Trustnet magazine issue 3

TRUSTNET magazine Issue 3 / January 2015

? e r u t u f r e t A brigh

Shedding light on the pensions overhaul

Multi-asset

2014

SIPPS

An array of funds for very different needs

A year few experts could have predicted

Managing your pension has never been easier

EDITOR’S LETTER

TRUSTNET magazine Issue 3 / January 2015

A brighter future?

Shedding light on the pensions overhaul

Multi-asset

2014

SIPPS

An array of funds for very different needs

A year few experts could have predicted

Managing your pension has never been easier

000 Front Cover.indd 1

14/01/15 19:41

ISSUE 3

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 publishing 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

A

nd it all seemed to be going so well…

I write this a day after the FTSE 100 fell 2.5 per cent on deflation fears in Europe and beyond, while the Swiss central bank’s decision to cut interest rates has seen the index plummet another 50 points.

By the time you read this, a recovering oil price may well have put these fears to bed. Or, as a growing number of fund managers fear, we could be faced with the biggest market crisis since 2008.

Anyway, enough of all this short-termism. The problem with being a financial journalist is you pay too much attention to daily swings. If you’re a genuine longterm investor with a 20 year-plus time horizon, 5, 10 or even 30 per cent falls are mere speed bumps in the grand scheme of things. Even if you invested in the FTSE on the eve of the Lehman Brothers crash, you would still be sitting on a gain of more than 50 per cent – not bad given the pathetic yields on cash.

Speaking of long-term investors, they are about to get a major shot in the arm thanks to pension reforms outlined in last year’s Budget. From April 2015, investors over the age of 55 will have much more freedom when cashing in their pension pots, and if they’re wellorganised, there are big tax benefits. Exactly how it works in practice remains to be seen, but hopefully the following pages will shed some light on the matter.

So it’s not all doom and gloom. “Keep calm and carry on” seems to be the recurring message from experts, and if you’re feeling particularly savvy, you could even ‘buy the dips.’ Every little helps…

Josh Ausden Head of publishing content FE Trustnet

In association with:

IN THIS ISSUE most organised investors need to prepare for worst case scenarios (p.22-23)

GIVE YOUR PENSION THE SIPP The rise of platforms has made it easier than ever to manage your pension.

P. 24-25

STOCKS YOU CAN BANK ON Financials are seen by many as one of the riskiest sectors, but Rathbones’ Alan Dobbie disagrees.

P. 26

WHAT I BOUGHT LAST

15

PICK ‘N’ MIX

CAUGHT NAPPING Iona Bain takes a look back at 2014 – a year few investors could have anticipated.

P. 2-3

DEATH AND TAXES Inheritance tax is hugely controversial, but what can you do to protect yourself? Holly Thomas investigates.

P. 5-6

A BRIGHTER FUTURE? Most of the news flow has been positive, but what are the practical advantages of the pension reforms?

P. 8-10

IN FOCUS BlackRock Continental European Income, Fidelity Special Values IT and Polar Capital Global Technology are all under the spotlight this month.

P. 12-14

INVESTMENT STRATEGY SECTOR PROFILE: There are hundreds of funds with differing risk profiles across the four multi-asset sectors.

P. 15-19 FP Matterley Regular High Income (p.17), Schroder MM Diversity (p.17-19) and Neptune Global Alpha (p.19) couldn’t be more different.

RETIREMENT INCOME Schroders explains why planning for retirement is a fusion of art and science (p.20-21), and why even the

In the next in the series, Peter Lowman explains why he’s just bought the Franklin UK Managers’ Focus fund.

P. 28

2

CAUGHT NAPPING

MONEY

CAUGHT NAPPING A

t the end of 2013, it seemed so obvious. Interest rate rises were just around the corner, which meant the investment outlook would be set fair for equities and cloudy for bonds.

Fast-forward a year and things haven’t quite worked out that way. Most fund houses and managers would admit they have been caught off-guard, as the best-performing IA sector in 2014 was UK Index-Linked Gilts, with returns of 18.56 per cent. The UK Gilt sector was in third place with gains of 13.12 per cent, as bond yields remained under pressure.

Colin McLean, managing director at SVM Asset Management, said: “The biggest overall surprise was the inexorable move of the global economy towards deflation, which wrong-footed almost everyone. This was linked to wrong 2

Predicting the outlook of any market is always difficult, but 2014 was particularly tricky.

Iona Bain reports

predictions on bond yields.”

On the equity front, few predicted that the US could outperform – for example, a year ago BlackRock said that it looked like the most expensive market.

However, its 17.79 per cent return placed it top of the equity market pecking order, with the Technology & Telecoms sector next on 12.78 per cent.

The industry also misjudged the fortunes of European equities, strongly tipped by JP Morgan, L&G and BlackRock. It was also seen as the most promising market among managers surveyed by the Association of Investment Companies (AIC), favoured by 24 per cent. But European fund investors on average only gained less than 1 per cent.

Emerging markets had been expected to fall away from their previous highs, hit by the rising

dollar, but a strong rally after the first quarter was a turn-up for the books.

WINNERS & LOSERS

UK smaller companies, the star performer in 2013, had been widely tipped to reign supreme in 2014 as well. Who would have envisaged that the sector would be propping up the table with a 1.65 per cent loss? A market rotation out of small stocks into large caps, which began in the spring, tripped up many managers.

It did benefit the equity income sector however, which has a natural overweight to large cap dividend-payers.

Global equities proved a fruitful hunting-ground, but only if you invested in certain countries and sectors.

Adrian Lowcock at AXA Wealth said: “Generally the managers trustnet.com

2014 OVERVIEW

that have suffered the most are those with exposure to Russian markets and commodities, while Indian funds have topped the performance charts.”

Losers include Schroder European Alpha Plus and M&G Recovery, while First State Asia Pacific Leaders, with 25 per cent in India, and Fundsmith Equity, with its focus on strong global brands, were among the winners.

RALLYING BONDS

In fixed income, it was longerdated UK gilts that confounded expectations by outperforming shorter-dated bonds.

In credit, groups such as Threadneedle which tipped high yield to continue outpacing investment grade bonds were also disappointed, as the latter proved stronger.

Both strategic bonds, averaging a 6.9 per cent return over the calendar year, and absolute return, with an average gain of 2.85 per cent, struggled with the macroeconomic climate. In multi-asset, for example, Mike Turner had reduced his Aberdeen Multi Asset fund’s exposure to index-linked and investment grade bonds in favour of equities at the start of 2014.

2014 was once again a year when central banks overshadowed active managers, even though many experts said stockpickers would outperform.

Lowcock said: “Central banks continued to dominate markets, through the US tapering and finally stopping QE, and Japan carrying out trustnet.com

“THE BIGGEST OVERALL SURPRISE WAS THE INEXORABLE MOVE OF THE GLOBAL ECONOMY TOWARDS DEFLATION, WHICH WRONG-FOOTED ALMOST EVERYONE”

further QE, to Mario Draghi making noises as to what action the ECB would or wouldn’t take.”

WHAT ABOUT 2015?

The question now is how this drama will play out in 2015.

“Yes, the Fed remains the dominant force, but the BoJ certainly came to the fore more in 2014,” Lowcock said. “The trend will be the same in 2015 but with eyes on US and UK central banks over interest rates and whether the ECB will introduce QE.” A year ago, 90 per cent of managers polled by the AIC said they expected the FTSE 100 to end 2014 above 6,500 and 58 per cent

were shooting for 7,000 and above.

When polled this time, admittedly before a 9 per cent sell-off in the first half of December, 95 per cent said they expect the index to close 2015 above 6,500, with almost half predicting 7,000-plus.

Thirty-nine per cent of those managers expect Europe to be the top performer in 2015, followed by 22 per cent for the US and 17 per cent for Asia Pacific excluding Japan.

