Episode Income’s portfolio, however, is allocated to European, Asian Pacific and US equities. Andrew believes that equities are “the place to be” at the moment due to their supportive growth dynamics and the likelihood that companies will be net beneficiaries of low interest rates and cheaper oil.

The manager also believes that equities are one of the few areas of the market “decent” yields can be found within developed markets.

When it comes to alternatives, the fund has 5.1 per cent of assets in property. The bulk of this exposure comes through the M&G Property Portfolio, which is the fund’s second largest holding at 4.4 per cent.

For income investors, the fund’s current yield is 3.28 per cent while an initial investment of £10,000 at launch would have seen dividends of just under £1,800 paid into an investor’s pocket.

SMOOTHLY DOES IT 50%

M&G - Episode Income A Acc GTR in GB (47.74%)

40%

IA Mixed Investments 20%60% Shrs GTR in GB (28.93%)

30% 20% 10% 0%

Dec

Sep

Jun

Mar 14

Dec

Sep

Jun

Mar 13

Dec

Sep

Jun

Mar 12

Dec

Sep

Jun

Mar 11

-10% Dec 10

MANAGER: Steven Andrew FUND SIZE: £308.8m SECTOR: IA Mixed Investment 20%-60% Shares LAUNCHED: Nov 2010 OCF: 0.83% CROWN RATING:

Source: FE Analytics

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trustnet.com

TRUSTS

R&M UK MICRO CAP INVESTMENT TRUST Investors often wait at least three years before taking a position in a fund or trust, but there’s been plenty of demand for the R&M UK Micro Cap Investment Trust

trustnet.com

with this trust, if they feel the size of the trust has grown too big, they will start giving capital back to shareholders. It means the manager always has access to his best ideas,” Conway said.

The £54m trust, which launched in December last year and invests in companies with a market cap of below £100m, has a unique structure. The board will instigate compulsory redemption of shareholdings if the NAV were to grow between £110m to £125m to manage liquidity.

Given that the trust only came to market a few months ago, data on the R&M UK Micro Cap’s portfolio isn’t yet available.

However, this doesn’t concern Conway. Not only does he like the structure of the trust, he is a massive fan of its manager, Philip Rodrigs,

who is regarded as one of the best in the business thanks to his record on the Investec UK Smaller Companies fund and more recently R&M UK Smaller Companies Equity.

Our data shows he has returned 186.58 per cent to investors since he started running portfolios in June 2006, beating his peer group by close to 100 percentage points.

Conway added: “He is a fantastic manager and this trust is a really, really interesting and shareholder friendly trust for investors.” MANAGER: Philip Rodgrigs FUND SIZE: £54m SECTOR: IT UK Smaller Companies LAUNCHED: Dec 2014 OCF: N/A (does charge performance fee) Discount/Premium: +3.14% Crown Rating: N/A

PROVEN OUTPERFORMANCE 200%

Phillip Rodrigs TR in GB (184.59%)

Phillip Rodrigs peer group composite TR in GB (86.62%)

150% 100% 50% 0%

Jul

Jan 14

Jul

Jan 13

Jul

Jan 12

Jul

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istory has proven that smaller companies, while often more volatile, offer good long-term growth –especially compared to large-caps.

However, one of the major problems that can hit private investors is that they buy a “smallcap” portfolio but, over time, it starts holding bigger companies as its assets grow.

The major reason for that is liquidity. Funds with vast assets simply cannot hold the smallest members of the index as they would have to own a huge stake in the business.

There are a number of instances of this happening in the past and while some managers have managed to outperform despite the inflows, the undeniable truth is that the portfolio is no longer the offering an investor bought in the first place.

Clearly investors can chop and change their holdings if they feel their fund is growing too big, but if they are tired of constantly worrying about flows into their smaller companies holding, Ben Conway – fund manager at Hawksmoor – recommends the newly launched R&M UK Micro Cap Investment Trust.

It is closed-ended in nature, so the manager doesn’t have to deal with inflows or outflows, making it ideal for investors who want a portfolio they can “buy, hold and forget about.”

“One of the problems you have in micro-caps is liquidity. However,

Source: FE Analytics

13

TH INK I NG I S A ?

TH INK F & C

Make the most of this year’s tax allowance with an F&C Investment Trust ISA Put a team of highly skilled fund managers and over 146 years’ experience to work for you.

Our award-winning range of 11 investment trusts cover a wide choice of markets and asset classes. All you need to do is select the investment you need for the future you want.

Visit www.fandc.com/trustnet and choose an ISA to make the most of your tax allowance.

The value of investments can go down as well as up and you may not get back your original investment. Tax benefits depend on your individual circumstances and all tax rules may change. Please read the Key Features Document before investing.

Call 0800 915 6018 quoting 15MCA/10 (8.30am-5.30pm, weekdays, calls may be recorded)

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F&C Management Limited is authorised and regulated by the Financial Conduct Authority FRN: 119230 and is a member of the F&C Group of which the ultimate parent company is the Bank of Montreal. Registered Office: Exchange House, Primrose Street, London EC2A 2NY. Registered in England & Wales No 517895.

PENSIONS

SCOTTISH MORTGAGE Investors who are just starting their investment journey may find a long-term option like James Anderson’s Scottish Mortgage Investment Trust attractive

trustnet.com

compared to its IT Global sector average gain of 151.42 per cent and a gain in the FTSE World index of 86.57 per cent.

