Trustnet magazine / Issue 2

TRUSTNET magazine Issue 2 / November 2014

Absolute Return

Hold tight

ISA Investor

Three very different funds for your portfolio

Equities to ride out a rollercoaster year

Why market timing doesn’t work

EDITOR’S LETTER

TRUSTNET magazine Issue 2 / November 2014

T

Absolute Return

Hold tight

ISA Investor

Three very different funds for your portfolio

Equities to ride out a rollercoaster year

Why market timing doesn’t work

000 Front Cover.indd 1

10/11/14 14:03

ISSUE 2

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 Pascal Dowling, Head of publishing content T: 0207 534 7661 Art Direction & Design Javier Otero W: www.feedingcrows.co.uk Editorial Joshua Ausden 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

he affable complacency which has affected investors recently may come to an abrupt halt next year.

In the US, five years of quantitative easing will come to an end, turning off the liquidity tap which has driven share prices up across the globe.

In the UK we face a challenge on two fronts.

Three more or less incompetent political parties will fight for control of the country in a general election which will, at very best, leave us with a weak majority.

At the same time the oddly unsatisfying economic recovery we have supposedly witnessed will be tested by a rise in interest rates.

Some might argue that the recent uptick in our economic vitality – led again by credit fuelled consumption, construction and services – has little foundation without a political, monetary and fiscal agenda entirely geared to supporting the rampant Ponzi scheme we call a housing market.

Rather like an athlete whose dope wears off mid-race, we may find ourselves feeling a little weak at the knees by the midpoint of 2015.

These issues, though, are not nearly as complicated as those which face our biggest trading partner – and the mightiest economy in the world when considered a whole; the eurozone.

Beset by political strife at a geopolitical level, riddled with dissatisfaction at ground level, the European Union is in a dire predicament, but the prospect of a breakup is – surely – unthinkable.

In this month’s issue of Trustnet Magazine we focus on the funds, equities, strategies, and managers best placed to protect your cash in this potentially difficult environment.

Our gloomy predictions may yet be proved wrong, but as any good Boy Scout knows, it’s better to be prepared.

Dib dib.

Pascal Dowling Head of publishing content FE Trustnet

In association with:

IN THIS ISSUE 18

WEATHERING THE STORM

SCHRODERS MULTI-MANAGER DIVERSITY RANGE A strict focus on volatility and three decades of experience make the case for the Schroders multi-manager fund range, according to managers Marcus Brookers and Robin McDonald.

P.24-25

IT PAYS TO SHOP AROUND Trustnet Direct’s John Blowers explains why it’s crucial to choose the right investment platform for your needs.

P.27-28

DEFENSIVE STOCKS FOR 2015 The Share Centre’s Helal Miah gives his stock-picks for cautious investors.

P.30-31

HOLD TIGHT Cherry Reynard highlights the stocks that are most likely to succeed in 2015.

P.2-3

SLOW AND STEADY WINS THE RACE Playing the long game is far better than trying to time the market.

P.4-5

WHAT I BOUGHT LAST Saunderson House’s Ben Williams explains why he’s recently bought the Liontrust Special Situations fund for his clients’ portfolios.

P.33

SLOW AND STEADY WINS THE RACE

4

INVESTOR CHECKLIST Holly Thomas explains the benefits of the new ISA – or NISA. P.7-8

CRUNCH TIME The UK, Europe and the US all face significant challenges in 2014. How will markets cope?

P.10-12

IN FOCUS Trojan Income, BH Macro and Premier Multi Asset Monthly Income are all in the spotlight this month.

P.14-17

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CRUNCH TIME

INVESTMENT STRATEGY SECTOR PROFILE: IMA Targeted Absolute Return As momentum falters and defensive strategies come to the fore, we focus on three funds with very different characteristics; Newton Global Dynamic Bond (P.19), Invesco Perpetual Global Targeted Return (P. 21) and FP Argonaut Absolute Return (P. 23).

P.18-23 trustnet.com

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MONEY

D L HO The end of QE, rising interest rates here and a eurozone in growing crisis, mean equity investors could be in for a bumpy ride in 2015. Cherry Reynard reports.

hort of a last-minute surge, 2014 is likely to be a relatively unproductive year for stock market investors. After a significant bounce in 2013, companies had to deliver better earnings for share prices to make further progress and, in many cases, they didn’t.

On the surface, 2015 is likely to prove trickier still, with rate rises widely believed to be imminent, the eurozone slowing and geopolitical tensions mounting.

The first thing with which markets must contend in 2015 is likely to be interest rate rises.

Although these had been earmarked for 2014 in the US and UK, central bankers have taken weakness in Europe as a ready excuse to defer rises until 2015.

Debate remains on when rises might happen and by how much.

INTEREST RATES

Interest rate rises would likely only come about as part of growth in the wider economy.

Some companies tend to be natural beneficiaries of interest rate rises. James Henderson, manager of the Henderson UK Equity Income fund, says: “General insurers receive premiums, which they then put on deposit. These 2

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T H TIG

EQUITY INVESTOR

He believes that food retail may be a notable area to avoid, noting: “There has been a structural shift within the industry. Aldi and Lidl continue to add space, and consumers increasingly just want low, honest prices rather than lots of two-for-one offers.” He says the larger utility groups may struggle because they are already expensive and their share prices are linked to bond market pricing.

ON THE SURFACE, 2015 IS LIKELY TO PROVIDE cash balances have been earning A TRICKIER BACKDROP very little, but would earn more if interest rates rose, and this tends to WITH RATE RISES be reflected in stronger earnings for WIDELY BELIEVED TO the insurers.”

BE IMMINENT, THE Henderson believes there will EUROZONE SLOWING also be some key areas to avoid.

“The general consensus is that rates AND GEOPOLITICAL don’t need to go up very far to have TENSIONS MOUNTING a slowing effect on the consumer,”

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Any improvement in the European situation - particularly any signal that economic weakness was caused by the ‘one-off’ problem of the Ukrainian crisis - would be helpful to stock market confidence in general.

Nevertheless, those companies with European earnings would be buoyed more than the wider market.

Nickols describes it as an environment that investors have to ‘stock pick their way through’. The heady gains were made in 2013, and there is unlikely to be a significant lurch forward in economic growth to support similar overall market gains in 2015.

BARRATT DEVELOPMENTS: JUST GETTING STARTED? 250%

Barratt Dev FLC Ord

FTSE 350 Real Estate

200% 150% 100% 50% 0%

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Feb 14

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-50% Aug

Dan Nickols, manager of the Old Mutual UK Smaller Companies fund, says he is retaining a domestic UK focus across his portfolios: “We prefer UK domestic opportunities rather than internationally-focused companies, believing the earnings growth is likely to be stronger.”

He favours housebuilders, believing that they will continue to trade well notwithstanding the noise surrounding the UK housing market. Barratt Developments (see chart) is among his top ten holdings.

The banks are no longer in the market, which makes land buying less competitive. Nickols adds: “There is lots of anecdotal evidence of recovery and the cycle can be pretty lengthy once it has turned.”

However, he believes that economic figures in 2015 are likely to be choppy, with potentially weaker data from China and Europe. He says: “We don’t expect risk appetite among investors to be

Jun

HOUSING MARKET

STOCKPICKING

stable, therefore we want to ensure that we also hold a number of structural growth companies. “ Douglas Scott, UK equity fund manager at Kames Capital, believes that higher-quality companies that return cash to shareholders are likely to be prized in this environment..

He too thinks property-focused stocks are likely to do well going into a rising rate environment because it is a reflection that the economy is strong and rental rates are improving.

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he says. “Consumer debt is still relatively high and rate rises could take spending power off the high street quite quickly.”

Rate rises are only likely to happen in a climate of stronger growth and most managers believe it should not put investors off the UK.

Source: FE Analytics

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MONEY

SLOW AND STEADY WINS W

ith the strong possibility that the remainder of this year and 2015 will be a volatile period for markets, ISA investors face some choices.

Do they chop and change their portfolios to try and take advantage of that volatility, or do they sit tight and seek out a flexible, all-round type of fund that can help protect their assets whatever the market conditions?

Attempting to time the market can be fraught with difficulties.

Aside from getting the timing wrong, and therefore buying and selling at inopportune times, there are also costs associated with trading funds. The vast majority of professional investors generally think market timing is a bad idea, and is something that often relies more on luck than judgement.

Mike Deverell, investment manager and partner at Equilibrium, says most investors who are looking after their own money should be very careful about moving around between funds.

