Acting for clients as they would want to act for themselves
Autumn issue 2019 Published quarterly
C O N F I DAN T Save | Plan | Invest
Mastering the macro
Cleaning up
Avarice in Wonderland
Beginning again
Patrick Gordon's three big numbers, p6
Gordon Smith’s top renewable energy play, p8
The strange world of negative bond yields, p15
Lucy Kellaway on leaving the City for teaching, p22
Effortless investing How to build wealth with Silo, p4
C O N TA C T S
Head Office
Other locations
46 Grosvenor Street, Mayfair, London W1K 3HN T: 020 7337 0777
Chelsea Guy de Zulueta 45 Cadogan Street, London SW3 2Q J T: 020 7337 0590 E: chelsea@killik.com
Richmond Ian King 2 Paradise Road, Surrey TW9 1SE T: 020 8948 7337 E: richmond@killik.com
Chiswick George Harrison 23 Chiswick High Road, London W4 2ND T: 020 8090 3303 E: chiswick@killik.com
Kensington Julian Chester 281 Kensington High Street, London W8 6NA T: 020 7603 3618 E: kensington@killik.com
Esher Paul Martin 9 Esher High Street, Surrey KT10 9RL T: 01372 464877 E: esher@killik.com
House of Killik Northcote Road Richard Morris 125 Northcote Road, Battersea SW11 6PS T: 020 7337 0455 E: northcoteroad@killik.com
Private Client Team Simon Marsh, Fred Robinson, Kristian Overend, Michael Pate, James Dunn, Gary Meredith, Michael Berry, Julian Spencer, Jeremy Sheldon, Fabrizio Argiolas, Joseph Henry T: 020 7337 0400 Killik Asset Management Graham Neale T: 020 7337 0008 Family Office Jer O’Mahony T: 020 7337 0664 Wealth Planning Svenja Keller 46 Grosvenor Street, London W1K 3HN T: 020 7337 0724
Hampstead Peter Day 2a Downshire Hill, London NW3 1NR T: 020 7794 3006 E: hampstead@killik.com
Killik & Co is a trading name of Killik & Co LLP, a limited liability partnership authorised and regulated by the Financial Conduct Authority and a member of the London Stock Exchange. Registered in England and Wales No OC325132. Registered office: 46 Grosvenor Street, London W1K 3HN. A list of partners is available on request. Telephone calls are recorded for regulatory purposes, your own protection and quality control. This communication has been approved by Killik & Co for distribution to retail clients. The value of investments and the income from them may vary and you could lose some or all of your investments. Past performance of investments is not a guide to future performance. The tax treatment of investments may change with future legislation. Prior to taking an investment decision based on the content of this publication, investors should seek advice from their Investment Manager on the suitability of such investment for their personal circumstances. Killik & Co accepts no liability for any loss or other consequence arising from the use of the material contained in this publication to make investment decisions, where advice has not first been sought from their Investment Manager. Killik & Co has no obligation to notify a reader or recipient of this publication in the event that any matter, opinion, projection, forecast or estimate contained herein changes or subsequently becomes inaccurate, or if research coverage on the subject company is withdrawn. Partners or employees of Killik & Co may have a position or holding in any of the investments covered in this publication. You may view our policy in respect of managing conflicts of interest on our website.