However, this has come with a significant amount of volatility – almost the worst in sector – and it has gone through several periods of losing money.

Nonetheless, Anderson is focused on a long term growth strategy and vocal in his criticism of short termism in the fund management industry.

It is also worth noting that Tom Slater was recently appointed as co-manager of the trust, having been Anderson’s deputy since 2009.

Scottish Mortgage is one of the most popular and well-known investment trusts which will also help with liquidity should you wish to buy or sell vast quantities.

It is on a premium of about 1 per cent. Most experts believe the discount/premium will remain fairly close to neutral over the long

term owing to this being a priority of Baillie Gifford.

The trust has some of the lowest fees in its sector and Anderson says the firm will aim to keep reducing charges, which should help to boost total return.

A commitment to low fees, while not set in stone, can be a huge boon especially if they go lower. For example if Scottish Mortgage’s fees had been 0.5 percentage points higher over Anderson’s tenure as manager returns would have been 20 percentage points lower. MANAGER: James Anderson & Tom Slater FUND SIZE: £3.1bn SECTOR: IT Global LAUNCH DATE: March 1909 OCF: 0.5% DISCOUNT/PREMIUM: 0% CROWN RATING:

LONG-TERM GAIN 250%

Baillie Gifford & Company-Scottish Mortgage Investment Trust PLC Ord 5P TR in GB (236.48%)

200% 150%

IT Global TR in GB (151.42%)

100%

FTSE World TR in GB (86.57%)

50% 0% -50% Apr 14

Apr 12

Apr 10

Apr 08

Apr 06

Apr 04

Apr 02

-100% Apr 00

I

f you are at the stage where drawing from your pension seems a long way off and you desire maximum capital growth the type of funds you hold are likely to be very different than retirees who want to focus on capital preservation and income.

Baillie Gifford’s Scottish Mortgage investment trust has a high growth strategy that plays largely on two meta-themes; the economic emergence of China and broader technological change that ‘disrupts’ global markets in a highly commercial manner.

Its largest holding for example, which makes up 8.5 per cent of its £3.1bn portfolio, is US listed biotechnology firm Illumina. The company sequences the human genome with an eye to rapidly bring down the costly process for use in healthcare which many anticipate will usher in a new era of highly personalised medicine. The stock has risen by more than 400 per cent over the past three years.

Other top holdings include Amazon and Chinese super technology names such as Baidu and Tencent which have seen rapid growth of late.

A change in its mandate in 2014 also allows the trust to hold up to five per cent of its portfolio in unquoted companies. It bought a tranche in Alibaba before its recent stock market listing, for example, and currently represents 4.4 per cent of the total portfolio.

Scottish Mortgage has had a strong run since its manager James Anderson took over in 2000, returning 236.48 per cent

Source: FE Analytics

15

INVESTMENT STRATEGY Global investment trusts used to be much of a muchness and offered investors little real difference from just tracking the market, but Cherry Reynard looks at how they have grown up over recent years

I

nvesting in global trusts used to be the compromise option for those without the skill or bank balance to select between different regional equity funds. They were often undifferentiated, overdiversified and offered little more than might be expected from an MSCI World tracker.

How times have changed. Global funds are now the preferred route for non-domestic exposure for institutional investors, and increasingly for retail investors as well. Equally, rather than being limited to a small range of interchangeable funds, the various global sectors now offer real choice, with plenty of high quality, stock-picking trusts available, plus those with an income or specialist sector bias.

James Calder, research director at City Asset Management, said: “Ten years ago, global equity funds used to be for those clients that couldn’t afford to buy regional equity funds.

The average global equity fund might have up to 400 holdings and would simply be an amalgamation of a fund management group’s regional funds. That has changed massively. Global equity is now seen as an important asset class in itself.”

Global equity investment trusts tend to be housed in the AIC’s Global, Global Equity Income or Global High Income sectors.

Although the Global Equity Income sector is relatively new, it

16

GLOBAL FUNDS ARE NOW THE PREFERRED ROUTE FOR NONDOMESTIC EXPOSURE FOR INSTITUTIONAL INVESTORS contains a number of the oldest and most respected trusts, such as Murray International. The sector has been popular, fuelled largely by the squeeze on global interest rates.

Trusts in the sector need to generate an income from their portfolios in excess of 110 per cent of the MSCI World Index yield, which is currently 2.3 per cent.

The development of this sector has been made possible because of increased willingness among company management across the globe to distribute some of their profits in the form of dividends.

The most recent Henderson Global Dividend Index, which monitors

dividend payouts globally, found that dividends have grown nearly 60 per cent since 2009 on a global basis, soaring 10.5 per cent to $1.167trn in 2014 alone.

The Global sector is larger with 34 funds and again has some familiar names – Foreign & Colonial, Monks and Witan. The trusts have a capital growth orientation in common, but have become increasingly diversified in how they aim to generate that growth. Some, such as Witan, take a multi-manager approach. Others, like Monks, are strongly stock-picking in focus.

There are also a number of specialist funds that sit outside the mainstream sectors, but may also be considered ‘global’. There are global healthcare, biotechnology or technology trusts, for example.

The Global sector has the edge on performance with the average trust up 38.6 per cent over three years, compared to 37 per cent for the global equity income sector (to 3 March).

However, this masks some trustnet.com

GLOBAL TRUSTS

R O T C SE ILE F O R P

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17

We strive to explore further.