Trevor Greetham, director of asset allocation at Fidelity Worldwide Investment, said his favourite region is still America. “We think that’s where the growth is and where the policy is most supportive to growth.

We also think Japan can do well.”

McLean said: “Europe still has further potential for stimulation, but we see the US and UK offering better value against the turmoil.”

But amid the optimism, there is a note of caution. “Last year’s collapse in energy and commodity prices was sudden. Oil and mining are big sectors on the London market and were a drag on performance – a pattern that looks likely to continue in 2015.”

BEST AND WORST PERFORMING IA SECTORS OF 2014 BEST

%

WORST

%

UK Index Linked Gilts

18.56

UK Smaller Cos

North America

17.79

European Smaller Cos -1.42

UK Gilts

14.52

Europe ex UK

0.94

Property

13.12

Europe inc UK

0.07

Tech & Telecoms

12.78

Japan

0.62

-1.65

Source: FE Analytics

3

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MONEY

INHERITANCE TAXES

DEATH AND TAXES The highly controversial “death tax” has angered many people, but there are ways to protect yourself and your loved ones from the charge. Holly Thomas explains

T

he increase in the number of families saddled with inheritance tax bills has led to industry-wide calls for greater urgency in the way people approach financial planning. If asset prices continue to boom, there will be even more taxpayers exceeding the £325,000 inheritance tax-free threshold set by the Government.

Inheritance tax (IHT) is paid on everything above this nil-rate

NEW PENSION AND ISA RULES

A Government initiative will help individuals avoid more IHT in the future. From April, the 55 per cent charge that applies to defined contribution pension pots left by anyone aged 75 or over and to pensions in drawdown will be abolished. Access to the pension pots of anyone who

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band at a rate of 40 per cent. For a married couple, HM Revenue & Customs charges IHT only after the second partner dies. They have a combined nil-rate band of £650,000.

The most recent numbers speak for themselves. According to HMRC, it collected £3.4bn worth of IHT in 2013/14, up from £3.1bn in 2012/13 – a rise of 8.4 per cent.

The average amount of IHT paid per estate is highest in London

dies before the age of 75 will be tax-free, even if the pension is in drawdown.

Investors, however, still need to consider how to plan for the impact of inheritance tax on their ISA savings. The Government has changed rules that allow the surviving spouse to inherit savings left in ISAs by their other half without losing the tax benefits.

at £209,000, dropping slightly to £193,000 in the south-east and down to £106,000 in Wales.

The IHT nil-rate band has been frozen at £325,000 since April 2009 and will remain at this rate until 2018 under current rules, which will only see more people getting caught in the IHT net.

Luckily, there are plenty of ways to structure your finances to limit the amount of IHT paid.

Previously, the tax-wrapper passed away with its owner and money that had been sheltered became liable for income and capital gains tax thereafter.

However, this does not change IHT rules for ISAs. Julie Hutchison, savings and tax expert at Standard Life, says: “Those near to or already over the age of 55

may want to consider moving some of these savings into a pension, potentially allowing the pension fund to be passed on to their children and grandchildren tax-free.”

GIFTING

Gifting money to your children while you’re still alive is also a good way of being efficient – as long as you live for seven

5

The firm offers EIS schemes, as well as an actual IHT investment service product that aims to preserve capital and deliver a return of 3 per cent per annum, while being free of IHT after two years. They also provide an AIM investment portfolio for mitigating IHT and, because of the recent changes, offer this within an ISA wrapper.

There are risks, however, as with any type of investment.

Ben Willis at Whitechurch Securities says: “Ultimately, all of these schemes invest in fledgling and/or AIM listed companies, which must be considered high risk. A sensible solution is to use a years after giving the money away. If this doesn’t happen, it will still be counted as part of your estate and could attract inheritance tax.

HMRC allows us to make gifts worth up to £3,000 a year without affecting the inheritance tax position. If you make regular gifts out of your income, rather than your capital, these may also be exempt. And any gifts you make to charity, either during your lifetime or in your will, will be exempt from inheritance tax.

TRUSTS

There are many different types of trust. They were traditionally regarded as a popular way of positioning property outside your estate, and because you have a say in the terms of the trust, you can decide what your family spends the money on and who benefits from it. Since trusts are complex legal documents, you will need a legal professional to set one up for you. As with gifts, you will usually have to live for seven years after the trust is created for it to be fully effective for inheritance tax purposes.

6

combination of this kind of investment as well as using gift allowances.”

WEALTH WARNING

Choosing the best way to make the most of inheritance tax strategies is crucial. Do your research and, where you can, take advantage of the free guidance available to you. If you are in any doubt about what to do, then see a financial adviser. It’s not something you want to get wrong.

HM Revenue & Customs is currently consulting on changes to how it polices IHT tax avoidance – as well as other taxes in general.

INVESTING IN BUSINESS

Invest in small, privately owned companies that qualify for business property relief (BPR) for two years and your money is safe from the taxman for IHT purposes.

Some of the stocks listed on AIM, the smaller companies arm of the London Stock Exchange, qualify for BPR as well.

The Government also allows you to leave your business to your family without inheritance tax.

This concession is another element of business property relief, designed to make sure people are not forced to sell businesses just to pay IHT bills.

BESPOKE SCHEMES

Some investment firms have specific investment packages that mean the money invested becomes exempt from inheritance tax after it has been held for two years, provided it continues to be held after the time of death.

These tend to be made up of investments in companies that qualify for BPR, such as those at Octopus Investments.

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MONEY

A BRIGHTER FUTURE? George Osborne’s pension reforms in last year’s Budget were seen as a vote-winner, but how they will actually work in practice has confused even professional investors. Neal Underwood sheds some much-needed light on the subject.

G

eorge Osborne shook up the pensions system in the March 2014 Budget with wide-reaching reforms that promise retirees far more freedom in what they can do with their pension pot. Prior to the changes, savers were able to take 25 per cent of their pension in a tax-free lump sum, with the rest typically used to buy an annuity to provide them with an income.

But from April 2015, savers over the age of 55 in a defined contribution pension scheme will have the option of taking a number of smaller lump sums. In each case, 25 per cent of the sum will be tax-free. The main beneficiaries are likely to be people with a relatively large pension pot, who can use the new freedom to avoid paying 40 per cent tax when they draw it down.

The changes effectively mean a pension can be used like a bank account, with the money saved sitting in a pension pot for the individual to access whenever they want from the age of 55, subject to marginal tax rates.

8

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PENSIONS

Someone aged 56 with a £200,000 pension pot, for example, could cash the entire amount in from April 2015. They would be entitled to £50,000 of that amount tax free, but the remaining £150,000 would be subject to tax. Depending on the individual’s personal allowance and other earnings, this could see them paying as much as £53,600 at the 40 per cent tax rate.

However, should they choose to take the pension as £50,000 each year for four years, they would be entitled to £12,500 of that free of tax, and be liable for income tax on the remaining £37,500. Instead of paying more than £50,000 in tax, they could instead be paying only a little over £20,000.

EDUCATION

As a result of these changes, people approaching retirement are likely to have different investment requirements from those who have already. Financial advisers tell me they have already had plenty of conversations with their pension clients with a view to potentially changing how their investment proposition should be shaped.

Peter Chadborn, director and adviser at Plan Money, says the most significant change will be in educating clients about their

“THE REPORT SHOWS USING INCOME DRAWDOWN WITH THE SAME SIZED PENSION POT COULD GENERATE AN ANNUAL INCOME OF £17,499.96 OVER THE SAME PERIOD – AN INCREASE OF 33 PER CENT”

new-found pension flexibility.: “Our strategy will change on educating clients. Clients who previously would have wanted an annuity will want advice on how to manage their income.”