PERSONAL VIEW
FROM THE EDITOR
Creating true wealth Tim Bennett Head of Education As a Partner at Killik & Co, I am lucky enough to have been given early access to our new save and invest app, Silo. Anyone keen to know more about the thinking behind its development and how it enhances the firm’s range of services, should turn straight to Paul’s article on page 4. As I was exploring the various clever ways in which it works at our newest (and, for me, closest) location, the House of Killik Northcote Road, my attention was drawn back to a picture that hangs there, over what was once a Victorian fireplace. It contains the original definition of wealth as wellbeing. That was a reminder that the word wealth means different things to different people. I then began to ponder what it means to me. Silo undoubtedly ticks the boxes when it comes to wealth building and helping us to achieve the financial independence and security that comes from disciplined saving over many years. However, there is more to overall wellbeing than that. A recent US study found that once our annual income goes beyond $75,000, we derive less and less relative pleasure from each extra dollar (or pound) that is added to our pay cheques. This suggests that, at a
certain level of financial wealth, the path to complete happiness lies elsewhere. I doubt I am alone in saying that true fulfilment comes, not only from building wealth (whether defined as money, assets, knowledge, skills or experiences) but also, at a certain point, giving some of it back. The good news is there are many ways to do this. It can come, for some, through raising children who will, hopefully, become good citizens and make a positive contribution to their families and society. Supporting grandchildren may also be part of that equation. Then there is charitable giving in its many forms, a topic that I discussed at some length with our Head of Wealth Planning, Svenja Keller, and our Tax and Trustee Services Director, Sarah Hollowell. You can read that article on pages 12, 13 and 14. Killik & Co is a firm that prides itself on giving something back through the work of the Charitable Trust. Every year it supports a broad range of causes, from the Chicken Shed Theatre Trust in north London to the St Elizabeth Hospice in Ipswich. Paul also helped pioneer the Share Gift scheme, which allows people to give low value shareholdings to charity at minimal cost. It is still going strong (sharegift.org).
Another man making a big contribution via a real, rather than a virtual, classroom is science teacher Justin Abel. You can read all about his decision to “retire retirement” and join the Bolingbroke Academy in Battersea, at the age of 57, on pages 20, 21 and 22. I have also included some insights from Now Teach founder and ex-Financial Times columnist Lucy Kellaway. I hope you enjoy reading that article plus the rest of this issue – here’s to building true wealth! ●
C OMING UP
SECURITIES IN THIS ISSUE
Is Europe broken? P5
Schroders ISF Global Energy p8,
Healthy profits P10
Polar Capital Automation & AI p9, L&G Cyber Security p9, Syncona Ltd p9, Scottish Mortgage p9,
Charity begins here P12
Thermo Fisher Scientific p11, Abbott Laboratories p11,
Sustainable opportunities P16
AstraZeneca p11, UnitedHealth Group p11,
Mind games P18 News roundup P23
As for me, I have quite literally found another channel via financial education. Thanks to the internet, I can reach thousands of people on a weekly basis with my Killik Explains videos. Whilst I am not sure whether, or not, they make me “the best financial educator on YouTube”, as one kind follower recently put it, they clearly help a lot of people who would otherwise struggle. Since the financial world is still overloaded with jargon and underserved when it comes to high quality, easily accessed education I am happy to do my bit for our clients, their children and the wider world.
Phillips p11, Mind Gym p17, Hydrodec p17, Inspired Energy p17, Orsted p23, Xylem p23, BP p23, Shell p23, Total p23, Amazon p23, Spotify p23
Autumn 2019 — 3
VIEW FROM THE TOP
Innovating from cradle to grave and for generations beyond Paul Killik Senior Partner Paul sets the scene for the forthcoming launch of Killik & Co’s new app for savers and investors, Silo. We started Killik & Co in 1989, at the end of a decade during which the government embarked upon ground-breaking changes to the financial services industry that altered it beyond recognition. Formidable barriers were removed to make way for a new breed of savers and investors accompanied by a statutory regime of regulation. Meanwhile, the stock exchange club was broken up and opened to competition. During this exciting and fast-moving period, concepts such as privatisations, demutualisations, PEPs (the forerunners of today’s ISAs) and personal pensions were introduced. Against this backdrop, we started the firm with the vision of appealing to the new savers who were being encouraged to invest in a stock market that had previously been elitist and difficult to access without significant wealth. The early opportunity Whereas traditional Private Client Brokers and the new Execution-Only (“XO”) firms were slow to see the opportunities offered by PEPs and the concept of long-term saving, they fitted like a glove into our approach. With an original and unintimidating offering and our intimate knowledge of the rules, we became the “go to house”. This turbo-charged our growth through the 1990’s, aided by the introduction of Self Invested Personal Pensions (SIPPs) a few years later, and the multi-privatisations of the early 1990’s. Our growth slowed in the latter part of that decade, as XO houses woke up and moved aggressively into PEPs with their new online services. We resolved not to compete as our mission was to advise, which wasn’t possible online in those early days. Rather, having grown the awareness of our brand, we moved our focus toward the traditional high net worth private investor market, a decision that has served us well over the last 20 years – indeed, it is a space in which we remain ambitious. However, savers were also very central to our thinking, and I vowed to return to that market, as soon as technology allowed us to compete, with an online managed savings service. 4 — Autumn 2019