Aberdeen Investment Trusts ISA and Share Plan At Aberdeen, we believe there’s no substitute for getting to know your investments face-to-face. That’s why we make it our goal to visit companies – wherever they are – before we invest in their shares and while we hold them.

With a wide range of investment companies investing around the world – that’s an awfully big commitment.

But it’s just one of the ways we aim to seek out the best investment opportunities on your behalf.

Please remember, the value of shares and the income from them can go down as well as up and you may get back less than the amount invested. No recommendation is made, positive or otherwise, regarding the ISA and Share Plan.

The value of tax benefits depends on individual circumstances and the favourable tax treatment for ISAs may not be maintained. We recommend you seek financial advice prior to making an investment decision.

Request a brochure: 0500 00 40 00 invtrusts.co.uk

Issued by Aberdeen Asset Managers Limited, 10 Queen’s Terrace, Aberdeen AB10 1YG, which is authorised and regulated by the Financial Conduct Authority in the UK. Telephone calls may be recorded. aberdeen-asset.co.uk

Please quote G TNITM 03

INVESTMENT STRATEGY

R SECTO E PROFIL considerable discrepancy in returns within both sectors. The top funds in Global – including Scottish Mortgage, Witan and Majedie – are all up over 70 per cent over three years, while others with more specialist mandates, such as Hansa have fallen over the same period.

John Monaghan, senior investment research analyst at Square Mile, says investors need to decide at the outset which type of global equity strategy they prefer: “Traditionally many global funds offered investors a broad exposure to the majority of global sectors and economies. In principle these sound like wholly valid investment options and there have been many successful strategies managing money in this style.”

GLOBAL TRUSTS

AS WITH ALL SECTORS, LEADERSHIP WILL SWITCH, DEPENDING ON THE TYPE OF COMPANY FAVOURED

BY THE MARKET “However, these funds can lead to some inherent biases such as around half of the assets being invested in the US, and some may not have any direct exposure to emerging markets. Furthermore, from a sector standpoint there can be a higher level of exposure to more cyclically sensitive areas such as financials and energy.”

Monaghan says investors have to be conscious of the style bias of individual funds. Some may have a higher exposure to emerging markets, while others may seek

to insulate investors from the market’s cyclical peaks and troughs by investing in companies whose businesses can grow irrespective of underlying economic conditions.

This is fine in theory, but can leave the fund over-exposed to currently expensive areas like healthcare and consumer staples. This could lead to underperformance in more momentum driven markets but should offer investors greater protection during more uncertain conditions.

As with all sectors, leadership will switch, depending on the type of company favoured by the market.

Global growth companies – those that are not economically sensitive and have a reliable dividend – have been in favour for a long time, as has the US market. If European and Japanese quantitative easing starts to improve the global economic outlook, it may be time for a change of guard at the top of the sectors.

THE TURNAROUND STORY: MAJEDIE INVESTMENTS

trustnet.com

management of the majority of the group’s assets to the skilled team at Majedie. Part of the fund will be run in line with strategies that have now closed on the openended side at Majedie. Admittedly,

this turnaround has already had a significant effect on the discount, but the trust still offers access to a blend of Majedie’s UK Equity, UK Income, Tortoise, Global Equity, Global Focus and US Equity funds.

BACK FROM THE BRINK 70%

Majedie Investments IT - Majedie Investemnets PLC TR in GB (67.04%)

60%

FTSE World ex UK in GB (54.85%)

50% 40% 30% 20% 10% 0%

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THE MAJEDIE INVESTMENTS TRUST sits comfortably near the top of the Global sector, after an impressive run of performance that has seen its share price rise more than 67 per cent over three years.

Things were not always as rosy for the trust. A few short years ago, it was subject to a barrage of criticism from analysts for its unwieldy structure, its unsustainable dividend and its persistent discount to net asset value.

Part of the problem was that Majedie Investments had been the partial owner of Majedie Asset Management. Majedie was a highly successful boutique asset manager and the trust benefited hugely from the holding, but when the trust tried to replicate the experience with Javelin Capital, it failed and was forced into a £2.1m write-off.

The board eventually took note of the criticism and handed the

19

Deep experience in investment trusts Schroders launched its first investment trust in 1924 and our current range offers nine distinctive strategies. These target growth and income opportunities across UK equities, Japanese equities, Pan-Asian equities and property.

The funds are managed by Rosemary Banyard, Andy Brough, Matthew Dobbs, King Fuei Lee, Hugo Machin, Philip Matthews, Nick Montgomery, Sue Noffke, Robin Parbrook, Andrew Rose and Tom Walker. With an average of 23 years of industry experience, they are among our most experienced fund managers.

Please remember, the value of investments and the income from them may go down as well as up and investors may not get back the amount originally invested. Some trusts invest solely in the companies of, or in property located in, one country or region. This can carry more risk than investments spread over a number of countries or regions. Investors in the emerging markets and the Far East should be aware that this involves a high degree of risk and should be seen as long term in nature.

Less developed markets are generally less well regulated than the UK, they may be less liquid and may have less reliable arrangements for trading and settlement of the underlying holdings. Investors should note that exchange rates may cause the value of investments denominated in currencies other than sterling, and the income from them, to rise or fall.