Old Mutual Wealth’s Retirement Income Uncovered Report reveals that the average income in retirement in Britain today is £13,118.80, not including the state pension. To achieve this income for the average amount of time people expect to be retired – 21 years – via an annuity would require a pension pot of £237,000. However, the report shows that using income drawdown with the same sized pension pot could generate an annual income of £17,499.96 over the same period – an increase of 33 per cent.

Carl Lamb, managing director of Almary Green, says he is already having conversations with clients who want to move to drawdown about the need for both income and growth assets.

“We need a strategy to put in place with the right asset allocation,” says Lamb. “These are the clients we’re focusing on, looking at cash and gilt holdings, but also some assets that will give them real value.”

Although these pension changes clearly provide more freedom, they also present some practical challenges in terms of how to provide sufficient income in retirement. Does the client want to preserve their capital and generate an income from it, or do they want to take the approach of deliberately eroding capital and using that for income? The answer to these questions will drive the direction in which the individual and their adviser go when making investment decisions.

WHAT REVOLUTION?

Paul Flynn, director of Paul J Flynn Limited, says he does not manage the investments of someone in retirement any differently from his pre-retirement clients.

“My question to clients as a starting point is whether they are

THE EMERGING WORLD OF PENSION DRAWDOWN ANNUITY

INCOME DRAWDOWN -ANNUITY MATCH

INCOME DRAWDOWN -SMALLER POT

INCOME DRAWDOWN -HIGHER POT

Annual income for 21 years

Annual income for 21 years

Annual income for 21 years

Annual income for 21 years

Pot required

Pot required

Pot required

Pot required

Remaining value after 21 years

Remaining value after 21 years

Remaining value after 21 years

Remaining value after 21 years

£13,118.80 £237,000 £0

£13,118.80 £237,000 £154,000

£13,118.80 £178,000 £0

£17,499.96 £237,000 £0

Source: Old Mutual Wealth report

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9

PENSIONS

likely to pre-decease their income, or their income will pre-decease them.

It makes them sit up and think,” he explains.

“I do a form of lifetime cash-flow planning, probably more in-depth at the taking income phase. There are usually three options: you can go for totally exhausting your fund by design, aim to have zero at 100, or leave a bit for the people we want, and those we don’t want, such as the Inland Revenue.”

“WHILE PROPERTY HAS RISEN IN PRICE OVER THE LAST 20 YEARS, AND MAY BE EXPECTED TO CONTINUE TO RISE, THE SYSTEM OF TAXING PROPERTY OWNERS MAY GIVE SOME INVESTORS PAUSE FOR THOUGHT”

PROPERTY

Other options are also available for those approaching retirement.

Simon Morris, a London-based independent property adviser, estimates that of the 200,000 people who are expected to cash in their pension in 2015, around 16 per cent will use the money to fund a property purchase. But he warns prospective buy-to-let landlords of the higher tax bills they face if they invest in bricks and mortar rather than property funds in an ISA. “While property has risen in price over the last 20 years, and may be expected to continue to rise, the system of taxing property owners may give some investors pause for thought,” says Morris.

“If you cash in a £300,000 pension to buy a property, and you expect to live off the rent for the next 20 years, you’ll find you are taxed 43 per cent more than someone who keeps the money in the pension and draws an income from it.”

A wiser move, says Morris, may be to take the 25 per cent tax-free lump sum from the pension and invest this in a property fund through an ISA. “This way you’d gain from property rises and avoid costly taxes.

No tax on the 25 per cent lump sum, no tax on the ISA.” A survey carried out by Stonehaven shows equity release may become more popular in light of the recent changes. Figures from 10

the Equity Release Council show it hit its highest quarterly level for six years, with a figure of £375.5m recorded for the third quarter of 2014 - a 15 per cent increase on the previous quarter.

Stonehaven is attributing this, at least in part, to the pension landscape changes.

“We are entering a pension seachange and older homeowners need to consider their home as part of their pension pot to supplement the low interest rates and offset the volatility of drawing too much from their pension fund,” says Stonehaven’s Alice Watson.

“Flexible equity release products mean that borrowers can still provide a protected legacy for their children, while releasing some cash for themselves to enjoy.”

THOSE AT RISK

Historically, says Chadborn, the clients who wanted the flexibility to draw down income tended to be those with a larger pot of assets, who were often more financially astute.

He does have some fears for people who have a smaller pension pot and do not have a clear idea of what to do, however.

“Someone with less money could get themselves in a lot of trouble and so could we if we’re not holding their hand properly,” he warns.

Paul Lindfield, director of accountancy and wealth management firm Sedulo, agrees that smaller clients who try to manage their own investments are most at risk.

“It’s the lower-end people who are not receiving advice who will really come unstuck.”

Some clarity is still required on these changes. The National Association of Pension Funds (NAPF) says next April could be a confusing time for anyone retiring.

“They may have heard about the new freedom, but their own scheme may not have developed the systems to deliver all of these,” said the NAPF in a submission on the pensions bill.

“Some new products available on the market may carry risks and costs that are not immediately apparent to those retiring and some may only be accessible through a financial adviser, access to which could be costly for some.”

GUIDANCE

The Government also says Citizens Advice will provide guidance to people approaching retirement about their pension choices. The Pensions Advisory Service will also provide free and impartial advice over the telephone, but the NAPF says there is an “urgent need” for more clarity about what guidance will be given.

So while the pension reforms will give retirees more freedom, which is to be applauded, at the same time the challenge is to use this freedom wisely. Those with smaller pots for whom financial advice may not be a viable option are likely to be the most at risk.

Cashing in your pension pot may seem like an attractive option, but it could prove to be a somewhat short sighted act. The holy grail, as ever, remains to provide a sufficient income stream for the duration of retirement. trustnet.com

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

IN FOCUS FUNDS

BLACKROCK EUROPEAN CONTINENTAL INCOME:

A FUND THAT’S DEFIED THE ODDS One European fund has provided a decent yield and a smooth ride over the past few years, despite operating in one of the most hated sectors. Daniel Lanyon reports

E

uropean equities are a hard sell for many investors. Since the 2011 eurozone-fuelled crash, the market has spent a large period of time losing money and much of the rest treading water.

While the threat of a break-up remains, certain countries are very cheap compared with both historical averages and other developed markets. Moreover, Europe is home to some of the best companies in the world and has a very established dividend culture, making it interesting for anyone willing to be patient.

Among the most popular funds in recent years is the £672m Blackrock European Continental Income portfolio, co-managed

by Alice Gaskell and Andreas Zoellinger. It celebrated its third anniversary last May and saw significant inflows throughout 2014.

One look at its record and it’s easy to see why: the fund has returned 41.99 per cent since its launch in May 2011 as at 19 December 2014, almost doubling the average sector return.

It is also one of the least volatile of its kind, and is top decile for max drawdown, which measures how

much an investor would have lost if they bought and sold at the worst possible moments. For anyone cautiously dipping their toe back into Europe, such a risk profile appealing.

While many investors in the fund will be interested in total return, Gaskell and Zoellinger’s priority is finding companies with a sustainable and ideally growing income. It is a standout performer in this area, delivering more than £1,600 worth of income from an initial £10,000 investment since launch. This is the fifth best result in the sector over the period. The five crown-rated fund currently has a yield of 4.27 per cent, which is paid quarterly.

Zoellinger’s largest sector weighting is to financials at about 30 per cent, up from just over 5 per cent in late 2012. The likes of Allianz, Zurich Insurance Group and Nordea Bank are all top-10 holdings. Its exposure to industrials, on the other hand, has almost halved to 18 per cent over the period.

BlackRock European Continental Income has a bias to established dividend-paying markets like Switzerland, Germany and France, which have a combined weighting of 60 per cent. However, all three are underweight positions.