Our savings and investment ladder Little had I expected that it would take 20 years to fulfil that vow. However, with the current launch of Silo, our beautifully simple savings app, in our 30th year, we have finally come full circle back into the savings market. Now we can embrace the financial implications of every stage of life, from cradle to grave and for generations beyond through our saving and investment ladder of services. Over time, from Junior ISAs and SIPPs at birth, through to full ISAs, SIPPs and General Investment Accounts (GIAs), Silo can ladder clients toward a full personal adviser relationship, via investments in equities or funds, once a savings account reaches £30,000. At that point, the convenience of saving via Silo would continue, but if balances grow further, money can be swept over to a larger portfolio for direct and bespoke investment through a personal Adviser. Should a portfolio continue to expand, our full suite of investment and planning services, supported by a growing team of around 100 qualified Advisers and Specialists, becomes available. This sets us apart from most other “robo-investing” services in the UK, where advice is difficult to access and it answers the perennial “what happens when?” question faced by most robo app start-ups. Over time, this ladder leads to our Estate & Intergenerational Planning Service, which is part of our Full Wealth Planning Service, designed to ensure that clients’ affairs are in order and that loved ones have been thought of once clients are no longer able to organise everything themselves. Retiring retirement Replacing the word retirement with the phrase “peak savings” is another mission of mine. Ours is a binary view – people are either saving or decumulating. Our job is to help people to determine and then reach their peak savings target, before assisting in the process of decumulation that follows. As Workplace Pensions become widespread and apps such as Silo allow people to save from as little as £1 per day, it becomes increasingly possible for UK investors
to explore this approach and, in so doing, meet our defining criteria of becoming disciplined, regular savers and investors. However, my ambition for Silo extends beyond the small or medium sized saver. It is equally relevant to a hypothetical larger investor, aged 60, who has a £1m portfolio. With children having left home and any mortgage paid off, their focus can turn to maximising their savings during their last period of earning. By way of an example, this investor might be advised that, in order to achieve a desired standard of living in their decumulation phase, they should aim for peak savings of £3m by the age of 75. Saving £5,000 per month into Silo over 15 years would generate £900,000, nearly doubling their starting capital, whilst a purely illustrative (and not guaranteed) 5% real return over that period could take them close to their peak savings target. Flexible saving Silo leaves the rate of saving under a client’s complete control and in the palm of their hand. In more difficult times, monies can be reduced or stopped and even withdrawn, whilst in better times they can be increased, via a “boost” function, when surplus funds permit. An added advantage is that, instead of saving in cash and then facing the dilemma of when to send it to an Adviser for investment, regular Silo saving allows clients to benefit from “pound cost averaging” without worrying about market timing decisions on larger sums. Every Killik Adviser will be aware of the growing value of a client’s Silo account and can sweep monies to a main portfolio, with the appropriate authority in place. This makes it straightforward to grow the main portfolio for either a Managed or Advised account. In this way we are fully living up to our mantra – save, plan, invest. Like to be involved? If you, or any members of your family, would like to trial Silo, which is currently in the closing months of testing before a full launch in January, please download it using the QR code on the enclosed flyer, or speak to your Adviser. ●
O P I N I O N
Europe – a melting pot in melt down Matthew Lynn Columnist and Author Matthew explains why Britain’s economic future lies increasingly outside Europe. It is the world’s largest trade bloc. It is right on our doorstep. It is the region with which we have the closest historical, cultural and trading ties. For at least a couple of generations most of us have therefore assumed that our country’s economic fortunes over the next few decades will be determined largely by Europe and that our ties with the continent will ultimately determine our success or failure. As the government tries to wrap up the tortured debate on how and when to leave the EU, and on what terms, even the most ardent Brexiters are expecting us to strike a trade deal with our neighbours across the channel. But perhaps a harsh truth is being obscured behind the politics: Europe’s economic importance globally has been in decline for years, a trend that shows no sign of being reversed.