“Information is not easy to come by and it’s quite expensive to get that data. Investors should certainly be looking at either a multi-asset fund or a mixture of different asset class funds, and probably rebalance once a year.”

Amyr Rocha-Lima, financial planner at Financial Management, says: “As stockmarket volatility has resumed its vigour, we have been reminding our clients that the secret to investing successfully is time in the market, rather than timing it.”

A CLEAR PLAN

This adage of ‘time in the market’ has long been the mantra of those who adopt a long-term investment approach. Figures from Fidelity 4

THE RACE The recent upsurge in stockmarket volatility makes trying to time the market a riskier business than ever, says Neal Underwood – far better to play the longgame. show that missing out on just the ten best performing days of the FTSE All Share Index over the last ten years to the end of September would have resulted in a return of 20.28 per cent, compared with a return of 120.22 per cent for investors who were in the market over that entire period. That is a huge difference. Investors who missed out on the best 20 days would actually see a negative return of -17.47 per cent.

With this in mind, says Rocha-Lima, a long-term view is essential to having success as an investor. “However, without a clear financial plan, investor’s emotions normally get in the

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ISA INVESTOR

ATTEMPTING TO TIME THE MARKET IS FRAUGHT WITH DIFFICULTIES. THE VAST MAJORITY OF PROFESSIONAL INVESTORS THINK ITS A BAD IDEA.

PROFESSIONAL CHOICE: VANGUARD BOND/EQUITY TRACKERS Vanguard LifeStrategy 100% Equity

Vanguard LifeStrategy 60% Equity Acc

IMA Mixed Investment 40%-85% Shrs

Vanguard LifeStrategy 20% Equity Acc

15% 10% 5% 0% -5%

Sep

Jul

May

Mar

Nov

Jan 14

Sep

Jul

May

Mar

Jan 13

Sep

Nov

Jul

May

Mar

Jan12

Nov 11

-10%

Source: FE Analytics 1/11/12 - 1/11/14

way,” he says. “This is why we believe that financial planning can bring great value to people, by educating and coaching them to make sensible financial decisions and persuading them not to react through fear of investment market performance.”

For people who want to go at it alone rather than through an adviser, Rocha-Lima recommends that they spend some time understanding their attitude towards investment risk and their capacity to take financial loss.

“They can then align this with a low-cost multi-asset fund, such as those offered by the 7IM AAP funds, LGIM Multi-Index funds and Vanguard LifeStrategy funds.”

VANGUARD

Equilibrium’s Deverell also highlights the Vanguard LifeStrategy funds as a good option for investors.

“They use indices rather than a fund manager, so you don’t need to worry about the fund manager moving,” he says. “They also do your rebalancing and asset allocation for you. Even trustnet.com

if you invest via a platform, it’s a good way of managing it. The two extremes are either to go for a lowcost passive solution or pay for the expertise of, for example, the Jupiter fund of funds house. This is a lot more expensive, but it’s down to personal preference. It depends on the size of your [asset] pot whether it’s cost effective.”

Deverell also suggests most investors should seek some form of advice. “It’s worth looking at that. If you have a larger portfolio, a wealth manager would be able to manage that for you as part of an overall service.”

Martin Bamford, managing director of Informed Choice, says the temptation is always there to try and time the market. “Decisions do get driven by emotion. The best thing is to stay put for the long term.

Pick an investment portfolio that’s right for you and what you’re trying to achieve and ride out the volatility.

If you want to time the market, become a day trader.”

JUPITER MERLIN

If an investor wants to pick a single fund with a multi-asset strategy, it is important not to give the manager too much of a mandate to chop and change themselves, Bamford stresses.

Some will try and time the market, says Bamford: “The description of the fund should give you as an investor a good idea, as well as the IMA sector it resides in.”

While the majority of Bamford’s clients typically have larger portfolios for which Informed Choice can build a more bespoke solution, he points to a fund such as Jupiter Merlin as a good allweather investment vehicle.”

Bamford says he does a lot of work establishing an investment strategy with clients at the outset, so rarely needs to have a conversation about market timing.

“It takes the emotion out of the equation. You need to take longterm investment decisions and try not to time the market.” 5

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 02

MONEY

ISAs

WHY LIFE IS NICER WITH A NISA The new ISA or ‘NISA’, introduced in July this year, allows you to invest up to £15,000 a year tax-free in a blend of stocks, shares and cash. Holly Thomas thinks it’s a compelling proposition.

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aving through an ISA (Independent Savings Account) should be your first port of call for any spare cash.

Why? Because it’s money that the taxman cannot touch. An ISA is effectively a safe house for your money, which earns interest or provides returns tax-free. You don’t even have to declare these savings on a tax return.

From 1 July 2014, ISAs were replaced by new ISAs, or NISAs, as they are also referred to. Savers can shelter a mixture of cash, and stocks and shares, up to £15,000 in their new-look ISA. It’s important to save as much as you can afford to, but only once any debts are cleared, as they will cost trustnet.com

you far more interest than you can earn from any ISA. If you are thinking of investing in an ISA, here’s what you need to know.

RAINY DAY FUND

Many people like to keep their money in cash – especially if it’s their ‘rainy day’ fund, as it means they can get their hands on it quickly. Everybody should have money available in cash to cater for any short-term emergencies or requirements, and so avoid the need of going into debt.

Patrick Connolly, head of communications at Chase de Vere, says: “If you’re only investing for a short period, certainly five years

or less, or don’t want to take any investment risk, then you should keep your money in cash ISAs.” With interest rates so low these days, experts recommend putting money in stocks and shares using your ISA allowance if you are leaving it untouched for five years or longer.

A BETTER RATE

The appetite for equity ISAs is expected to be stronger with savers disillusioned with paltry returns on cash ISAs from banks and building societies. To stand a chance of earning a better rate of return than you would typically get from a savings account, you need to accept more risk.

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MONEY

REMEMBER THAT ANY LOSS OR GAIN IS ONLY REALISED WHEN YOU SELL YOUR HOLDINGS That means getting comfortable with the fact that your investments will go down in value some of the time. Investors worry when shares are falling – as they did in October 2014.

When this happens, remember that any loss or gain is only realised when you sell your holdings.

Investments are for the long term, so short-term volatility is not necessarily a reason to panic.

Whether savers are topping up their current allowance of £15,000 or planning ahead for how to invest the fresh limit in April, the challenge is picking the right funds.

To make sure a portfolio is spread across asset classes, it could contain a blend of equities, bonds, cash, property and other things, such as commodities and gold, to benefit from their different investment cycles.

Connolly says: “Most people will invest in shares, fixed interest or property, or ideally a combination of all three in order to spread risks.

If you are a novice or cautious investor then consider multi-asset funds such as Schroder MultiManager Diversity or JPM MultiAsset Income. However, if you are prepared to take more risk, then a tracker fund like HSBC FTSE All Share Index or a diversified global equity fund such as Aberdeen World Equ ity or Threadneedle Global Select could be considered.

“More speculative funds such as BlackRock European Dynamic, AXA Framlington American Growth, Artemis UK Special Situations and JPM Emerging Markets can be used by more aggressive investors or as part of an overall balanced portfolio.” 8

ISAs

TOP TIP NOT EVERYONE CAN AFFORD TO SAVE THE FULL ISA ALLOWANCE each and every year. But putting a little something away every month is better than doing nothing, especially if you start to build up your contribution over time.

You won’t reach ISA millionaire status by saving £50 a month, but every little helps. If you invested that sum every month for 25 years, and

it grew at an average rate of 5 per cent a year after charges, you would end up with nearly £30,000. If you could double your monthly investment to £100, then that figure could rise to a much more impressive £60,000.

Many investment funds offer regular investment plans from £25 or £50 a month, without paying for advice, from fund supermarkets.

A much favoured trick by experts is drip-feeding your money into the market, which removes the need to get the timing right. This smooths the highs and lows in share prices so you buy fewer shares when prices are high and more when prices are low – removing much of the worry of market timing. This is known as “poundcost averaging”.

WATCH THIS SPACE...

SAVERS WHO INVEST THEIR MONEY WITH peer-to-peer lending websites could see tax-free returns after the UK Government said it was officially consulting on how to integrate them into the ISA system.

The Government is keen to encourage the peer-to-peer market, which helps savers at a time when interest rates are ultra-low, as well as businesses that can borrow money without having to go to a bank.