Explore the depths of this talent at schroders.co.uk/its

Fund manager industry experience: Rosemary Banyard: 35 years, Andy Brough: 27 years, Matthew Dobbs: 33 years, King Fuei Lee: 15 years, Hugo Machin: 15 years, Philip Matthews: 16 years, Nick Montgomery: 17 years, Sue Noffke: 25 years, Robin Parbrook: 24 years, Andrew Rose: 33 years, Tom Walker: 15 years. The most up to date key features can be viewed on the UK Investor website via www.schroders.co.uk/investor.

Issued in February 2015 by Schroder Unit Trusts Limited, 31 Gresham Street, London EC2V 7QA. Registered No: 4191730 England. Authorised and regulated by the Financial Conduct Authority. UK08975

INVESTMENT STRATEGY

GLOBAL TRUSTS

R SECTO E PROFIL THE OLD TIMER: MURRAY INTERNATIONAL MURRAY INTERNATIONAL CAN RIGHTLY CLAIM to be one of the pioneers of the Global Equity Income approach. It was launched in 1995 and has a lengthy and impressive track record, mostly attributable to the skill of Bruce Stout, who has employed Aberdeen’s investment process to good effect.

However, a difficult run of form has seen its premium to net asset

value drop to near par (from around 15 per cent in 2013) and returns lag the rest of the sector in recent years. The ÂŁ1.37bn trust is still fourth quartile over three years, having risen an anaemic 17.6 per cent compared to 37 per cent for the wider sector. An overweight in emerging markets, particularly Latin America, was responsible, plus low exposure to the top-performing

markets of the US and Japan.

Nevertheless, Stout is sticking to his guns, believing that the developed world will prove unable to navigate the government debt burden now in place. The trust has over half of its assets invested in Latin American and emerging Asia.

Performance has started to turn, and the fund is significantly ahead of the wider sector over one year.

OFF TO THE RACES: THE TECHNOLOGY TRUST

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has historically been seen as US focused, this is changing. Price is increasingly finding opportunities in new markets, notably China.

The high profile IPO of Alibaba last year showed innovation in technology is now a global phenomenon.

DOUBLE YOUR MONEY 100%

Allianz Technology Trust PLC TR in GB (93.70%)

80%

Polar Capital Technology Trust PLC Ord TR in GB (65%)

60%

Dow Jones GL World Technology TR in GB (63.24%)

40% 20% 0%

Nov

Jul

Mar 14

Nov

Jul

Mar 13

Nov

Jul

20% Mar 12

AS THE NASDAQ APPROACHES NEW HIGHS, it is a reminder of the recent strength in the technology sector: A combination of the strength of well-established technology businesses such as Apple, plus strong performance from cloud computing and mobile retailing groups has seen technology companies outperform over the past three years.

The Allianz Technology Trust (previously known as the RCM Technology Trust), is managed

by Walter Price. It is up 93.7 per cent over three years, putting it ahead of sector rival Polar Capital Technology. Price is a growth investor, looking for companies whose revenues can significantly outpace those of their rivals over time.

Although the technology sector

19 21

INVESTMENT STRATEGY

ALIBABA AND CHINESE LESSONS James Anderson, manager of the Scottish Mortgage Investment Trust, highlights one of the great companies on offer for investors who are willing to look further afield than the FTSE 100

L

ast year I argued that identifying transformative companies at a very early stage and owning them through to maturity is central to investment success. The returns from such extraordinary winners can far outweigh the oscillations of normal companies or the headlines blaring of daily market movements. This requires endurance. Even great companies have trying times.

But it is finding the potential giants of the future that is most alluring. Their occurrence is not random. They are concentrated by sector, geography and especially management philosophy. For some time now I have thought that the next great global company was Alibaba. Scottish Mortgage owned a stake as an unquoted investment.

It was valued at £44 million in our Interim Report in Autumn 2013.

A year later the same holding was worth £148 million. Today Alibaba itself enjoys a market capitalisation of around $250 billion – or a bit more than BP and Glaxo combined.

Alibaba displays characteristics that are sufficiently common amongst great companies as to suggest that Tolstoy’s aphorism that ‘All happy families are alike’ has a corporate equivalent. They

22

look not at all like the unhappy companies that litter our indices.

They have founders with vision.

THE FOUNDER

Alibaba is unimaginable without Jack Ma. He is now China’s richest man but more significantly the dreamer who convinced 17 questioning friends that he could overthrow US e-commerce dominance from his Hangzhou apartment. That these partners still control the firm horrifies many but delights us. Far better their commitment than the impatience of fund manager capitalism. For, as at almost all great companies, Alibaba pays little attention to immediate earnings prospects or the mantras of shareholder value.

As Ma remarks: “Customers first, employees second, and shareholders third.”

His aspirations are almost boundless. Many investors fight shy of such ambition. Instead we believe that once the ultimate scale of any business is known and defined then it is of little interest to the forwardlooking. Already Alibaba has moved into territory it once could not imagine. Chinese finance is already reeling from its attacks.

Alibaba is both cause and symbol

of the transformation of China.

The imagined China of forced industrialisation, of belching steel plants and party ideology is being superseded by innovative, transformative and potentially uncontrollable private juggernauts.

Alibaba’s marketplace generated 14.5 billion orders in the year to June 2014. The company is still growing around 50% year on year. Its sales volumes are bigger than those of Amazon and eBay combined. China is not imitating but leaping ahead. Alibaba, Tencent and Baidu are well ensconced amongst the world’s top 10 internet companies by capitalisation.