Peripheral countries Italy and Spain are both overweights, making up 16 per cent of assets.

WEATHERING THE STORM BlackRock.

Continental European Income A Acc in GB (41.99%)

50% 40% 30%

IA Europe Excluding UK TR in GB (23.27%)

MSCI Europe ex UK TR in GB (20.71%)

20% 10% 0% -10% -20% Oct

Jun

Jun 14

Oct

Jun

Jun 13

Oct

Jun

Feb 12

Oct

-30% Jun 11

MANAGER: Alice Gaskell and Andreas Zoellinger FUND SIZE: £672m SECTOR: IMA Europe ex UK LAUNCHED: 6 May 2011 OCF: 0.92%

Source: FE Analytics

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TRUSTS

FIDELITY SPECIAL VALUES IT: A CHEAP TRUST THAT TARGETS CHEAP STOCKS

FE Trustnet senior reporter Alex Paget takes a closer look at Alex Wright’s Fidelity Special Values trust, which one leading expert is tipping as a buy for investors

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consequent widening discount, he thinks that now is a good time to buy.

“I think Alex has a very good record. He typically has a small and mid cap bias which will have hurt performance last year,” LovettTurner explains.

“The key aspect is his value/ contrarian approach. He has delivered over the longer term and the trust is currently on an 8 per cent discount, which is reasonably wide compared with where it has typically traded. I think it is an interesting opportunity.”

After building up a decent track record on his Fidelity UK Smaller Companies fund, Wright took charge of Fidelity Special Values in September 2012.

It has more than doubled the return of its FTSE All Share

benchmark since then, with gains of over 70 per cent. The trust has also considerably beaten its sector over the period in question.

Wright currently has 22.6 per cent in the FTSE 100, 34.2 per cent in the FTSE 250, 23.4 per cent in the FTSE Small Cap index and 30 per cent in overseas stocks. Top-10 positions include Shell, Lloyds and FTSE 250 financial services company Brewin Dolphin. MANAGER: Alex Wright FUND SIZE: £469.8m SECTOR: IT UK All Companies OCF: 1.12% GEARING: 25% DISCOUNT: 8.1% LAUNCHED: 17 October 1994

A GREAT START Fidelity (FIL Invt Intl) Fidelity Special Values PLC TR in GB (70.92%)

100% 80%

IT UK All Companies TR in GB (46.39%)

FTSE All Share TR in GB (30.37%)

60% 40% 20% 0%

Sep

Jun

Mar 14

Dec

Sep

Jun

Mar 13

Dec

-30% Sep 12

I

t has been a year of mixed fortunes for the Fidelity Special Values IT. FE Alpha Manager Alex Wright’s style was largely out of favour in 2014 due to the switch from small and mid caps into larger stocks, and cyclicals into defensives.

Wright has a value/contrarian approach, which means his portfolio tends to have a skew to cheap, out-of-favour companies. This often leads him down the market cap scale, emphasised by his natural bias towards small- and medium-sized firms.

FE data shows the trust was down 6.76 per cent in 2014 as at 19 December, while the FTSE All Share lost 0.5 per cent and the IT UK All Companies sector was down 2.59 per cent.

It was likely to be a challenge for Wright anyway, given that he was handed Fidelity’s multi-billion pound flagship Special Situations fund. In spite of his stellar record, questions have been asked about the volume of money he is now running and whether he is able to dedicate enough time to each portfolio.

However, Numis’s Ewan Lovett-Turner says that while the announcement regarding Fidelity Special Situations was initially a cause for concern, he now feels confident that the group has the resources to make sure Wright is fully supported.

He rates Wright highly, and given the recent underperformance and

Source: FE Analytics

13

PENSIONS

POLAR CAPITAL GLOBAL TECH: A LONG-TERM PLAY THAT ISN’T FOR THE FAINT-HEARTED

Tech stocks have burned investors’ fingers in the past, but they remain a worthwhile option for anyone with a long-term horizon. FE Trustnet news editor Gary Jackson highlights a fund that specialises in this area

14

online advertising, e-commerce/ m-commerce, social media/ communications, cyber security, mobile gaming, digital payments and online travel, as well as themes such as factory automation/robotics and wearable computing.”

Polar Capital Global Tech has returned 139.11 per cent since its launch in late 2001 as at 17 December, in spite of losing close to 50 per cent in the first year or so.

This puts it well ahead of its peer group. Like most tech funds it has a high volatility, with an annualised score almost twice as high as the FTSE All Share.

Evans, who was previously head of technology at AXA Framlington, has run the fund since inception, with

Rogoff joining him in 2007.

Square Mile Investment Research & Consulting has awarded the fund an “A” rating, highlighting the managers’ skills in identifying changing trends in technology.

They said: “We believe this is an attractive fund for long term investors who are looking for exposure to rapidly growing technology companies.” MANAGER: Nick Evans and Ben Rogoff FUND SIZE: $819.8m SECTOR: IMA Technology & Telecoms OCF: 1.20% DOMICILE: Dublin LAUNCHED: 19 October 2001

BACK FROM THE BRINK 150% 125%

Polar Capital.

Global Tech USD in US (139.11%)

IMA Technology & Telecoms GTR in GB (103.14%)

FO Equity. Tech Media & Telecom TR (90.30%)

100% 75% 50% 25% 0% -25% Nov 13

Nov 11

Nov 09

Nov 07

Nov 05

Nov 03

-50% Nov 01

O

ne of the advantages of investing in a pension is being able to add more aggressive holdings that have the potential to boost returns over several decades.

While portfolios should be built around a core of reliable funds across many asset classes, longterm investors can also afford to hold satellite holdings to play specific opportunities.

One area that offers the potential for huge long-term gains – for those willing to stomach higher volatility – is technology, and a fund that is well placed to capitalise on this theme is Nick Evans and Ben Rogoff’s $819.8m Polar Capital Global Tech portfolio.

The Dublin-domiciled fund’s largest holdings are Google, Apple, Facebook and Intel. The presence of these tech giants does not mean it solely focuses on the biggest players in the industry, however, making the fund relatively unique. Although large caps account for 64.9 per cent of assets, it has a structural underweight to mega-caps and overweight to small and mid caps.

Given the softer economic background and the fact this is likely to translate into a reduction in corporate IT spending in the immediate future, the fund is exploring new areas that are likely to disrupt traditional technology and offer long-term gains.

The managers say: “Focus areas for our investments include

Source: FE Analytics

trustnet.com

INVESTMENT STRATEGY R T C SE ILE PR F

PICK ‘N’ MIX

The various multi-asset funds on offer fit the bill for pension investors, and their popularity could surge when the monopoly of annuities is broken. Joshua Ausden tells you all you need to know

W

ith over 460 constituents between them, the three Mixed Investment and Flexible Investment sectors are daunting for even the most sophisticated fund-pickers.

Funds range from being highly risk-averse with a keen eye on downside protection, to those with a long-term horizon invested mostly in equities. Some are focused purely on growth, though many pay out an income on a regular basis. The trustnet.com

sectors go some way in helping investors target the right product, but you’ve really got to look under the bonnet to know what you’re buying.

Multi-asset funds are used across many different types of investment accounts, but their diversification benefits make them particularly popular with those looking for a one-stop shop for their pension. Some like to actively trade of course, but in

the main these are low-turnover portfolios, meaning funds with a reliable and consistent process are rightly in high demand. The funds could become even more popular in the coming years in light of changes announced in last year’s Budget, which means that investors will no longer be forced to buy an annuity. A raft of fund launches have duly followed, though there are plenty with a proven track record already.