Peer-to-peer websites, which match-make savers and investors with people needing capital, typically offer interest of 6 per cent, although sometimes higher, albeit with more risk. They could join the ISA brigade next April.

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MONEY

Next year could be difficult as interest rates, a close UK election and European woes come together to clobber markets – so get your asset allocation right now, says Pádraig Floyd.

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he UK – like much of the rest of the world – may be in recovery from a systemic market failure and the worst recession in living memory, but it is worth preparing for more bad weather.

Equity markets have been remarkably benign, with the FTSE100 reaching the high 6,880s in May and September this year.

This is not only considerably higher than before the crash in 2008, but only just below the all time record of 6,930 in 1999. Despite this, domestically, there is a good deal of uncertainty as the UK heads for a general election in May. None expected a coalition government in 2010, but few would bet against the possibility in 2015, even if the line-up was changed.

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A change in government can make the markets twitchy, says Saku Saha, a fund manager at Woodford Investment Management.

“Any uncertainty triggered by the general election in terms of a hung parliament will likely have a dampening effect on consumer sentiment, business confidence and investment intentions,” he says.

Of course, in the UK, market reactions to changes in government tend to be slight and short-lived.

However, it should be remembered that Labour has already made manifesto commitments to intervention in the utilities sector and a ‘manison tax’ on properties worth more than £2m.

Domestic politics, though are a relative distraction compared

to what may happen across the channel. The UK is still generating growth, but there could be big trouble brewing in Europe, the UK’s largest trading partner.

EUROPEAN MAELSTROM

Growth has stalled in a number of European companies, but not only in what is often referred to as the ‘periphery’ or less pleasantly PIGS – Portugal, Ireland, Greece and Spain – which opted for EU bailouts.

Though something of a basket case, Spain is expected to grow faster than Germany in 2015, and Portugal has reduced unemployment by more than 2 per cent in a year.

But the top three economies – Germany, France and Italy – are all struggling. France has seen trustnet.com

OUTLOOK

INVESTING IN VOLATILE MARKETS Patrick Connolly, certified financial planner at Chase de Vere, recommends three simple investments for those who are nervous about market volatility in 2015.

CASH ISA RECOMMENDATION: NS&I DIRECT ISA This is a straightforward product backed by the UK Government, says Connolly, which accepts a minimum investment of £1, and withdrawals can be made without notice or penalty.

“The current interest rate is 1.5 per cent, making it competitive and less likely you that will need to transfer elsewhere, which can be the case with some other providers as their rates tumble down the ‘best buy’ tables,” says Connolly.

LOW RISK INVESTOR: NEWTON REAL RETURN This multi-asset core holding fund is designed to preserve capital and beat inflation.

The managers use a team approach to running the fund and have a lot of flexibility over where they invest, mindful of managing downside risks.

“The approach is proving to be very successful, as the fund has produced a positive return in each of the 13 years since it was launched,” says Connolly.

THE UK IS STILL GENERATING GROWTH, BUT THERE COULD BE BIG TROUBLE BREWING IN EUROPE growth stagnate and Germany has weakened and seen reductions. Italy, though, is the one the analysts are most concerned about. It largely ignored the need for reform, relying on the domestic demand for government debt. But this hasn’t generated growth and it, too, is saddled with huge debt and growing unemployment figures. As a result, the whole eurozone is staring down the barrel of a deflation gun. This could result in years of economic stagnation, similar to that which Japan has witnessed for a generation.

The European Central Bank (ECB) has set interest rates below zero as part of a package of measures designed to stimulate growth. Just as the US has confirmed the end of its quantitative easing (QE) package, it is thought the ECB may be forced trustnet.com

CAUTIOUS INVESTOR: SCHRODER MULTIMANAGER DIVERSITY This is an ideal choice for a novice or cautious investor, suggests Connolly, essentially offering a whole portfolio in one fund.

Those investments are split across one-third equities, onethird in cash and fixed interest, and one-third in alternative investments, such as hedge funds and commodities.

into a similar policy in the next year.

Though this may be good in the long term for all the eurozone, it may dent confidence in the short term.

“Many of the market corrections that happened up to September were in response to specific shocks, often geopolitical, such as Ukraine, Islamic State, the falling price of oil and the Ebola outbreak,” says Darius McDermott, managing director of Chelsea Financial Services. He believes corrections driven by short-term sentiment will give way to those grounded in fundamentals in 2015, as Europe’s true position becomes apparent.

The threat of deflation and the possibility of a European QE programme makes McDermott uneasy about fixed income investments, preferring strategic bond funds holding more cash and floating rate notes (see boxout overleaf for McDermott’s fund choices). “Absolute return funds are also useful,” he says. Given how buoyant equity markets have been, absolute return may seem counterintuitive as it tends to lag behind the index when markets rise. However, 11

OUTLOOK

PICKING A WINNING TEAM AT CHELSEA Darius McDermott, managing director of Chelsea Financial Services, identifies the funds he’d choose for a tricky climate.

Darius McDermott is at pains to emphasise Chelsea doesn’t advise, but he does share the funds the firm is currently partial to. When it comes to fixed income, he favours strategic bond funds that hold cash and floating

they are much better at protecting capital when markets fall. “When the market is at 6,300 or 6,400, we consider equities to be favourable.

And arguably you should have been topping up your ISA,” he says.

McDermott admits to having topped up his own ISA in the current markets and particularly likes commercial property. He accepts the need to be comfortable with property being less liquid, but argues if you are nervous of the markets, real estate investment trusts (REITs) might present the answer.

REITs offer liquidity in property investments, and this liquidity means they can even be used as a tactical short term investment.

McDermott says: “In the short term they are equity-like, but after about three years they appear more like property. You can buy them and hold for six or 12 months, but if you need to get out, you can sell a REIT.”

12

notes with sufficient discretion to move between asset classes.

Current favourites include the GLG Strategic Bond Fund and the Jupiter Strategic Bond Fund.

McDermott also likes absolute return funds, particularly

“EMERGING MARKETS ARE INCREDIBLY UNDERVALUED – YOU GET THE GROWTH WITHOUT PAYING A PREMIUM” GO GLOBAL

Alan Miller, founder and chief investment officer of SCM Direct, agrees there is better value to be had outside Europe and even the developed world.

He sold out half of his European holdings in March this year as he was mistrustful of what he calls the “mad euphoria of fund managers”.

He favours emerging market equities, and small cap in particular.

“Emerging markets are undervalued in general, and

the Henderson UK Absolute Return Fund and the Premier Pan-European Fund.

“In Germany, property is doing very well, as companies are borrowing cheaply and letting out at 7 per cent,” he says.

incredibly undervalued in terms of small cap,” says Miller. “In emerging markets you get the growth without paying a premium.”

Miller’s mantra is ‘diversification, diversification, diversification’. In emerging markets, he achieves this through exchange-traded funds (ETFs).

“The beauty of this is ETFs come into their own where you invest in small cap indices, because it takes other risks of small stocks blowing up,” says Miller.

SPREAD IT OUT

Patrick Connolly, a certified financial planner and head of communications at Chase de Vere, recommends a multi-asset approach.

“Spread your money across different assets, such as equities, fixed interest, commercial property and cash, but make sure this is in the right proportions to meet your objectives and attitude to risk,” he says.

Then sit tight, try and ride out the storm, as far too many investors buy at the top and sell at the bottom.

If you feel brave, you can top up your ISA as the stock market falls, and investing regular amounts rather than large sums in one go takes out some of the risks of market timing. If values continue to fall, units will be cheaper next time, reducing the purchase cost.

“If your investment strategy was right for you before this recent bout of market volatility, it is probably still right for you today,” says Connolly. trustnet.com

Investment markets tackled on your behalf

Picking the best players requires dedication and skill.

Unlike your long-term investment objectives, the market environment is often subject to change. So it can help to have a talented and experienced team on your side, putting in the hard yards to maintain a suitable balance of investments for you.

To help you tackle markets from your own perspective, the Schroder Multi-Manager Diversity Range offers a choice of six funds combining hand-picked fund managers from across the entire market.

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

Talk to your financial adviser or visit schroders.co.uk/multimanager

The most up to date Key Investor Information Documents (KIID) and Prospectus can be viewed on the UK Investor website via www.schroders.co.uk/investor. Issued in November 2014 by Schroder Unit Trusts Limited, 31 Gresham Street, London EC2V 7QA. Registered No: 4191730 England. Authorised and regulated by the Financial Conduct Authority.