however, has been one of relative decline on top. In short, much of the rest of the world has been growing more rapidly than the EU in PPP terms. Developed economies in general have struggled to keep pace – the United States, for example, accounted for around 26% of global GDP in 1980 and is still at 22%, having been above 30% in the 1990s. Europe, meanwhile, has fared much worse. Indeed, since the euro was launched, it has consistently grown far more slowly than the US, a fact that is taking its toll as economies from Germany in the north (where manufacturing is now in contraction) through to Italy and Greece in the south, start to creak.
Watching the sunset Re-wind 30 or 40 years, and you could make the case that Europe was one of the key hubs of the global economy. Whilst the US still rules the roost in nominal GDP terms, the euro could once have rivalled the dollar in global significance, given that its leading countries (including Germany, France, Italy and Spain) combined were wealthier and more technologically advanced than most rivals. That is not the case anymore. The EU, which covers almost the entire continent, now accounts for around 16% of the world’s total GDP, measured in purchasing power parity (PPP) terms, according to the IMF World Economic Outlook. That figure will drop further once the UK leaves the EU. Yet, go back to 1980 and the equivalent figure is more like one third, once adjustments have been made for countries that have subsequently joined the EU such as Spain and Portugal, plus the whole of Eastern Europe. Why such a huge drop? Some of it is down to the fact that, as rapidly developing countries such as China, Russia, Brazil and India have grown, so the global economic pie has also become a lot bigger, meaning that everyone contributes a smaller absolute slice of it. Europe’s problem,
Silver but not surfing On other measures Europe is hardly thriving. Its overall population is largely stagnant and ageing rapidly. Indeed, some of its biggest members, such as Germany and Italy, are in danger of falling off a demographic cliff. According to the Population Research Institute, Germany will drop to 76 million people by 2050, down from 83 million now, while Italy will shrink to 55 million from 60 million now. In both cases the ratio of workers to non-workers is set to fall dramatically over the same period. Europe can’t really be called a centre of innovation anymore either. While its biggest countries led the first and second industrial revolutions, they are nowhere to be seen in the third. Britain and Sweden may be home to some significant internet-based companies and thriving technology sectors, but how many world-beating French, German or Italian web companies can you name? This is unlikely to change in the near term, given Europe’s approach of imposing mega-fines and new regulations. Indeed, the EU seems more intent on harassing (primarily American) tech giants than it does on incubating rivals to them.