15

INVESTMENT STRATEGY

The three Mixed Investment sectors are separated by their allocation to equity. Funds in the Mixed Investment 0-35% sector, for example, can hold a maximum of 35 per cent of their assets in equities, with the rest typically invested in cash, bonds, property and other alternative assets. These tend to be the least risky from a volatility and drawdown point of view, making them a good fit for investors with a relatively short-term time horizon. Strong performers in recent years include Jupiter Distribution and FP Matterley Regular High Income – both dividend payers which prioritise downside protection.

Mixed Investment 20-60% consists of funds that can invest between 20 and 60 per cent of their assets in equities. On average these tend to be more volatile than their peers in 0-35%, but over the longterm their potential for generating returns is higher. Some have managed to keep volatility to a minimum whilst generating strong returns, however, including the likes of CF Ruffer Total Return and Aberdeen Managed Distribution.

16 TRUSTNETMAGAZINE

MULTI-ASSET FUNDS ARE USED ACROSS MANY DIFFERENT TYPES OF INVESTMENT ACCOUNTS, BUT THEIR DIVERSIFICATION BENEFITS MAKE THEM PARTICULARLY POPULAR WITH THOSE LOOKING FOR A ONE-STOP-SHOP FOR THEIR PENSION

Next up the risk-spectrum is Mixed Investment 40-85%, which can invest up to 85 per cent in equities. The IA Flexible Investment sector, on the other hand, is very much a mixed bag; whilst some of its funds have a near constant 100 per cent weighting to equities such as the Unicorn Mastertrust, others like Trojan and CF Ruffer Equity & General use the flexibility of the sector to give them either a very

high or very low exposure to riskassets, depending on the managers’ outlook.

‘Multi-asset’ is a relatively loose term. Historically, funds in the four sectors have invested in a mixture of equities, bonds and cash. These are typically referred to as mixed asset funds, and include some of the largest and most established across the sectors, such as the £3.2bn Invesco Perpetual Distribution portfolio.

More recently, however, a number of genuine multi-asset funds have emerged. While bonds and equities have provided investors with adequate diversification for many years, worries over the growing correlation between the two asset classes have led many fund houses to launch more sophisticated vehicles. As well as equities, bonds and cash, funds such as Schroder MM Diversity and JPM Multi Asset Income invest in property, infrastructure, convertibles, hedge funds and commodities – to name but a few. trustnet.com

MULTI-ASSET

R SECT ILE PR F

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remained relatively consistent over the past three years.

SLOW AND STEADY WINS THE RACE

Investors with a five to 10 year time horizon can afford to be a little bit more adventurous, though that doesn’t mean they should go for an all-out equity fund. The FTSE 100 hasn’t managed to breach its 1999-high, and though bulls would disagree, there is a chance equities will suffer even worse fortunes in the coming years. Being diversified across asset classes therefore remains crucial.

Schroder MM Diversity is one to consider. Managers Robin McDonald and Marcus Brookes invest in an array of asset classes via other funds. They invest in three buckets: equities, bonds and cash, and alternatives, with broadly a third of their assets in each. Their weightings can vary depending on where they see opportunities, though.

Sitting in the IA Mixed Investment 20-60% sector, the managers invest on a total return

A SMOOTH RIDE 0%

FTSE All Share TR in GB (51.76%) FP Matteley Regular High Income Acc in GB (38.30%)

50%

IA Mixed Investments 0%-35% Shrs TR in GB (26.78%)

40% 30% 20% 10% 0%

Jul

Jan 14

Jul

Jan 13

Jul

Jan 12

-10% Jul

If you’ve recently retired and are looking for a product to provide you with a steady and hopefully growing level of income – and aren’t a fan of annuities – one sitting in the IA Mixed Investment 0-35% sector makes good sense. While there are some very good dividend-paying funds in sectors with a natural bias towards equities, these are more susceptible to steep and sharp losses – characteristics that do not sit well with investors with a relatively short time horizon.

One of the standout options in the sector is the little-known FP Matterley Regular High Income fund. FE Alpha Manager Chris Evans aims to generate a high income with the potential for capital growth from a portfolio consisting predominantly of UK corporate and government bonds, together with high yielding equities and preference shares.

FE data shows that he has achieved both objectives; the £67m

Jan 11

THE LOW-RISK INCOME PAYER

Jul

THOUGH THESE FOUR SECTORS are the most popular for multiasset investors, some funds reside elsewhere. The IA UK Equity & Bond Income sector, for example, is full of funds that must invest between 20 and 80 per cent of their assets in UK fixed interest, and between 20 and 80 per cent in UK equities.

There are also some bond funds which typically take up significant positions in equities such as Invesco Perpetual Monthly Income Plus and Artemis High Income, and there are also a handful of multi-asset funds in the IA Specialist sector such as those in the Aberdeen multi-manager range.

fund is currently yielding a healthy 3.68 per cent and is one of the best dividend payers in the sector over a five year period, paying £241.21 worth of income from an initial £1,000 investment. Dividends are paid quarterly.

From a growth and capital protection point of view, the fund has also excelled. Our data shows it’s a top quartile performer for total return over three and five years, returning 22.26 and 38.30 per cent, respectively. While the FTSE All Share has returned more, it has done so with significantly higher risk. Over five years, for example, FP Matterley Regular High Income has a max drawdown – which measures how much an investor would have lost if they bought and sold at the worst time – of 4.34 per cent, compared with over 15 per cent for the index.

Evans is invested almost exclusively in the UK. Equities have a 28 per cent weighting while corporate bonds account for 58 per cent of assets. The remaining 14 per cent is split between preference shares, cash and convertibles. The weightings towards these has

Jan 10

OFF THE BEATEN TRACK

Source: FE Analytics 31/12/2009 – 31/12/2014

TRUSTNETMAGAZINE 17

Picture your perfect retirement For many people approaching retirement, capturing a regular income while maintaining the value of capital is a key focus.

Schroders’ highly experienced Multi-Asset Team, who manage over £4 billion in global income focused strategies, have a clear aim of delivering an attractive and sustainable monthly income from an investment portfolio while carefully managing risk. Note, the value of investments and the income from them can go down as well as up and you may not get back the amount invested.

To find out more about Schroders retirement solutions, speak to your financial adviser or visit schroders.co.uk/retirement for your

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This prize draw is free to enter and no investment into or purchase of any Schroder product is necessary to enter. Issued in January 2015 by Schroder Unit Trusts Limited, 31 Gresham Street, London EC2V 7QA. Registered No: 4191730 England. Authorised and regulated by the Financial Conduct Authority. UK08643

INVESTMENT STRATEGY

MULTI-ASSET

R SECT ILE PR F

trustnet.com

50%

Schroder MM Diversity A Acc in GB (38.59%)

40%

FTSE All Share TR in GB (38.36%)

30%

IA Mixed Investment 20%-60% Shrs TR in GB (28.47%)

20% 10% 0% -10% -20% -30% Jan 14

Jan 13

Jan 12

Jan 11

-40% Jan 10

Though the Schroder and Matterley funds have made strong returns, even beating equities over

returns of 275.6 per cent. The fund is also a top decile performer in its IA Flexible Investment sector over the past decade, thanks to stellar performance in 2005, 2007, 2009 and 2013 in particular.

Geffen is completely benchmark unaware. He currently has an eye watering 44.4 per cent in Japan and at one point last year had only 20 per cent in the US. This tactic has worked very well at certain times, including in recent months, but at other times it has led to heavy losses. In fact, since 2005, Neptune Global Alpha has only ever been top or bottom quartile over a calendar year – seven to three in favour of the former. Investors with a small appetite for loss may well have had their fingers burnt, but over the long-term his macro calls and strong stockpicking have won out. Past performance is of course no guide to the future, but for a longterm investor, a fund with a risk/ return profile such as this is well worth considering.