UK08361

IN FOCUS FUNDS

TROJAN INCOME:

AN ALL-ROUND GEM FOR INCOME INVESTORS Editor Joshua Ausden highlights a fund that has been at the forefront of FE Trustnet stories in recent weeks – and all for the right reas ons.

T

here are a number of reasons why investors choose equity income funds. Most managers specialise in a particular area of the asset class, but there are a select few that tick every box.

One of these is the £1.7bn Trojan Income fund, managed by Francis Brooke, which celebrated its tenth anniversary early this autumn.

The obvious draw of an equity income fund is their dividend cheques, giving investors a regular stream of income. If you’re relying on income from your investments, it’s not only the volume of money you receive, but the stability and predictability of it. In this regard, Trojan Income stands out.

FE Alpha Manager Brooke doesn’t simply target companies with a high yield, but instead those that have a commitment to growing their dividend year on year. Such companies tend to be high in quality from a corporate governance point of view, with a proven ability of generating cash without taking on high levels of leverage. This has

MANAGER: Francis Brooke FUND SIZE: £1.782bn SECTOR: IMA UK Equity Income OCF: 0.8 per cent FE CROWN RATING:

enabled Trojan Income, which pays out dividends quarterly, to generate £355.06 worth of dividends from an initial £1,000 investment over seven years, without once cutting its annual dividend. The fund is one of only two in the IMA UK Equity Income sector to do this, the other being BlackRock UK Income.

These funds tend to protect investors better against the downside, as dividend paying companies tend to be more mature and higher in quality than the wider market.

Brooke is a master on the downside. In 2008, for example, Trojan Income was number one in the sector, losing only 12.14 per cent. This compared to almost -30 per cent from the FTSE All Share.

At the same time, the fund has outperformed the largest FTSE

4,000 3,500 3,000 2,500

passive fund – BlackRock UK Equity Tracker – in terms of income earned. Equity income funds also have a place in riskier portfolios. The compounding effects of reinvested dividends can result in compelling returns over the long-term. Trojan Income has managed to generate decent capital growth over the years.

Part of this is linked to its ability to protect capital in the bad times; however, Brooke also managed double digit returns in 2009, 2010 and 2013, and was only a whisker away in 2012. All this has resulted in strong total return performance; FE data shows that it is ahead of its All Share benchmark over one, three, five and ten years, and top quartile in its sector in all but a three year period. Given the fund has been the least volatile in the entire sector over seven years, that’s some going.

INCOME EARNED: £10K TROY TROJAN INCOME vs BLACKROCK UK EQUITY TRACKER £355.06 Troy Asset Management Ltd – Trojan Income O BlackRock – UK Equity Tracker

£223.62

2,000 1,500 1,000 500 0

Nov ’12

Nov ’12

Nov ’11

Nov ’10

Nov ’09

Nov ’08

-500 Nov ’07

FE ALPHA MANAGER RATING

Source: FE Analytics 01/11/2007-03/11/2014

14

trustnet.com

TRUSTS

BH MACRO: A TRUST YOU CAN TRUST IN Hedge funds tend to be viewed with suspicion, but used in the right way they are an effective weapon against turbulent markets.

trustnet.com

a trader does well they are given more assets, and if they don’t they are given less. If they have a particularly poor period, they are shown the door.

The atmosphere is undoubtedly tense, but the results compelling – particularly in times of acute market stress. FE data shows that the trust delivered a positive return of more than 20 per cent in both 2008 and 2011. As the traders are targeting neutral to negative returns, they tend to underperform when markets rise, and the trust actually lost money in 2012; however, BH Macro has certainly made up for any underperformance with its stellar showing when markets fall, as the graph below shows.

The trust, which is a favourite with a number of multimanagers, including Hawksmoor’s Richard Scott and Newton’s Paul Flood,

is a good option for investors who want to diversify an otherwise risk-heavy portfolio.

Though it is susceptible to underperformance, and even significant losses when markets rise, the trust’s ability to generate positive returns when everything else around it is falling is very unusual. Very few saw 2008 coming, and if an unforeseen crisis rears its ugly head again, an investment that softens the blow is highly desirable.

The cherry on the cake? BH Macro is currently trading on a 4.6 per cent discount – much higher than its three year average. MANAGER: N/A (Fund of funds) MARKET CAP: £1.3bn SECTOR: Hedge funds DOMICILE: Guernsey LAUNCHED: 9 March 2007

BH MACRO vs FTSE ALL SHARE 200%

Brevan Howard Offshore Mgmt – BH Macro USD TR

150%

FTSE All Share TR 111.70%

125% 100% 75%

35.41%

50% 25% 0% -25%

Nov ’14

Nov ’13

Nov ’12

Nov ’11

Nov ’10

Nov ’09

Nov ’08

-50% Nov ’07

I

nvestment trusts are commonly viewed as long-term vehicles for risk-takers. Their ability to gear can lead to vast outperformance when markets rise, and narrowing discounts can also provide a big boost to returns. On the flipside, both of these factors can work against closed-ended funds and losses can be both significant and sharp, which is why they are best avoided by short-term, cautious investors.

Th e BH Macro trust is one of the exceptions however. This is one of the very few trusts that tends to be used as a diversification tool. It has made the headlines in recent weeks thanks to its record of posting returns in spite of the autumn sell-off. FE data shows that it has made returns in excess of 7 per cent over the past three months, compared to a loss from the FTSE All Share index. The fund came into its own when the markets took a turn for the worst back in September, rising as the index fell into red territory.

So how does it work? BH Macro is a way for investors to access one of the largest and most successful macro hedge fund portfolios in the world, investing all of its assets into the $25bn Brevan Howard Master hedge fund.

This fund is run by 70 traders working across ten desks, who are set with the task of generating positive returns with a neutral to negative correlation to traditional asset classes, such as bond and equities. There are numerous ways they can do this, often using derivatives to make money, even as markets fall. The management of this team is Darwinian – when

Source: FE Analytics 01/11/2007 - 03/11/2014

15

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 01

S

PENSION

PREMIER MULTI-ASSET MONTHLY INCOME:

A PENSION FUND FOR MANY PURPOSES The changes to the way pensions are accessed has opened up a compelling opportunity for the asset management industry.

trustnet.com

has driven performance thanks to powers of compound interest.

Hambidge and his team pay a dividend once a month, attempting to increase the payment every time.

The team manages the payments conservatively, paying out any excess at the end of the tax year.

The fund is a good option for income investors, and especially those in retirement. From April next year, investors will be able to take as much as they like from their pension pots as a lump sum without fear of punitive tax charges, only paying the marginal rates on their withdrawals.

Funds that pay out a regular income like this Premier fund could well be seen as a potential alternative to annuities. Hambidge’s commitment to growing dividends and his ability to protect against downside losses makes the fund

MANAGER: David Hambidge FUND SIZE: £194.5m SECTOR: IMA Mixed Investment 20-60 per cent Shares OCF: 2.28 per cent FE CROWN RATING:

especially attractive to those relying on income from their investments.

In effect, Premier Multi-Asset Monthly Income could be held by investors early on in their investment journey, to the very end. Holding accumulation shares in the fund will allow investors to build a healthy pension pot, and then switching into income shares will hold them in good stead in later life.

INCOME EARNED: £10K INVESTED IN PREMIER MULTI-ASSET MONTHLY INCOME

100

£96.73

80

Premier – Multi-Asset Monthly Income A

60 40 20 0

Oct

Jul

Apr

Jan ’14

Oct

Jul

Apr

-20 Jan ’13

W

hile some investors like to construct their own pension portfolio, outsourcing decisions to a fund of funds is a popular choice for novices.

These products give investors access to an array of asset classes and management styles, led by a manager who chops and changes their weightings when they see fit.

The kind of product you choose depends on your risk-tolerance.

One that caters to many needs is Premier Multi-Asset Monthly Income, suited to both medium- and longterm investors, and even those in retirement, who would probably want something a little more conservative.

David Hambidge’s £195m fund sits in the IMA Mixed Investment 20-60 per cent sector, meaning it can hold up to 60 per cent in global equities.

The rest is split across bond and property funds, cash, and alternative vehicles including absolute return.

While the fund isn’t appropriate for the ultra-risky, it has participated very effectively on the upside, delivering 84 per cent since its launch in January 2009, beating its sector average by more than 35 percentage points. A high weighting to UK smalland mid-caps in 2012 and 2013 was a big driver of performance.