EAST VS WEST

The East coast of China is the only global rival to the West coast of America as the cutting edge of global capitalism. It is no wonder that Mark Zuckerberg has taught himself to speak Mandarin.

Ultimately the great companies of North West America and SouthEast China are shockingly similar.

Beyond their parallel mental trustnet.com

BAILLIE GIFFORD

models they bring huge challenges to the world.

As investors we have to become accustomed to companies that have little need of capital or of public quotation. Alibaba, like Facebook, built its dominance as a private company. By the time of its first official trades it was valued at over $200 billion. The boundary between public and private is blurring rapidly. Sadly this is hard for individual investors to negotiate.

The global competitive landscape will be dominated by this breed of super-ambitious competitors. As they expand and flex muscles that are now intimidating in financial and intellectual scale, the prospects of traditional, conservative

ALIBABA IS BOTH CAUSE AND SYMBOL OF THE TRANSFORMATION OF CHINA managerial behemoths will dim.

We fool ourselves if we believe that their threats will be confined to some unfortunate but peripheral internet casualties. What up until now has affected retailers and newspapers is just starting to undermine the business models of our largest companies. The greed of bankers has survived the crash but their businesses may not survive the advances demonstrated by Alibaba

and Tencent. For BP and Glaxo it may be demeaning that they are now half the size of Alibaba but their future may be much worse.

As the ambitions and ethos of the great technology companies move beyond narrow electronics and e-commerce, then the business world will be ripped apart. If Elon Musk proves that electric cars and solar energy are the economic future, if Illumina’s exponential improvements in genomic sequencing show up how little of the current drugs industry is beneficial to our health, then there is much pain ahead for what is said to be safe and secure in our market indices. And that is before Google’s planned solution to death.

Important information: The Scottish Mortgage Investment Trust PLC is managed by Baillie Gifford& Co Limited and is a listed UK company. As a result, the value of its shares, and any income from them, can fall as well as rise and investors may not get back the amount invested. Investments should be viewed as long-term. Investments with exposure to overseas securities can be affected by changing stock market conditions and currency exchange rates. The Trust invests in emerging markets where difficulties in dealing, settlement and custody could arise, resulting in a negative impact on the value of your investment.

The Trust’s risk could be increased by its investment in unlisted investments. These assets may be more difficult to buy or sell, so changes in their prices may be greater.

Investment trusts are listed on the London Stock Exchange and are not authorised or regulated by the Financial Conduct Authority. The views expressed in this article are those of James Anderson and should not be considered as advice or a recommendation to buy, sell or hold a particular investment. They reflect personal opinion and should not be taken as statements of fact nor should any reliance be placed on them when making investment decisions. This article contains information on investments which does not constitute independent investment research. Accordingly, it is not subject to the protections afforded to independent research and Baillie Gifford and its staff may have dealt in the investments concerned.

This article is issued and approved by Baillie Gifford & Co Limited (company registration no. SCO69524), which is the manager and secretary of seven investment trusts and based in Scotland at Calton Square, 1 Greenside Row, Edinburgh EH1 3AN. Baillie Gifford & Co Limited is authorised and regulated by the Financial Conduct Authority whose address is 25 The North Colonnade, Canary Wharf, London EH14 5HS.

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INVESTMENT STRATEGY

GLOBAL REAL ESTATE: AN UNLIKELY BUTTRESS AGAINST RISING INTEREST RATES? Tom Walker and Hugo Machin, co-fund managers of Schroder Global Real Estate Securities Limited provide an upbeat assessment on the outlook for the sector

A

fter a strong year for global real estate securities, many investors are wondering whether the sector can continue to grow in an economic environment which is likely to result in rising interest rates. We think it can. The fragility of many economies will, in our view, result in the continuation of a low yield, low growth environment. This should be supportive of the real estate sector as long as investors are selective in their approach. With bond yields at historically low levels and investors still searching for income, real estate offers the potential for

24

income and, over the short term at least, capital growth in major cities around the globe.

There is a strong – and we believe misguided – belief that, as soon as interest rates rise, the listed real estate sector will underperform.

The main issue here is the perceived link between real estate and bond yields. If rates increase and drag up bond yields, the expectation is that investors will move back into bonds from other higher yielding asset classes. While it is certainly true that the announcement of increases in interest rates can cause short term volatility in the listed property

sector, over the longer-term, history suggests* that property could continue to perform well in a rising rate environment.

PROTECTED

In the short to medium term, property investors should be cushioned against rising rates to an extent as bond yields will have to rise significantly from current levels to make them attractive compared to higher yielding companies in the property sector. Further out, we need to look at why central banks may want to increase interest rates in the current environment. trustnet.com

SCHRODERS

The likelihood is that any announcement by the Fed this year will be as a result of an improving economy and a desire to ensure that inflation is kept in check. It will need to be backed by solid evidence of falling unemployment, improvements in manufacturing and positive sentiment. Even then, the global economy is likely to remain fragile and initial rate increases will very probably be in small steps, as a sharp rise could imperil the economic recovery.

If, as we suspect, economic growth and business sentiment is improving by that stage, companies will want to expand their workforces and will need space to accommodate the growth of their businesses. In these circumstances, they will gravitate towards locations which will give them a competitive edge. These places tend to be the major global cities.