DON’T LOOK DOWN!

Jan 09

NOT FOR THE FAINT HEARTED

certain time frames, it’s unlikely that an investor with 30 years or more before they retire will want to hold vast quantities in cash or low-yielding bonds in their pension.

Across the IA Flexible Investment and 40-85% sectors, there are a number of funds with a structural bias to equities. They have the flexibility to diversify their assets if they are particularly bearish on equities, but more often than not they are fully invested. These are only designed for genuine long-term investors of course, and some funds on offer are risky even compared with equities.

Take the Neptune Global Alpha fund, managed by Robin Geffen, for example. The £91m portfolio has been almost one and a half times more volatile than the FTSE All Share over the past 15 years and lost a whopping 45.48 per cent in 2008. The manager has more than made up for this over the long-term, however, achieving sector-topping

Jan 08

basis, aiming to achieve long term capital growth in excess of inflation with less volatility than equities. Our data shows the fund has done this and more, beating not only inflation but also UK equities over the past seven years.

As well as achieving top decile returns of 38.2 per cent, the fund has also been one of the least volatile of its kind.

McDonald and Brookes have a habit of protecting investors very effectively against the downside, illustrated by their strong showing first in 2008 and then in 2011, though have made competitive returns on the upside as well.

They are very value-focused, selling out of asset classes that they believe are over-valued in favour of those that are cheap.

A severe lack of value across the board saw them up their cash in the run-up to 2008, which served them very well. Their wariness of valuations in recent months has again led them to hike their weighting; this move has had some success, though the managers believe there will be more pain to come, and are sticking by their conviction.

Schroder MM Diversity currently has 33.6 per cent in cash and 26.6 per cent in alternatives. Major holdings include absolute return funds such as Majedie Tortoise and Morgan Stanley Diversified Alpha.

Bonds have only an 8.5 per cent weighting, while equities account for 29.1 per cent, including a 5.1 per cent position in the Majedie UK Equity fund.

Source: FE Analytics 31/12/2007 – 31/12/2014

TRUSTNETMAGAZINE 19

INVESTMENT STRATEGY

PLANNING FOR RETIREMENT: A FUSION OF ART AND SCIENCE? Making sure you have enough of an income stream to retire in comfort should be a priority. Schroders provide some tips to get you started

G

etting the most out of your retirement requires a thorough and honest understanding of what you want to achieve, both personally and financially.

“Alongside your financial position, a financial adviser will consider your planned lifestyle post-retirement as well as your current lifestyle when assessing your needs,” explains Robin Stoakley, head of UK intermediary 20

at Schroders. “This will help them to provide advice that is tailored to your individual circumstances and preferences.”

START WITH A TARGET

The UK Money Advice Service recommends setting an initial target for what you think you might need.

This figure does not need to be set in stone since it can be tweaked to reflect changing circumstances, but it will give you an idea of the

monthly income you think you will need when you retire, which can be expressed either as a sum of money or a proportion of your income from employment.

The most generous pension schemes aim to provide a retirement income of two thirds of salary, while others target around 50 per cent, so using between half and two thirds of your current salary is a useful rule of thumb when planning for your retirement income needs. trustnet.com

SCHRODERS

HOW DOES YOUR PERSONALITY AFFECT YOUR INVESTMENT DECISIONS YOUR PERSONALITY HAS A SIGNIFICANT IMPACT on your investment and risk decisions because losses have a greater emotional impact than equivalent gains. To measure the extent to which this affects you, consider the following scenarios: Firstly, you have £1,000 and must choose either a 50 per

cent chance of gaining £1,000 and a 50 per cent chance of gaining nothing (option A) or a guarantee of gaining £500 (option B). Secondly, you have £2,000 and must choose either a 50% chance of losing £1,000 and a 50% chance of losing nothing (option A) or a guaranteed loss of £500 (option B).

EXPENSES MAY RISE AS WELL AS FALL

Another way of arriving at a monthly target is to estimate your outgoings in retirement. If you do this, you should consider that people often find their expenses fall once their working life ends, especially if mortgages or other debts have been paid off. But don’t automatically assume that all your expenses will go down – some may increase, such as heating and leisure costs.

If you have plans to travel postretirement or intend to set up a business, there is every possibility that your expenditure might increase significantly. Different retirement goals will require different levels of income, which may test your appetite for risk.

If you have identified more than one main retirement goal, it is worth considering the level of risk you are prepared to take on the income you need to support each goal. Of course you need enough to live comfortably and the risk level on income to cover daily living should be minimal, but would you be prepared to accept a higher level of risk for the proportion of your pot that is earmarked for funding a new hobby?

“Savers need to balance both risk and return very carefully when making their decisions rather

Logically, you would choose either ‘A’ or ‘B’ for both scenarios. However, research has found that while most people would play safe on their gain, they would take a chance to limit a loss.

The science behind such psychological influences on investments is called ‘behavioural finance’.

“SAVERS NEED TO BALANCE BOTH RISK AND RETURN VARY CAREFULLY WHEN MAKING THEIR DECISIONS RATHER THAN JUST FOCUSING ON EITHER RISK OR POTENTIAL RETURN – THEY ARE ALWAYS LINKED” than just focusing on either risk or potential return – they are always linked,” says Stoakley.

INFORMATION IS KING

Most customers expect advice tailored to their individual circumstances and aspirations, especially those with the largest pension pots. They are also likely to seek information from a variety of sources so that they can ask sensible questions of their adviser.

However, they will often also have multiple, conflicting objectives – looking for a substantial income guaranteed over their lifetime as well as the ability to leave a significant inheritance. No single product can deliver all these objectives, so one of

A financial adviser will carry out a detailed review and assessment of you overall financial situation, your current and future needs, and your risk appetite.

This will enable them to advise you on an appropriate investment strategy that could minimise the impact of behavioural biases.

the jobs of the adviser is to manage expectations and explain what each product offers.

Income funds can be a useful component of a flexible retirement income plan. While they are designed as a medium- to long-term investment, you can withdraw part or all of your money at any time. For more information on retirement solutions from Schroders, visit www.schroders.co.uk/retirement

WHAT TO DISCUSS WITH YOUR FINANCIAL ADVISER • Your retirement income priorities • The implications of planned lifestyle changes • The level of investment risk with which you are comfortable If you do not currently have a financial adviser, one option is to search for a local, independent adviser at www.unbiased.com.

You may also find it useful to visit www.vouchedfor.co.uk, where members of the public rate and review advisers they have used.

Important information: 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. Schroders has expressed its own views and opinions in this document and these may change. This document is intended to be for information purposes only and it is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable but Schroder Investment Management Ltd (Schroders) does not warrant its completeness or accuracy. No responsibility can be accepted for errors of fact or opinion. This does not exclude or restrict any duty or liability that Schroders has to its customers under the Financial Services and Markets Act 2000 (as amended from time to time) or any other regulatory system. Schroders has expressed its own views and opinions in this document and these may change. Reliance should not be placed on the views and information in the document when taking individual investment and/or strategic decisions. Issued in January 2015 by Schroder Unit Trusts Limited , 31 Gresham Street, London, EC2V 7QA. Registered Number 4191730 England and is authorised and regulated by the Financial Conduct Authority. UK08669

trustnet.com

21

INVESTMENT STRATEGY

EXPECT THE UNEXPECTED W

hile the UK government plans to raise the pension age for men and women from 65 to 66 by 2020 and 67 by 2026, those currently entering the post-work phase of their lives are spending more time retired than ever before.

In England and Wales, life expectancy for men at age 65 increased from 17.8 years in 2007–09 to 18.6 years in 2011–13 and from

22

20.5 years to 21.2 years for women of the same age*. But living longer in retirement also increases the importance of financial contingency planning.