The figure is only a fraction below that of the All Share, yet Hambidge has operated with a fraction of the volatility. This makes the fund attractive for those with a keen eye on the downside.

As well as effective asset allocation and fund selection, the team’s focus on income-payers

Source: FE Analytics 01/01/2013-01/11/2014

17

INVESTMENT STRATEGY R SECT ILE PR F

WEATHERING THE STORM The IMA Targeted Absolute Return sector contains many funds with differing strategies, so it pays to choose your investment carefully. The FE Trustnet team investigates.

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18

been willing to take on more volatility have generally returned more over five years, but at a cost.

Some have suffered significant losses over certain periods, dealing a heavy blow to investors looking to cash in on their investment at the worst possible time. Standard Life GARS (Global Absolute Return Strategies) is a good example; while the fund has a strong cumulative record, it lost 5 per cent in a single month back in 2013. This is why GARS makes it very clear that it is targeting a positive return over rolling three-year periods.

WHAT IS SHORTING?

Short selling is a way of making money when an investment falls in value.

Short selling may be prompted by speculation, or by the desire to hedge the downside risk of a long position in the same security or a related one.

a positive return every year since inception. The downside? The fund has only made 10.62 per cent over the past five years compared to 56.48 per cent from the All Share.

As the graph below illustrates, absolute return funds that have

RISK vs RETURN: FIVE YEARS 137.23 Odey

108.71 PERFORMANCE

ll IMA (Investment Management Association) sectors are full of managers with different styles and objectives, but few are more diverse than IMA Targeted Absolute Return. These funds are designed for investors who want a positive return regardless of how markets are performing, and are prepared to sacrifice upside gains in the process.

However, each manager has a different appreciation of the sector definition. Those that are more focused on the short-term tend to be very risk averse, attempting to eke out very small returns every month. These will hopefully protect investors when risk assets tank, but underperform when markets rise. Some of the more short-term focused funds invest in a mixture of bonds and cash, hedging that exposure with short positions. Newton Global Dynamic Bond is a good example; it has been one of the least volatile funds in the sector and has made a positive return in six of the last seven calendar years.

Some funds look to strip out the impact of markets completely, by hedging all long positions with short positions. Among them is Insight Absolute Insight Equity Market Neutral, which has made

FTSE All Share

80.18

Argonaut GARS

51.65

Newton Insight

23.13 -5.40

0

1.52

3.04

4.57

6.09

7.61

9.13

10.65

12.18

ANNUALISED VOLATILITY Source: FE Analytics

trustnet.com

ABSOLUTE RETURN

THESE FUNDS ARE DESIGNED FOR INVESTORS WHO WANT A POSITIVE RETURN REGARDLESS OF HOW MARKETS ARE PERFORMING

FUND vs SECTOR: OVER ONE YEAR IMA Targeted Absolute Return

3.5% 3%

Newton – Global Dynamic Bond

2.5% 2% 1.5% 1% 0.5%

trustnet.com

0% Oct

Sep

Aug

Jul

Jun

May

Apr

Mar

Feb

Jan ’14

Dec

-0.5% Nov ’13

Barry Norris’ FP Argonaut Absolute Return fund is a long/ short strategy but tends to have more longs than shorts. It therefore has a higher correlation to market movements. This goes some way in explaining why the fund has been one of the best-performers from a total return point of view over five years, with returns of over 50 per cent, but also one of the most volatile.

IMA Targeted Absolute Return has come under a lot of scrutiny, with many criticising funds for making losses over short periods.

Perhaps more than any sector however, it’s crucial that an investor understands what they are buying into when choosing an absolute return fund. Even the lowest risk portfolios shouldn’t be seen as an alternative to cash, and some with a longer-term focus are susceptible to significant losses from time to time. That doesn’t mean they should be discarded however, and a number have proven extremely effective as either a standalone product or a diversification tool.

Source: FE Analytics 3/11/2013-3/11/2014

NEWTON GLOBAL DYNAMIC BOND FIXED INCOME INVESTORS ARE FACING a decidedly difficult situation. Though it may not feel like it – given the strong performance of government bonds so far this year – experts tend to agree that the global economy is on an upward trend. While it may not be booming, the consensual view is that as economies strengthen, interest rates will rise gradually, causing the prices of bonds to fall.

That may seem like a strong case not to hold bond funds altogether, but as investors are constantly reminded, the key to a successful portfolio is diversification, and fixed income assets can provide a cushion of safety against equity market risk.

So, what options are available to investors? Analysts and fund researchers have said on many occasions that fixed income investors should be focusing on bond funds that have the greatest degree of flexibility to navigate through what is likely to be a very difficult few years of rising yields. One vehicle that fits the bill is the £985m Newton Global Dynamic Bond fund.

Newton Global Dynamic Bond sits in the IMA Targeted Absolute Return sector, but it purely invests in fixed income assets, and Paul Brain, who has headed up the portfolio since its launch April 2006, says he relies on that degree of flexibility to protect his investors. “We focus entirely on producing an absolute return,” he says. “We need to be as 19

bl e Aa IS

The Merchants Trust PLC Leadership.

Stability.

Income. www.merchantstrust.co.uk 0800 389 4696 1

TH

25

ANNIVERSA

RY

•

•

18

89 – 2014

89 – 2014

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•

•

1

25

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ANNIVERSA

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We want the same from our investments as you do.

The Merchants Trust has a long history of focusing on income. Shareholders appreciate the trust's strong leadership and the stability of its 125 year foundations. They value the income expertise of portfolio manager Allianz Global Investors.

And they recognise that Merchants only invests in companies whose qualities match our own: well-run, with strong balance sheets and attractive dividend potential. To view the trust’s dividend history, watch an interview with manager Simon Gergel, or find out how to purchase shares, please visit us online.

The trust is a quoted company listed on the London Stock Exchange. Its share price is influenced by supply and demand which means that the shares may trade below or above the underlying net asset value. Merchants seeks to enhance returns through gearing which can boost returns when investments perform well, though losses can be magnified when investments lose value. Derivatives may be used to manage the trust efficiently.

Simon Gergel Portfolio Manager, The Merchants Trust PLC

INVESTING INVOLVES RISK. THE VALUE OF AN INVESTMENT AND THE INCOME FROM IT MAY FALL AS WELL AS RISE AND INVESTORS MAY NOT GET BACK THE FULL AMOUNT INVESTED. This is a marketing communication issued by Allianz Global Investors Europe GmbH, an investment company with limited liability, incorporated in Germany, with its registered office at Bockenheimer Landstrasse 42-44, D-60323 Frankfurt/M, registered with the local court Frankfurt/M under HRB 9340, authorised by Bundesanstalt für Finanzdienstleistungsaufsicht (www.bafin. de). Allianz Global Investors Europe GmbH has established a branch in the United Kingdom, Allianz Global Investors Europe GmbH, UK branch, www.allianzglobalinvestors.co.uk, which is subject to limited regulation by the Financial Conduct Authority (www.fca.org.uk). Details about the extent of our regulation by the Financial Conduct Authority are available from us on request.

INVESTMENT STRATEGY

ABSOLUTE RETURN

R SECT ILE F R P

trustnet.com

FUND vs SECTOR: ONE YEAR IMA Targeted Absolute Return TR

6% 5%

Invesco Perpetual Global Targeted Returns Acc

4% 3% 2% 1% 0% Oct

Sep

Aug

Jul

Jun

May

Apr

Mar

Feb

Jan ’14

Dec

-1% Nov ’13

flexible as possible to do this, and are not measured against an index.”

According to FE Analytics, the fund has returned 57.68 per cent since Brain has been at the helm. As a point of a comparison, the average fund in the IMA Sterling Strategic Bond sector has returned 45.83 per cent over that time.

However, high returns are not the be all and end all – most investors want their bonds funds to protect them when equities are falling.

Nevertheless, Brain has demonstrated an apt ability to defend his investors.

Our data shows that Newton Global Dynamic Bond has had a maximum drawdown of 5.76 per cent since its launch in 2006. That is slightly higher than the IMA Targeted Return Absolute Return sector’s maximum drawdown, though the IMA Sterling Strategic Bond sector’s is much higher at 11.79 per cent.

Newton Global Dynamic Bond has also made a positive return in all but one calendar year since its launch. That includes a 0.14 per cent return in the crash year of 2008, when equities fell 30 per cent and strategic bond funds lost 13.64 per cent.