GROWTH & INCOME

As things stand, increasing occupier demand is already resulting in property rental growth**, particularly in prime areas in major cities. This is good news for the listed market, which tends to own prime assets in these locations. As long as there is sustained rental growth, then any modest increases in interest rates should be unlikely to have any significant effect on the attraction of these assets for investors.

Income is undoubtedly the core of real estate returns, but in many markets capital growth has also been a significant factor. This capital growth is being driven by the significant increase in the sums being allocated to real estate around the world. Some investors have raised concerns that this is simply a return to the boom and bust of the last decade but we believe the fundamentals are different at the current time. Investors are seeking high quality property in prime locations, property which

term, it is worth remembering that INCOME IS new buildings can take months, if UNDOUBTEDLY THE not years, to arrive.

CORE OF REAL ESTATE COMPELLING RETURNS, BUT IN MANY So we don’t think rising interest rates should deter investors from MARKETS CAPITAL in property. Both the GROWTH HAS ALSO BEEN investing historical evidence and current A SIGNIFICANT FACTOR fundamentals suggest that this is

has traditionally been owned by the listed sector. Cashing in on increasing values in these areas provides the potential to redeploy capital to new projects to create value and provide a growing and sustainable rental stream.

The final part of the jigsaw is supply. The biggest risk to the property sector is oversupply. As economies recover and developers push ahead with construction, supply will start to become a headwind in some markets.

The good news is that in many locations new construction is being undertaken only on the back of space which has already been let. Longer

a market that should continue to prosper as monetary policy tightens.

Add to these features the growing interest in the sector globally from investors and we think listed real estate securities could continue to offer a compelling investment proposition.

Schroder Global Real Estate Securities Limited aims to provide investors with an attractive total return, through investing in listed global real estate securities with strong fundamentals, and seeks to offer sustainable income and a progressive dividend potential.

Please remember that the value of investments and the income from them may go down as well as up and investors may not get back the amount originally invested.

WHAT ARE THE RISKS? • Past performance is not a guide to future performance and may not be repeated.

• Investing in a smaller number of stocks can carry more risk than investing across a larger number of companies.

• Smaller companies that may be less liquid than larger companies, price swings may therefore be greater.

• Investing in specific sectors can carry more risk than investing in a number of different sectors.

• The trust may borrow money to invest in further investments, this is known as gearing. Gearing can reduce returns if the value of the investments purchased decrease in value by more than the cost of borrowing.

• Investments in the Far East and less developed markets involve a high degree of risk and should be seen as long term in nature.

• Exchange rates may cause the value of, and income from, investments denominated in currencies other than sterling, to rise or fall.

For more information, visit www.schroders.co.uk/investor * Source: Schroders, Factset. Between 2004 and 2006 when there were 17 US Fed rate increases, the FTSE EPRA/NAREIT index of US listed real estate securities returned almost 80% ** Source: UBS Global Real Estate Analyser November 2014, propertywire December 2014

Important information: The opinions, beliefs expectations or intentions are those of Tom Walker and Hugo Machin. All information and opinions have been obtained from sources we consider to be reliable.

No responsibility can be accepted for errors of fact or opinion.

This article is intended to be for information purposes only and it is not intended as promotional material in any respect, nor is it offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations.

Issued in March 2015 by Schroder Unit Trusts Limited, 31 Gresham Street, London EC2V 7QA. Registered No: 4191730 England. Authorised and regulated by the Financial Conduct Authority.

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25

SCOTTISH MORTGAGE INVESTMENT TRUST

SCOTTISH MORTGAGE WAS ORIGINALLY LAUNCHED TO PROVIDE LOANS TO RUBBER GROWERS IN MALAYSIA IN THE EARLY 20TH CENTURY.

While others stick to the indices, we are free to choose.

Scottish Mortgage Investment Trust has its own way of doing things. So it’s hardly surprising that the Trust’s portfolio looks nothing like the index, after all, we are active rather than passive investors and we firmly believe that the index is an illustration of ‘past glories’ rather than future prospects. In fact, our abiding principle has always been to invest in tomorrow’s companies today.

We give ourselves time to add value by being patient investors in an impatient world. But don’t just take our word for it, over the last five years Scottish Mortgage has delivered a total return of 150.7%* compared to 64.6%* for the index.

And Scottish Mortgage is low-cost with an ongoing charges figure of just 0.50%†.

Standardised past performance to 31 December each year*: 2009-2010

2010-2011

2011-2012

2012-2013

2013-2014

Scottish Mortgage

33.9%

-15.2%

30.1%

39.8%

21.4%

FTSE All-World Index

16.7%

-6.6%

12.0%

21.0%

11.3%

Past performance is not a guide to future returns.

Scottish Mortgage Investment Trust is managed by Baillie Gifford and is available through our Share Plan and ISA. Please remember that changing stock market conditions and currency exchange rates will affect the value of your investment in the fund and any income from it. You may not get back the amount invested.

Open an ISA to receive a £10 Amazon gift card††.