There is always a case for having some liquidity in a retirement income plan for the proverbial ‘rainy day’. If your needs change or you require quick access to a capital sum, an income-focused investment fund could offer greater flexibility than

Even the most organised investor can’t predict the future. Schroders explains why contingency plans are crucial when planning for income in retirement

some other options. For example with a buy-to-let portfolio, it can take months to sell a property and a lower than expected selling price could impact the return on your investment.

Moreover, if a serious illness is diagnosed and certainty of income becomes the most important consideration for you, a liquid investment gives you option of using all or part of your funds to

trustnet.com

achieve income certainty through purchasing an enhanced annuity, which can offer a higher rate of income if your life expectancy is reduced.

COST OF CARE OFTEN UNCLEAR

The cost of long-term care is the ‘elephant in the room’ of this conversation since few people retire knowing exactly how much care they will need, when they will need it and what it will cost.

Someone who enjoys reasonably good health during retirement might expect to see their expenses decrease over time as they become less able to travel or get involved in costly activities. However, a person who requires residential care may find their costs of living increase as they get further into retirement.

A survey published by the UK Institute for Public Policy Research (IPPR) and PwC in 2010 revealed some worrying misconceptions about social care funding.

Fewer than half (46 per cent) of respondents were aware that care provision is means tested and

“LIQUIDITY AND DIVERSITY OF INVESTMENT ARE KEY ELEMENTS IN EFFECTIVE FINANCIAL CONTINGENCY PLANNING FOR THE RETIREMENT YEARS” barely one in five (22 per cent) were taking steps to fund their own care.

ADVISERS ADDRESS CONTINGENCY PLANNING

More encouragingly, new figures from the Association of Professional Financial Advisers (APFA) show that almost two-thirds (65 per cent) of financial advisers are planning to advise people on their options for funding long-term care.

Many people also feel the need to leave some money for their children or grandchildren, especially to help them fund education fees or fund

FACTORS TO CONSIDER WHEN PLANNING FOR CONTINGENCIES IN RETIREMENT • Will your tax position change or your mortgage or other loans be paid off?

• Will a State Pension become payable, insurances mature or a partner stop working?

• Even if you don’t need extra income at the moment, how will you preserve (or increase) the value of your capital?

• Should you buy an annuity later in life? The so-called ‘longevity hedge’ does require you to have retained a certain level of capital, but the payoff is an element of income that is guaranteed

a deposit for a home. Again, your financial adviser should be the first port of call for these discussions.

“Liquidity and diversity of investment are key elements in effective financial contingency planning for the retirement years.

The changes to the UK pensions regime will increase demand for income producing strategies that have embedded risk control to help protect capital while allowing those who are comfortable taking some investment risk in retirement to do so,” concludes Robin Stoakley, head of UK intermediary at Schroders. For more information on retirement solutions from Schroders, visit ww.schroders.co.uk/retirement

WHAT TO DISCUSS WITH YOUR FINANCIAL ADVISER • The type of investments that can generate both a good income and growing capital to fall back on if your circumstances change • Whether income drawdown is an option for you •How much importance you attach to being able to leave a legacy If you do not currently have a financial adviser, one option is to search for a local, independent adviser at www.unbiased.com.

You may also find it useful to visit www.vouchedfor.co.uk, where members of the public rate and review advisers they have used.

Important information: 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. Schroders has expressed its own views and opinions in this document and these may change. This document is intended to be for information purposes only and it is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable but Schroder Investment Management Ltd (Schroders) does not warrant its completeness or accuracy. No responsibility can be accepted for errors of fact or opinion. This does not exclude or restrict any duty or liability that Schroders has to its customers under the Financial Services and Markets Act 2000 (as amended from time to time) or any other regulatory system. Schroders has expressed its own views and opinions in this document and these may change. Reliance should not be placed on the views and information in the document when taking individual investment and/or strategic decisions. Issued in January 2015 by Schroder Unit Trusts Limited, 31 Gresham Street, London, EC2V 7QA. Registered Number 4191730 England and is authorised and regulated by the Financial Conduct Authority. UK08669

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23

*Source: ONS November 2014

SCHRODERS

IN THE BACK

GIVE YOUR PENSION THE SIPP Managing your own pension used to be the preserve of the well-to-do, but with the advent of platforms, managing a SIPP is easier than ever. FE’s Jenna Voigt tells you how platforms have changed SIPPs forever

M

ost savers will be familiar with run-of-the-mill workplace pension schemes, where you drip-feed a small proportion of your salary into a pension every month. If you’re lucky, your company will top up your investment. While these schemes are certainly worthwhile, especially for anyone who can’t afford to put much away, they are relatively opaque and inflexible.

Those aren’t their only flaws.

After leaving a job, many savers forget about the pension pot they’ve accrued due to the complication and expense of rolling it into a new scheme at a new company.

This is where a SIPP (Self-Invested Personal Pension) comes in.

A SIPP is similar to a workplace 24

pension – it allows savers to benefit from tax relief on regular payments and take a tax-free lump sum at retirement. The pot has been sweetened by chancellor George Osborne’s sweeping changes which will allow investors to take their entire lump sum without suffering the punitive 55 per cent charge that previously hit savers who cashed in more than a quarter of their pension.

The big difference comes in the investments you select for your pension. While most workplace pension schemes offer a limited range of risk-rated products and a handful of external options, SIPPs give investors the chance to get access to the many thousands of funds available in the UK, as well as

stocks, investment trusts and even unquoted vehicles.

John Blowers, head of investment platform Trustnet Direct, says managing his own pension was a brilliant decision, and he has nearly doubled his money.

He explains that personal pension management has “changed unrecognisably” since platforms started making strides to host pensions.

“In the past, managing a pension yourself was really advanced so most people didn’t manage their own,” Blowers says.

“Only recently have people realised their old company schemes could be put together in one lump sum which can work together for greater returns.” trustnet.com

PLATFORMS

Blowers says there are three key areas where platforms have the edge over traditional brokers or company schemes.

AGGREGATION

Using himself as an example, Blowers says he had a collection of tiny £2,000 or so pots built up from various roles in his early career. He points out these were just sitting in the company schemes, doing nothing but still suffering from hefty chargers.

“In this situation, no one really knew what was going on.”

Because these pension pots were all over the place, he, like many savers, didn’t know what was going on in any of them. But when he combined them all together in a SIPP, he was surprised to see he had a pot of nearly £25,000 and, he says, it really ramped up from there, taking advantage of the effects of compounding.

“Most people have not put old pensions together and they still think their pensions are going to do something. They probably aren’t,” he adds.

COST REDUCTION

Fees are the great enemy of savers.

Blowers says platforms have made huge strides in cutting red tape and reducing costs across the board.

Among the cheapest SIPP providers on the market this year, according to Candid Money, are Hargreaves Lansdown, Trustnet Direct, Bestinvest, Interactive Investor and Charles Stanley Direct.

According to Blowers, Trustnet Direct levies an annual SIPP administration fee of £96 (including VAT). There is also a platform fee of 0.25 per cent per annum, capped at £200.

However, Trustnet Direct does charge £10 per trade for funds, shares and ETFs. Hargreaves Lansdown, on the other hand, has an annual administration charge of 0.45 per trustnet.com

“EVERYTHING IS FULLY ELECTRONIC AND TRANSFERS ARE MUCH QUICKER. WHAT USED TO TAKE WEEKS NOW TAKES A MATTER OF DAYS”

cent for pots of up to £250,000.

That fee drops to 0.25 per cent for savers with between £250,000 and £1m and 0.1 per cent for amounts greater than this. Hargreaves Lansdown also levies a monthly charge, which varies depending on the number of trades you make each month.