Brain invests across global fixed income markets – including using different currencies, types of assets and credit ratings – and will go both long and short, which effectively means betting against asset prices, to generate an absolute return.

The fund has a yield of 3.65 per cent and an ongoing charges figure (OCF) of 0.68 per cent.

Source: FE Analytics, 3/11/2013-3/11/2014

INVESCO PERPETUAL GLOBAL TARGETED RETURNS THE STANDARD LIFE INVESTMENTS GLOBAL ABSOLUTE RETURN STRATEGIES is the dominant player in IMA Targeted Absolute Return, running over half of the £41.4bn invested in the sector.

At £22.1bn in size, the fund is the default option of investors looking for an absolute return portfolio. No-one ever got fired for buying IBM, and the same argument could be made for GARS – its track record in achieving a positive return over rolling three-year periods has won it a place in many portfolios.

A real challenger to the dominance of GARS, however, emerged in September last year when Invesco Perpetual launched its Global Targeted Returns (GTR) fund under the leadership of three managers instrumental to the success of the original.

Invesco Perpetual Global Targeted Returns is managed by David Millar, Dave Jubb and Richard Batty. The three joined Invesco Perpetual in 2013 from Standard Life Investments, where they had worked on GARS, to launch the group’s first multi-asset range. Similar to Standard Life fund, GTR aims for a positive return in all market conditions over rolling three-year periods, targeting 5 per cent a year above UK threemonth LIBOR with less than half the volatility of global equities. The 21

JPMorgan European Investment Trust – Income Shares

A departure from the everyday – 150 European income stars.

Looking for a core European investment opportunity that offers high income and capital growth? The JPMorgan European Investment Trust (Income Shares) goes further than many of its peers, by seeking out at least 150 of what we believe to be the best of Continental Europe’s highest yielding stocks. Our disciplined investment process rigorously analyses the 1,200 strong universe of dividend paying stocks, avoiding companies that don’t have a high and sustainable yield. It’s an approach that works, with the trust delivering a consistent yield premium to the benchmark over the last five financial years as shown in the table below. The current prospective dividend yield as at 31 August 2014 is 4.0%.* Past performance is not a guide to the future. Please remember that the value of your investments and the income from them may fall as well as rise and you may not get back the original amount invested. Please see trust specific risks below.

Financial Year End – Trust Yield v Benchmark Yield 12 month period ending 31/03/10 31/03/11 31/03/12 31/03/13 31/03/14

Trust Yield (%) 4.23 4.11 4.86 4.26 3.86

Benchmark Yield (%) 3.21 3.30 3.99 3.60 3.11

Source: J.P. Morgan Asset Management as at 31 March 2014 (JPM European IT annual report, calculated by dividing total net dividend for relevant year by year end share price. Please note 2014 share price figure is as per the NAV announcement made on 1st April.) Benchmark source: 1/4/09 – 31/3/13 MSCI Europe cum UK and 1/4/13 – 31/3/14 MSCI Europe ex UK; calculated in the same manner as JPMorgan European IT yield. *Source: Morningstar as at 31 August 2014. Prospective dividend yield for 31 August 2014 based on mid market prices and the estimated dividend(s) payable in respect of the current financial year. This will include declared and net prospective dividends.

The yields quoted are provided as a guide and should not be taken for granted as a guaranteed yield. The affect of charges will reduce the amounts shown. Investment charges are taken from income and capital.

This may increase the amount of income available for distribution but will reduce the potential for capital growth. It may also erode capital if investment growth does not compensate the charges.

Exchange rate changes may cause the value of underlying overseas investments to be volatile. The trust may invest in smaller company shares, which can be more unpredictable and less liquid than shares of larger companies. Investment trusts may borrow to finance further investment (gearing). The use of gearing will increase the volatility of movements in the Net Asset Value (NAV) per share. This means that a relatively small change, down or up, in the value of a trust’s assets will result in a magnified fall or rise, in the same direction, of the investment trust’s NAV per share.

Make www.jpmorgan.co.uk/Europeanincome your destination.

This material should not be considered as a recommendation relating to the acquisition or disposal of investments. Investment is subject to documentation which is comprised of the Investment Trust Profiles and Key Features and Terms and Conditions, copies of which can be obtained free of charge from J.P. Morgan Asset Management Marketing Limited. Issued by J.P. Morgan Asset Management Marketing Limited which is authorised and regulated in the UK by the Financial Conduct Authority.

Registered in England No. 288553. Registered address: 25 Bank St, Canary Wharf, London E14 5JP.

INVESTMENT STRATEGY

ABSOLUTE RETURN

R SECT ILE F R P

trustnet.com

FUND vs SECTOR: ARGONAUT ABSOLUTE RETURN IMA Targeted Absolute Return TR

Argonaut- FP Argonaut Absolute Return A Acc

14% 12% 10% 8% 6% 4% 2% 0% Sep

Jul

May

Mar

Jan ’14

-2% Nov ’13

portfolio is managed on a ‘best ideas’ basis, making use of Invesco Perpetual’s range of funds and derivative-based strategies. It is free to investment anywhere in the world with no asset class constraints.

Invesco Perpetual Global Targeted Returns is currently playing 26 ideas, with the over-arching theme being “cautious optimism”, according to Millar. One of the most successful has been long Brazilian real and short Chilean peso, which was recently closed ahead of the Brazilian election.

Since launch, the fund has performed strongly – although this is a short period to judge a portfolio with a rolling three-year target. It’s up 9.16 per cent since 9 September 2013, compared with the 3.46 per cent gain in its average peer and a 7.32 per cent return from GARS. During the recent six-week market correction, GTR held up well by making a 0.93 per cent return.

The FTSE All Share fell 8.92 per cent over the same time, and the average absolute return fund lost 0.68 per cent. GTR appeared on the radars of fund buyers quickly, and has already attracted assets under management of £456.1m. Given its more aggressive approach than the average absolute return fund, it has proven more volatile over the past year. FE Analytics shows its volatility is 3.4 per cent against the peer group’s 2.3 per cent while its maximum drawdown is 1.96 per cent Invesco Perpetual Global Targeted Returns has clean ongoing charges of 0.87 per cent.

Source: FE Analytics 3/11/2014-3/11/2014

ARGONAUT ABSOLUTE RETURN WHILE THE ARGONAUT ABSOLUTE RETURN FUND IS A RELATIVE MINNOW IN THIS PARTICULAR POOL, size has been no barrier to performance, which has clocked up one of the best reputations and a strong total return over the past few years.

Since launch in February 2009 the £90m fund has clocked up the second best return in the sector, handing back almost 70 per cent to investors while the average fund in the sector made 24.41 per cent.

Managed by FE Alpha Manager Barry Norris since its launch, the fund aims to make a positive return over a rolling three year period, regardless of market conditions.

Expectations of a recovery in Europe, the fund’s largest weighting, are diminishing, so Norris has increased its gross exposure – the total value of its long/short positions. While it has lagged behind direct rivals City Financial Absolute Equity and CF Odey Absolute Return over the past three years, it has more than a quarter less annualised volatility.

The fund has held up in recent market falls, and is ranked fifth best in terms of downside risk over the past three years. From the point of view of risk-adjusted returns, the fund’s Sharpe ratio, a measure of excess returns per unit of risk, puts it at fourth best in the sector behind the likes of Henderson European Absolute Return and CF Odey Absolute Return.

23

INVESTMENT STRATEGY

INVESTMENT SOLUTIONS FOR A VOLATILE CLIMATE An in-depth look at the Schroders Multi-Manager Diversity fund range, and insights from the team behind it.

M

ulti-Manager funds can be an attractive option for investors seeking an effective ‘one-stop-shop’ solution for their investment needs. While you may not have too much of a problem defining your overall investment aims, putting together the right balance of long term investments at a level of risk you are comfortable with is not straightforward.

The premise of a multi-manager fund is that these time-consuming and onerous tasks are put in the hands of an experienced 24

professional investment manager.

And experience is not something that Schroders’ multi-manager team, led by Marcus Brookes, is short of.

“As the name implies, the Schroder Multi-Manager Diversity range invests in a number of hand-picked funds selected from across the entire market. Robin [McDonald] and I have 35 years of combined investment experience*, and much of this time has been spent together developing and refining the investment process behind the range,” Marcus says.

“Our dedicated Multi-Manager team is now five strong,” adds Robin. “And as part of Schroders we have access to economic and market insights from a very well resourced and experienced global team.* “This provides us with the level of in-depth information required to change and adapt the funds to reflect the broader environment, while ensuring that they still remain in line with the objectives of investors.”