For a free-thinking investment approach call 0800 917 2112 or visit www.scottishmortgageit.com

Baillie Gifford – long-term investment partners †† For a limited period and new eligible ISA clients only. Terms and Conditions and minimum investment amounts apply. *Source: Morningstar, share price, total return as at 31.12.14. †Ongoing charges as at 31.03.14. Your call may be recorded for training or monitoring purposes. Baillie Gifford Savings Management Limited (BGSM) is the manager of the Baillie Gifford Investment Trust Share Plan and the Investment Trust ISA. BGSM is an affiliate of Baillie Gifford & Co Limited, which is the manager and secretary of Scottish Mortgage Investment Trust PLC. Your personal data is held and used by BGSM in accordance with data protection legislation. We may use your information to send you information about Baillie Gifford products, funds or special offers and to contact you for business research purposes. We will only disclose your information to other companies within the Baillie Gifford group and to agents appointed by us for these purposes. You can withdraw your consent to receiving further marketing communications from us and to being contacted for business research purposes at any time. You also have the right to review and amend your data at any time.

IN THE BACK F CATS

FAT OR TOP DOGS It is no secret that fund managers are paid handsomely, but do they deserve it?

John Blowers finds out more

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und managers are next in line for some sustained pressure on their margins and many industry commentators say this is not before time. However well a fund performs, it still takes a generous cut of the money it has under management – typically around 0.75 per cent – every year, in good times and bad.

A typical £100m fund will generate an annual income of £750,000 for the management group, but think of the nine-month old Woodford Equity Income fund.

It now has £5.06bn under management and even I can work out that will generate Neil Woodford & Co £38.7m in annual fees. Not bad for a start up!

We have recently seen commissions on fund sales axed and a drop in the cost of ownership, with annual charges falling by one third.

However, it has been the distributors (most noticeably platforms) that have cut charges and not fund managers.

Someone with £100,000 invested in a fund may ask whether it costs more to manage this amount than Joe Bloggs’ £1,000. Indeed, Bloggs will pay just £7.50 each year to the fund manager, while you will pay £750.

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PLATFORMS

The counterargument is that if a manager increases their assets to that size it indicates their fund is successful and these fees are just reward for their efforts. But should there be reward for failure?

If a manager fails to outperform their index, or even loses money, should they still be paid as much?

A fund that stays at £100m for the year – providing zero growth for investors – will charge the same £750,000 as it did the year before.

So, where is the industry going on charges?

INVESTORS SHOULD ALSO WATCH OUT FOR HIDDEN CHARGES, SUCH AS CANCELLATION FEES. THESE ARE NOT ALWAYS OBVIOUS AND CAN BE TUCKED AWAY IN A FUND’S PROSPECTUS

CHANGE IS NEEDED

Nowhere fast, is the answer.

Although the current system is flawed, there is a logic in that the better the fund, the more money is invested in it and the more fees it receives. The converse is also true – poor funds have less money in them and will therefore make less.

Trustnet Direct’s Health Check tool helps investors monitor performance and flag up better scoring funds should returns tail off.

Remember, what you’re paying for is a manager’s skill in spotting the next opportunity and moving your money accordingly. So you would expect them to actively move your money and there is heightened interest in managers who charge active management fees (around 0.75 per cent a year) but adopt a passive management style (such as tracker funds that track an index). These funds charge much less each year – typically 0.2 to 0.4 per cent – so it is worth monitoring whether the funds you hold are actually outperforming their benchmark.

Investors should also watch out for hidden charges, such as cancellation fees. These are not always obvious and can be tucked away in a fund’s prospectus. An investor who recently sold a significant investment in a fund triggered a cancellation charge of £3,000.

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Another mysterious charge is the TER (total expense ratio), now being replaced with the OCF (ongoing charges figure).

This represents the total charges that will be deducted from your investment each year and covers not only the annual management charge (AMC) but the fund manager’s custodian fees, distribution costs, audit fees, registration fees and regulatory fees.

PLATFORM CHARGES

On top of the aforementioned charges are those of your platform provider. These are new, in the sense that before last year, funds typically used to levy a charge of 1.5 per cent, of which half would be paid to the platform.

Nowadays, funds typically take 0.75 per cent and the platform levies an explicit fee– somewhere between 0.2 and 0.5 per cent.

Some platforms cap these fees at relatively low amounts so charges don’t keep rising as your investments grow (Trustnet Direct has a £200 per year maximum fee and 0.25 per cent before the cap cuts in).

It sounds like a trivial amount, but it can add up to thousands of pounds over the years so seek out low platform fees with capped charges, or fixed fee offerings.

However, remember all these charges pale into insignificance compared with making the right investment choices. Below are the best and worst performing funds over five years, where the difference in returns is £1,657.84.

THE BEST AND THE WORST 5 Year Performance Fidelity Smaller Companies Acc MFM Junior Gold

Value of £1,000 after 5 years

+189.41%

£1984.10

-77.74%

£326.26

Source: Trustnet Direct as at 05/03/15. All performance is net of fees.

WHAT DOES THIS MEAN FOR ME? • Keep a close eye on fund charges (including hidden charges) but remember, you should get what you pay for from active managers • Make sure additional charges, such as platform fees, are good value and ideally capped (your charges shouldn’t grow as your investment does) • Picking the right fund should have more of a positive effect than buying one just because it has low charges

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IN THE BACK

STOCKS

CAPTURING HEARTS AND MINDS

Investing in brands that customers feel they can’t do without is the closest thing that Keith Ashworth-Lord has found to “legal drug dealing”

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like businesses that capture a piece of their customers’ minds.

Often this is because of powerful brands, must-have products, employee skill-sets or proprietary technology.