Investors using Charles Stanley Direct pay an annual SIPP fee of £120 as well as an annual charge for funds and shares of 0.25 per cent for the first £500,000 and 0.15 per cent on amounts exceeding this. Fund dealing is free, however.

VISIBILITY

As Blowers pointed out, he has benefited massively from putting his numerous pensions in one place. He

says platforms have made it easier than ever to aggregate funds and reap the rewards.

“Everything is fully electronic and transfers are much quicker.

What used to take weeks now takes a matter of days,” he says. “You can bung all your money together quickly.”

Blowers adds that it’s also easier to make sense of online investing because there are a number of tools, such as Trustnet Direct’s Health Check, which display performance, asset allocation guidance and other key information to help you manage your SIPP. “If you’re getting a statement every year, the chances are it doesn’t make sense. When you bring it online, you bring it to life.”

HOW LONG WILL YOUR SAVINGS LAST YOU? £600k Upper Rate 8% £500k

Middle Rate 5%

£400k

Lower Rate 2%

£300k £200k £100k 0 60 62 64 66 68 70 72 74 76 78 80’ 82 84 86 88 90 92 94 96 98 100 Source: FE Analytics

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IN THE BACK

FINANCIAL STOCKS

STOCKS YOU CAN BANK ON The sector has been viewed with suspicion since the 2008 global financial meltdown, but Rathbones fund manager Alan Dobbie says it’s home to some highquality companies that you can depend on

T

he financials sector is diverse and often volatile, but by taking a very selective approach, we believe that we can still find high-quality, attractively-priced businesses offering the opportunity for solid income and capital growth.

Six years on from the nadir of the global financial crisis, many of the heavyweight constituents of the UK banking sector remain significantly impacted by its repercussions.

Over recent years, a series of large fines have overshadowed much of the sector’s underlying progress and pushed a return to ‘normality’ further out. In our opinion, the rising burden of regulatory compliance and recent talk of a desire for greater competition in the retail banking sector may continue to stifle the returns of the sector giants.

Given our Rathbone Blue Chip Income and Growth fund’s preference for ‘high quality’ business models – those with a high return on capital, low debt levels and so on – we prefer to gain our financials sector exposure via investments in specialist lenders and insurers.

The three stocks discussed below all fit our definition of high quality investments and, despite performing relatively well in 2014, in our opinion they remain attractively valued for those with a medium to long-term investment horizon.

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PROVIDENT FINANCIAL

Although it is often dismissed as a low-quality ‘doorstep lender’, Provident Financial has carved out a niche in lending small amounts of money to those unable or unwilling to access mainstream credit markets.

This focus enables it to generate very high returns on equity and allows for a generous and growing dividend yield.

Allied to its compelling shareholder returns, the company also invests excess cash flows into future growth opportunities.

Recently launched ‘Satsuma Loans’ is an online-only product, designed specifically to comply with the regulator’s tougher approach to the short-term loans market. The company has also entered the motor finance market via an acquisition of ‘Moneybarn’. These are still very early days but we believe that this acquisition may give the company another leg to its investment case.

CLOSE BROTHERS

Close Brothers is another wellestablished financial business with a clear focus on exploiting

the attractive characteristics of its carefully chosen market niches. The company’s differentiated lending model, centred on ‘borrowing long and lending short’, provides its high margin banking division with a degree of resilience and gives us confidence that its dividend is sustainable. Recent results highlighted the compounding power of the company’s core banking division and also offered some hope that the restructured asset management business may have turned a corner.

SAMPO

Our final stock is Sampo, a Helsinkilisted financial conglomerate.

Over the last 15 years, the highlyrated management team has demonstrated its skill in creating shareholder value via a sensible approach to capital allocation.

The company’s sole focus on the attractively structured Nordic insurance and banking markets has allowed it to generate returns far in excess of most of its European competitors. The shares rarely look cheap, but we believe that the 5 per cent dividend yield is safe and this ‘mini-Berkshire Hathaway’ can continue to compound returns for many more years to come. trustnet.com

RATINGS YOU CAN COUNT ON We identify the best funds and fund managers, so you can focus on the best possible service for your clients.

FE Crown Fund Rating

FE Alpha Manager Rating

FE – THE ADVISERS’ CHOICE* Find out more at trustnet.com/ratings2014 *UK advisers’ preferred choice of research and ratings (source: The Platforum Adviser Survey, July 2013).

IN THE BACK

FRANKLIN UK MANAGERS’ FOCUS FUND Peter Lowman, chief investment officer at Investment Quorum, explains why he has decided to buy a multi cap UK fund that has very much flown under the radar of most investors

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Sep

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Jan 14

Sep

May

Jan 13

Sep

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Jan 12

WHAT I BOUGHT LAST

L

ast year was certainly a challenging one Franklin UK equity team, made up of Colin for UK equity investing, whether you Morton, Paul Spencer, Ben Russon, Richard were focused on large, mid or small caps.

Bullas and Mark Hall. The portfolio tends The unforeseen collapse and continued fall to own 35 to 50 stocks, with each manager in the price of crude oil and commodities, choosing up to 10 of these. respectively, took its toll on sectors such as oil The team has an unconstrained approach, and gas, basic materials and industrials. seeking out attractively valued businesses Equally, the fall in energy prices at the right across the investment spectrum. Each petrol pump engineered an unexpected idea is bought with conviction and no transfer of income into the pocket of the man holding accounts for less than 1 per cent of on the street, which in turn had a positive assets. Although this is a focused investment effect on consumer spending. Elsewhere, approach, the managers still aim to achieve a sectors like healthcare and utilities were total return that exceeds that of the FTSE All favourably supported throughout 2014 due to Share index over the medium- to long-term, their defensive qualities and M&A activities. meaning three to five years.

Concerns over economic growth within This fund’s track record shows it has already eurozone countries have also had an adverse delivered on its promises, but what we really effect on the UK, which is unsurprising given like about it is its pragmatic, common-sense they are our largest trade partners. Likewise, approach to investing and its experienced the unrelenting debate as to the expected fund management team, which is unified timing of the first interest rate hike in either through its managers’ ideas and researchthe US or UK has kept traders on edge in driven approach. recent months.

In an investment environment where many These events and the forthcoming UK active managers have suffered from the recent general election in May 2015 will continue economic dilemmas, and extended period to raise some concerns about the UK stock of extreme central bank policies, it has been market; however, we would expect equities to refreshing to see that the managers have been deliver some modest returns, given that UK able to navigate a steady course through some inflation is likely to remain subdued, yields fairly choppy waters. on cash and bonds remain historically low, and the prospects of A STELLAR THREE YEARS some positive surprises 80% Franklin. UK Managers’ Focus A Acc in GB (75.58%) in corporate earnings are fairly high.

70% IA UK All Companies TR in GB (46.14%) Against this backdrop, 60% FTSE All Share TR in GB (37.27%) we have taken a 50% position in the Franklin 40% UK Managers’ Focus 30% fund, which offers 20% investors a pragmatic, common-sense 10% approach to capturing 0% large, mid and small cap -10% exposure.

As its name suggests, the fund captures the Source: FE Analytics 05/01/2012 – 05/01/2015 best ideas from the

TRUSTNET magazine W IE V E R P Y R A U R B FE ISA DEADLINE… ARE YOU READY? Leaving things to the last minute is a bad habit, but when it comes to using up your ISA allowance, it’s a habit many of us struggle to shake. The end of the tax year is just a matter of weeks away, and we’re dedicating next month’s FE Trustnet magazine to getting you ready. We’ll be profiling what the experts are buying in the lead up to 6 April, and tips to help you become an ISA millionaire.

We’ll also be looking under the bonnet of the most popular asset class for domestic investors: UK equities. This will include an in-depth look at the IA UK Equity Income, UK All Companies and UK Smaller Companies sectors.