Schroders’ Multi-Manager Diversity Range offers six trustnet.com

SCHRODERS “We invest with a broad range of fund managers across equities, bonds and alternative asset classes such as property and commodities”, says Robin. “Our aim is to select strategies from leading managers across the fund management industry on the basis of our assessment of their ability to do well in the prevailing investment environment.”

Marcus is keen to stress the importance of active asset allocation to the process, “We believe that changing the balance of a portfolio to reflect the prevailing environment has the potential to add significant value,” he says. “For this reason, we take

an active approach to selecting the markets we invest in within a framework that aims to ensure that risks are appropriately controlled.”

So what are the team’s current views on the economic and market outlook?

“Recent market events suggest we may be entering a period of greater volatility as investors adjust to diverging global monetary policy.” says Marcus.

“We continue to see relatively limited opportunities at these broad market levels. This has manifested itself in relatively cautious portfolios whilst we await a more attractive risk reward trade off across asset classes.”

WHAT ARE THE RISKS?

SCHRODERS’ MULTIMANAGER DIVERSITY RANGE OFFERS SIX INVESTMENT OPTIONS WHICH HAVE BEEN DESIGNED TO REFLECT A BROAD RANGE OF INVESTMENT ASPIRATIONS AND RISK ATTITUDES

Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amount originally invested.

investment options which have been designed to reflect a broad range of investment aspirations and risk attitudes. “Each fund has a different target and we aim to deliver returns with less volatility than other similar funds in the market, although this is not guaranteed,” says Marcus.

“To meet the needs of different investors, the funds differ in the balance of shares, bonds and other investments that they contain.

But otherwise they’re managed in the same way by our expert fund management team.

“We focus on balancing the portfolio to suit the prevailing market environment and selecting fund managers from across the whole of the market with the potential to offer strong returns – although again we can’t of course guarantee that these will be achieved.”

The funds will invest mainly in collective investment schemes which themselves may invest in bonds, equities and alternative investments each of which will have specific risks as detailed in the full Prospectus.

trustnet.com

With some of the Schroder Multi-Manager Diversity funds currency fluctuations may adversely affect the value of investments and the income thereon. Some of the Schroder Multi-Manager Diversity funds invest partly in emerging markets. Investing in emerging markets can be extremely volatile, involving a higher than average risk compared with investing in established markets.

The levels and basis of, and reliefs from, taxation may change. Investors should obtain professional advice on taxation where appropriate before proceeding with any investment.

Derivative instruments may be used in the funds for the purposes of efficient portfolio management only. This should not lead to an increase in the risk to the funds. The managers will employ a risk management process to manage any derivative exposure achieved for the purposes of efficient portfolio management.

For further information, including the Key Investor Information Documents and Prospectuses for the funds, visit www.schroders.co.uk/multimanager or phone Investor Services on 0800 718 777 (for your security, calls will be recorded). *Source: Schroders November 2014. Issued in November 2014 by Schroder Unit Trusts Limited, 31 Gresham Street, London EC2V 7QA. Registered No: 4191730 England. Authorised and regulated by the Financial Conduct Authority. UK08242 25

Advertisement Feature

Schroders Multi-Manager Diversity range is available to buy through a number of fund supermarkets and investment platforms but it’s important to ensure you get the right advice before you invest. A financial adviser will work with you to determine your investment objectives and the level of risk you’re comfortable taking with your money. You can find a financial adviser at www.schroders.co.uk/unbiased or www.vouchedfor.co.uk

IN THE BACK

IT PAYS TO SHOP AROUND Fund supermarkets, investment platforms and online stockbrokers have made a real difference to private investors, but comparing them can be a complex business.

John Blowers, head of Trustnet Direct, looks at how to make the right choices.

U

ntil recently, there were just a handful of platforms allowing investors to manage, predominantly, their shares and gradually their other investments.

Now these investment platforms have proliferated, offering a multitude of functionality to both novice and expert alike.

That financial advisers now have to explicitly charge for their services, rather than take commission, has led many an investor to think that they can do the job of portfolio management them, and more costeffectively.

With the internet offering a huge amount of investment data and research, investors can gain access to the same information that the professionals use. Now this information is being incorporated into a number of investment platforms, so that you can research, choose, buy and manage your investments – all in one place.

Increasingly, there is a trend to offer simplified services and trustnet.com

MOST PLATFORMS HAVE OFFERS TO ATTRACT YOU IN, BUT EXIT FEES THAT CAN MAKE IT EXPENSIVE TO MOVE guidance for even the most novice investor, but the current platform marketplace is still mostly catering for the enthusiast.

NOVICE INVESTORS

There’s plenty of choice in the platform market. Have a good look at all the platforms out there to see which one suits you. It should stock a wide range of funds, shares, investment trusts and exchange traded funds. Although you might not understand – or want to invest in – some of these products now, they may well prove useful later.

Does the platform offer an Individual Savings Account (ISA), Junior ISA and a Self-Invested

Personal Pension (SIPP)? These tax efficient wrappers are important to have as part of your account.

Picking your platform should be for the long-term. Most platforms have offers to attract you in, but painful exit fees, which can make it expensive to move. Also, look at the portfolio features. Can you quickly see how well your investments are doing overall and at a granular level?

For the beginner, look out for model portfolios, which are preselected baskets of funds – and for other guidance, tools and educational material.

For example, Trustnet Direct offers three core model portfolios for growth, wealth preservation and income, plus four miniportfolios designed with goals in mind – for example, school fees planning, retirement, monthly saving or paying off a mortgage (www.trustnetdirect.com/fund/ helpme-choose-map).

27

PLATFORM REVIEW

your investments rise, your annual platform fees do not. The Share Centre, Interactive Investor and ATS offer fixed fees, whereas AJ Bell Youinvest and Trustnet Direct both cap the annual platform fee at £200.

ACCOUNTS THAT LOOK CHEAP FOR SMALL PORTFOLIOS TEND TO GET VERY EXPENSIVE AS YOUR INVESTMENTS GROW

More sophisticated private investors usually demand reliable and independent information and tools, and an attractive pricing structure to help them tune their portfolios. These investors fall broadly into two camps – the trader and the buy-and-hold investor.

Traders have tended to use sites such as TD Direct Investing, Barclays, Interactive Investor and Halifax, whereas buy-and-hold fund investors have used sites such as Hargreaves Lansdown, BestInvest and Fidelity.

However, there is a new generation of service that places equal emphasis on shares and funds to help investors build a significant portfolio over the long-term. Such services provide tools, research, information and guidance in order to help you really take control. Sites such as Charles Stanley Direct and Trustnet Direct are notable players here.

ANNUAL PLATFORM FEES FOR INVESTING THE CURRENT £15,000 ISA LIMIT EACH YEAR OVER 20 YEARS 2,000

Trustnet Direct

1,800

Charles Stanley

1,600

Fidelity

1,400

BestInvest

1,200

Hargreaves Lansdown

1,000 800 600 400 200 0

PRICING

It is hard to compare platforms on cost alone. Every platform

Some platforms look to lower cost when your portfolio is small, but remember – you want your investments to grow.

Think about the lifetime costs of managing your account .

Accounts that look cheap for small portfolios tend to get very expensive as your investments grow (see graph below).

A final word of caution: beware of additional charges such as trading fees, and additional administration charges for ISAs, SIPPs and so on, and take these into account when assessing the market.

has a different way of charging.

The key price point to evaluate is the platform fee. Now that no platform is allowed to take commission from the sale of a fund, they are obliged to charge an explicit annual service fee. Since this new rule came in on 6 April 2014, costs have tumbled from, typically, 0.75 per cent a year to between 0.2 per cent and 0.5 per cent a year.

Some platforms offer a fixed platform-fee, so has the value of

£ CHARGES PER ANNUM

MORE ADVANCED INVESTORS

A NOTE OF CAUTION

1

2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

YEARS Source: FE Analytics

Assumptions: We have assumed that someone invests their full ISA limit of £15,000 each year over a 20 year period. We have assumed that this money grows at 5 per cent per annum net of charges. This shows a total return – before charges – of £520,789. The graph above shows only platform fees and not transaction or other administration charges. We are illustrating the platform fees that would be levied according to the providers above. Source: providers’ own websites, 21/10/14

28

trustnet.com

LOOK BENEATH THE SURFACE FOR A MORE INFORMED CHOICE A depth of investment information you won’t find anywhere else.