The enthusiasts that buy Games Workshop’s Warhammer miniatures and manuals go about their hobby like zealots. They are hooked on wargaming, making Games Workshop the nearest thing to legal drug dealing on the stock market. This gives the company terrific pricing power and an enduring franchise.

It is reflected in sustainable midteen operating margins, 20 per cent plus returns on equity and one-toone conversion of earnings into free cash. The business is currently going through a transition phase, moving its stores to secondary locations and converting to one-man operations.

Operating lease rentals per store are coming down sharply. Once complete, there is nothing to stop Games Workshop rolling out many more new format stores to fire up its growth.

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In 2014, we only invested in two new businesses. One was Hargreaves Lansdown, the UK’s biggest directto-retail investment platform.

The firm derives income from managed accounts and executiononly stockbroking. Recurring income is typically 80 per cent of revenues and the retention rate of existing clients is in the mid-90s.

I like quasi-annuity income streams and scalability. That the latter is true can be judged from the progression of sales per employee, from £110k to £451k, and profit per employee from £25.7k to £262k over the past decade. Staff costs to sales have also fallen considerably.

But it gets better. The business has little appetite for capital to fuel its growth and so enjoys a spectacular return on equity of approximately 80 per cent. Like Games Workshop, it returns surplus capital to shareholders via generous dividend payments.

I believe that recent regulatory changes and the chancellor’s pension reforms will ultimately be beneficial to Hargreaves Lansdown.

The largest holding in the fund is Trifast, which manufactures and distributes industrial fasteners to the global automotive, electronics and domestic appliance industries.

It went through a near-death experience in early 2009, with sales down 20 per cent from their peak, losses incurred and debt rising.

The previous management team, which had guided Trifast until 2005, was prevailed upon to come back and sort out the mess. Through a combination of self-help measures and reinvigorating the sales teams, there has been a steady recovery in every half-year period since then.

I love the buzz about the place when you go to kick the tyres.

Margins, returns and cash-flow are all moving up and management has augmented organic growth with a handful of sizeable but sensible bolton acquisitions.

Using free cash-flow projections discounted back at 10 per cent suggests to me that all three companies are currently selling in the stock market for somewhat less than their true economic worth. trustnet.com

IN THE BACK

SCHRODER ASIA PACIFIC WHAT I BOUGHT LAST

BRI Wealth Management’s Dan Boardman-Weston explains how everything came together to make Matthew Dobbs’ Schroder Asia Pacific investment trust an attractive way to get exposure to the growth story of Asia

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or many years we’ve invested in Asian equities due to the increasingly favourable economic and corporate dynamics that the area presents.

Although there are well known risks within the region such as the slowing down of the Chinese economy and the political risks that have evolved in the likes of Thailand and Hong Kong, overwhelmingly the long-term investment case remains positive.

The burgeoning middle class remains a key driver of the region’s growth due to the potent combination of improving domestic demand, greater credit penetration and rising personal incomes.

When we look at the region with the issues that have to be tackled going forward, we view it as imperative to take a bottom-up stock-picking approach, whilst being cognisant of the macro-economic backdrop.

With all of that in mind, we selected Matthew Dobbs with the Schroder Asia Pacific investment trust as our manager of choice. We have held the open-ended Asian Alpha Plus fund for many years but viewed the investment trust as a more attractive proposition for several reasons.

The trust’s slightly heavier weighting towards India tied in with our own view that the country would do well under the leadership of the reformist Narendra Modi.

The stellar performance of India in 2014 gave weight to the belief in Modi and the recent budget which focuses on growth and decentralisation should continue to provide a conducive environment for companies.

However, the primary reason for the switch into the trust was the circa 10 per cent discount that it was trading on to its net asset value. For an environment that we feel will continue to be favourable

to investment trusts, favourable to stock specific Asian equities and favourable to managers with a strong track record like Dobbs, a 10 per cent discount to NAV felt undervalued.

Over the short term, we expect to see some valuation convergence between Asian equities and developed market equities due to frothier valuations in the US and Europe and Asian shares trading at historically inexpensive price-to-earnings ratios.

The lower oil price will also be a net beneficiary to the economies of Hong Kong, Thailand and India which make up nearly 50 per cent of the fund. Although we have concerns over the rebalancing of the Chinese economy towards consumption, the effects of the credit bubble and the falling property market, we believe the central bank remains very accommodative in its monetary stance and so should avert a ‘hard landing’.

The manager’s approach of bottom-up stock-picking focusing on companies with robust balance sheets and strong earnings should stand the trust in good stead over the course of the market cycle and it very much fits in with our own investment ethos. We often find that trusts present a more attractive investment proposition than open-ended funds.

Dan Boardman-Weston is senior investment analyst at BRI Wealth Management

TRUSTNET magazine APRIL PREVIEW THE DEATH OF ANNUITIES? Reforms coming into play next month mean people will no longer be forced to buy an annuity with the money they have built up in their pension pot. Instead they will be free to spend their savings as they wish.

So is this the end for annuities? Is there a place for them in your portfolio instead of an absolute return holding?

And will the reforms really benefit anyone apart from unscrupulous salesmen already salivating at the thought of naïve pensioners looking for someone to advise them on what to do with hundreds of thousands of pounds?

We will also be looking in detail at the numerous bond sectors, including IA Sterling Strategic Bond, home to FE Alpha Manager of the Year Richard Woolnough’s £24bn M&G Optimal Income fund.