Two areas, by contrast, where Europe does beat the rest of the world are taxation and social spending. If you look at the OECD countries with the highest tax burdens, the top ten are all in Europe and currently led by France and Belgium. Don’t get me wrong – if European voters want politicians who combine high taxes with lots of public spending, they are perfectly entitled to vote for them. However, that is not a recipe for economic dynamism or innovation. Looking beyond the reef In truth, Britain’s future lies in developing its ties to the rest of the world simply because other countries and regions are growing much faster. China is on track to become the biggest global economy as soon as next year according to some analysts. This fact has not been lost on Donald Trump, albeit his reaction (a tariff war) is unlikely to change it for long. Meanwhile, by 2027, India’s population is forecast to overtake even China’s, and with a demographic tailwind, its economy may not be far behind. Other emerging giants, such as Brazil and Russia, may have been held back by a mixture of political corruption, chaos and authoritarianism but one day they may finally start to live up to their promise. Look east and you find countries such as Indonesia and Vietnam that are already set on a seemingly solid path. Lastly, Africa is now home to some of the fastest-growing economies in the world – whilst news headlines tend to focus on the political turmoil that has troubled much of the continent, some of its biggest countries such as Kenya, Rwanda and Ghana are rapidly modernising. As these nations all get richer, Europe appears destined to remain a fading force. That’s why the ongoing debate about our exact future relationship with the EU, which continues to consume a huge amount of time and energy, is so frustrating to business leaders. Many know that, in pure economic terms, the EU nations combined are becoming less and less important. As such, the more British entrepreneurs, companies and policy makers put their energy into developing ties with the world’s other continents, the brighter the country’s future will be. ● Autumn 2019 — 5
THE BIG PICTURE
Deciphering economic data Patrick Gordon Head of Research
Pondering non-farm payrolls One indicator that draws investors’ interest is US non-farm payroll (NFP) data. Typically released on the first Friday of every month, this shows the number of non-farm jobs added in the world’s biggest economy over a month. It matters because it is estimated to account for about 80% of workers contributing to US gross domestic product 6 — Autumn 2019
However, there is a potential catch-22. When unemployment is low (which is good news on the face of it), firms may be forced into paying higher wages in order to attract new hires and retain good employees. This could put pressure on profit margins, if those additional costs are not passed on in the form of higher prices. If, on the other hand, they are passed on, they may trigger higher inflation which, in turn, can lead to demands for even higher wages. This upward spiral could ultimately result in a policy response, typically an increase
US Unemployment Rate Recession period
12 11 10 9 8 7 6 5 4
2019
2014
2012
2009
1999
3 1994
Apart from the number of non-farm workers added compared to the previous month, the Jobs Report also provides information relating to the unemployment and labour force participation rates, the average working week and hourly earnings. A healthy employment picture, particularly when it is coupled with wage growth, tends to boost consumer confidence and may result in more household spending. That is important as consumption represents over two-thirds of the US economy.
Chart 1 – US unemployment
1989
Thus, whilst certain economic indicators can provide useful information about the current, or future, health of the economy and have an input into portfolio positioning, long-term investors should not be tempted to constantly react to macro-economic news flow. With that caveat in mind, here are my thoughts on three metrics that tend to attract significant attention.
Broadly, a report that shows an increase in the number of non-farm employees, above the natural rate of growth in the labour force, points to economic health. It suggests that companies are hiring, either because they are seeing growing demand for their products or services, or they are confident in the future growth prospects for their business. The report also provides some insight into which parts of the economy are seeing the greatest employment demand.
Because hiring, or firing, staff can be costly and time-consuming, employment levels are seen as something of a “lagging” indicator. Companies may prefer to wait for confirmation of either a downturn, or upturn, in the outlook for their businesses before making changes to the size, or composition, of their workforce, albeit this factor has diminished somewhat as labour markets have become more flexible.
1979
In overview terms, the broader macro-economic environment provides important inputs into the investment process and can offer valuable information on the current state of the economy, or on developing trends that may provide an insight as to its future health. However, predicting market movements in response to economic data releases can be extremely difficult. That’s because a number of variables can influence the market’s reaction including; whether the data was better or worse than expected, its potential to influence policy (could it, for example, trigger a change in interest rates?) and the likelihood that the numbers will be revised later. On any given day, markets could also react to a separate and unrelated event that carries more significance than the data point released.
in interest rates, with the aim of taking some ‘heat’ out of the labour market. If that dampens economic growth, it could result in higher unemployment (chart 1).
1984
Investors are constantly bombarded with the latest data releases relating to a wide range of economic indicators. They are therefore right to wonder which ones offer useful informational content.
(GDP). It does, however, exclude farm workers and certain other categories, such as private household employees and employees at non-profit organisations. Provided as a part of the US Bureau of Labor Statistics’ Employment Situation Report (often referred to as the ‘Jobs Report’) this number offers an indication of the current health of the US economy.
1974
Patrick sheds some light on three popular metrics and assesses their usefulness to investors.