FE Ratings pull together many different types of rating and analysis to help investors make better informed fund choices: • A genuine all-round perspective • A pure, unbiased, quantitative view • Unique guidance for investment decisions • Rates funds, managers and groups • Provides fund recommendations • Assesses risk.

You can access our ratings from FE Trustnet www.trustnet.com/ratings.

IN THE BACK

DEFENSIVE STOCKS Helal Miah, investment research analyst at The Share Centre, looks at how investors can protect their portfolios against downturns in the market.

make a tentative recovery. The key commodity for BHP Billiton is iron ore and despite the price falling, mining of this is still lucrative for BHP as a low cost producer.

The company generate strong cash flows and pay an attractive dividend yield of 4.5 per cent.

I

nvesting in blue chip income paying stocks and reinvesting the dividends to compound the returns is an investment strategy that can protect investors from volatile markets. Even when the underlying shares don’t perform well, investors can still generate a positive return. It is also less risky than looking at growth stocks, which can often go belly up.

However, a dividend reinvestment strategy takes discipline and patience and should be executed over the longer term. Achieving success requires plenty of time and cash, as both examples in the table show. British American Tobacco (BAT) and Sainsbury’s are both large-cap companies and longstanding members of the FTSE 100 that pay a good dividend yield.

GLAXOSMITHKLINE

The bribery scandal in China has caused a lot of commotion for GlaxoSmithKline recently; however, China only represents a fraction of its global sales and this issue may have been given more coverage than it deserves.

The decline in the share price has had more to do with the management downgrading its 30

SAINSBURY’S

expectations for sales this year, as well as economic difficulties in Europe, the appreciation of sterling and the ongoing effects of generic competition. However, this is a company that generates solid cash flows, pays a very good dividend and has a yield of 5.5 per cent.

Another positive is its attractive pipeline of drugs coming through R&D. Due to these positive points, we believe the current dip in share price is very attractive for investors.

Sainsbury’s has plunged in recent months and in its Q2 results the supermarket reported a decline in sales for a third consecutive quarter. However, priced at around £2.27, Sainsbury’s looks good value for investors. The current yield of over 7 per cent is tempting and currently well covered. Whilst there has been no mention of it so far, investors should be aware this

BHP BILLITON

This is the most diversified of the large cap miners and also has significant exposure to oil & gas.

Commodities prices are in a trough following excessive investment into capacity expansion during the commodities boom up until the financial crisis. The subsequent drop in demand has led to massive over-supply. However, these imbalances are expected to fade away as over the longer term the global economy is expected to trustnet.com

DEFENSIVE STOCKS

could be trimmed. Another note of interest is its venture with Danish discounter Netto to open up a number of stores in the UK to help it combat the challenges it is facing from Aldi and Lidl.

Sainsbury’s has lost market share, but not to the same extent as the other major players in the sector. It has a good property portfolio and a strong management track record.

Investors considering taking a position in the stock should drip feed while short-term headwinds remain.

ROLLS ROYCE

Rolls Royce is doing well from civil orders. Airlines want more efficient engines and the company

is generating extra revenues from offering after-sales services contracts. There is a large order backlog of roughly £70bn which should provide a cushion if new orders tail off. However, sales to the defence market have lagged as

expected due to budget cuts both in the US and the UK, causing this year’s flat group revenue growth.

Next year, growth in the civil market is expected to more than make up for the lack of progress in the defence segment.

EFFECT OF REINVESTING DIVIDENDS: BAT AND SAINSBURY’S original shares

value 1999

513p

Dividends as cash

£10,000

£15,983

value 2012

capital gain

3058.5p £59,611

£49,611

1,949

Dividends reinvested

513p

3058.5p

£10,000

£113,011

£103,011

value 2012

capital gain

1,949 original shares

1,746

value 1988

215.7p

Dividends as cash 4.636

Dividends reinvested 4.636

trustnet.com

dividends /shares

£10,000

dividends /shares

£14,380.38

288.10p £13,356.46

215.7p

288.10p

£10,000

£33,160.31

6,874

£3,356.46

£23,160.31

31

These are the growth figures you don’t want to see in your next ISA Annual Platform Fees over 10 years* £1,000

0.45%

£900

0.40%

£800

0.35%

£700 £600

0.25%

£500 £400 £300

Trustnet Direct

£200 £100 0 1yr

2yrs

3yrs

4yrs

5yrs

6yrs

7yrs

8yrs

9yrs

10yrs

*The graph displays platform fees plus the cost of 5 transactions per annum with Trustnet Direct compared with platforms charging 0.45%, 0.40%, 0.35% and 0.25% per annum in platform fees. Assumes £15,000 new ISA limit invested each year for 10 years and assumes 5% growth net of charges.

The good news is that if you invest the new ISA limit of £15,000 per annum over the next 10 years and it grows at 5% per annum net of charges, you’ll have built a nest egg of over £198,000 tax-free.

The bad news is that platform fees can seriously damage your wealth, as the chart above shows.

At Trustnet Direct, we charge 0.25% in platform fees but cap it at just £250 max per annum (£200 + 5 trades at £10 per trade).

We may not be the cheapest on day one, but when your investments grow, your charges don’t.

So, if you want a premium platform, without the premium price tag, open your next ISA with Trustnet Direct.

Trustnet Direct does not provide advice on the suitability of investments. It is an execution-only service. If you are unsure about the suitability of investments, seek independent financial advice.

The price and value of investments and their income fluctuates: you may get back less than the amount you invested.

Past performance is no guarantee of future performance.

Prevailing tax rates and relief are dependent on your individual circumstances and are subject to change.

Set your account up now at:

www.trustnetdirect.com Trustnet Direct is a trading style of Trustnet Limited, Authorised and Regulated by the Financial Conduct Authority.

IN THE BACK

LIONTRUST SPECIAL SITUATIONS

WHAT I BOUGHT LAST

T

he themes that dominated the UK equity market in 2013 – mid and small cap outperforming large cap, and cyclical stocks outperforming defensives – went into reverse in the second and third quarters of the year, partly as a result of the slowdown in Europe and partly because robust US economic data brought forward expectations of interest rate rises.

At the end of last year we took some risk out of UK equity portfolios by lowering allocations to domestically-focused mid and small cap funds, while increasing weightings to funds with a large cap bias.

However, we reiterate our belief in focusing on out of favour, undervalued parts of the equity market when allocating to different fund style ‘buckets’. We remain concerned about the fairly expensive prices that investors are willing to pay for ‘high quality’ defensive names, such as Diageo. For now, we still believe better returns may be available in cyclical sectors or companies with management change or turnaround stories.

One fund that we have recently added to our recommended defensive growth ‘bucket’, and which we think will be able to take advantage when we rotate into a more defensive position is Liontrust Special Situations. We are long term supporters of co-managers Anthony Cross and Julian Fosh and their ‘economic advantage’ investment process, which allows them to idenify industry leading companies with a genuine edge over their rivals. Finding companies with sound intellectual property such as patents is a big priority.

Liontrust Special Situations is a multi-cap fund, drawing on the best ideas of Liontrust Smaller Companies and the large-cap focused Liontrust UK Growth portfolio. Their approach tends to favour certain sectors, such as industrials and technology.

Industry leaders such as EMIS, NCC and Rotork, which the managers

Ben Williams, investment manager at independent wealth manager Saunderson House, retains a bias towards UK cyclicals but uses the Liontrust fund as core defensive position across client portfolios. believe have dependable earnings growth and high barriers to entry, are currently big positions in the fund. Conversely, the managers are happy to avoid sectors where cash flow yields are low, such as telecomes and utilities.

The fund has performed exceptionally well, delivering top decile returns over the past five years and since launch. The focus on high quality growth companies led to underperformance versus the benchmark and peer group in 2013 for the first time in six calendar years. We took this period of underperformance as a timely opportunity to start building positions in a fund with a disciplined, long-term, high-conviction approach. We expect it to perform well during gently rising markets, and particularly well during falling markets, significantly outperforming its benchmark and peer group over a market cycle.

TRUSTNET magazine W IE V E R P Y R A U N JA PENSIONS OVERHAUL… HOW DOES IT AFFECT YOU? The changes to the pension system in March’s budget have shaken the industry to its core, but what – if any – are the material benefits for investors?

In January’s edition, we shine a spotlight on the controversial reforms, and look at some of the funds and investment strategies that will help investors hit their retirement objectives.