Source: Bloomberg
Gauging GDP growth Gross Domestic Product (GDP) can be defined as a measure of the total value of all final goods and services produced within a country during a given period (e.g. quarterly or annually). A data release will often attract the attention of markets as well as the media, particularly when it focuses on the rate of GDP growth. Whilst there are several different ways of calculating GDP, it is essentially a measure of the size of an economy. One commonly used measure factors in consumption (consumer spending), investment (such as business capital expenditure), government
THE BIG PICTURE
Now for some words of caution. Although GDP data can provide a quick indication of the size and health of the economy, it is backward looking and doesn’t reveal much about its future strength. It may also be revised a long time after the initial estimate is released. Further, as a measure of how well an economy is doing it has its flaws, including an inability to capture activity in certain valuable parts of it where there may be no payment involved, for example where people are caring for relatives or enjoying the benefits of technology. Nevertheless, GDP and its associated growth trend are closely monitored and projected by economists and central banks and act as an important input into the latter’s policy decision making. Chart 2 – UK real GDP, q-o-q % 2.5 2.0 1.5 1.0 0.5 0.0 -0.5 -1.0 -1.5 -2.0
2019
2015
2012
2007
2004
1999
1995
1991
-2.5
Source: Bloomberg
Analysing PMI activity Another series of economic data that are closely monitored are the Purchasing Managers’ Indices (PMIs) derived from monthly surveys of supply chain managers across a number of sectors. PMIs cover both the manufacturing and non-manufacturing (or services) parts of the economy - an index level above 50 indicates that the level of activity is expanding, whilst below that level activity is seen to be contracting.
The manufacturing PMIs can provide useful information about the current level of business activity and how companies see the outlook for their sectors. That, in turn, can have a bearing on investment and hiring decisions. As such, this data can generally be viewed as more forward-looking with certain components, such as new orders, often viewed as leading economic indicators. Since manufacturing is usually seen as cyclical, surveys which indicate that businesses are seeing a decline in the level of expansion (or a contraction), in activity, can even act as a leading indicator of a potential economic downturn. That said, in many developed economies, the influence of the manufacturing sector on overall economic output has declined over time as non-manufacturing sectors have increased in importance. In both the UK and US, for example, the services sector, which includes areas such as retail sales and financial services, now make a greater contribution to GDP. Chart 3 below for the US shows the recent degree of divergence between the manufacturing and non-manufacturing parts of the economy. Whilst weakness in manufacturing can prove to be a drag on economic growth it may not necessarily signal a broader economic downturn, provided the services sector holds up. A prolonged downturn in the manufacturing sector, on the other hand, may impact investment decisions and employment prospects, which can then feed across to the services side of the economy. Chart 3 – US Institute for Supply Management PMI US – ISM Manufacturing PMI US – ISM Non-Manufacturing PMI 65 60 55 50 45 40 35 30 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
spending, and a country’s net exports. Attention is often focused on the growth in real GDP, or, put another way, the growth in the economy after considering the impact of inflation (chart 2). This provides a snapshot on the health of the economy – it is either expanding (a positive number) or contracting (a negative one). When real GDP growth turns negative for two consecutive quarters, there is often talk of a “technical” recession.
Source: Bloomberg
Wrapping up Accurately predicting the turning points in an economic cycle is tricky. However, indicators such as the three above, can provide important information about the current state of the economy, or developing trends that may provide some insight into potential future growth. The actions of central banks and governments can also serve to either cool, or prolong, an economic expansion. In recent months, concerns over a slowdown in global growth have seen the former take a more dovish (or, accommodating) stance. In the US, arguably still the most influential economy in the world, the Federal Reserve (Fed) has judged it necessary to take pre-emptive action to extend the already record long expansion by cutting its funds rate twice in recent months. With the economic data painting a generally mixed picture, only time will tell whether these turn out to be ‘insurance’ cuts, or the start of a new easing cycle. That’s why, whilst investors should monitor important economic data, they should also keep a watchful eye on the activity of central banks such as the Fed. ● Autumn 2019 — 7
FUNDS RESEARCH
Generating renewable profits Gordon Smith Senior Fund Analyst
Nonetheless, to be fully realised this transition will require a greater policy response from the major global economies to release the spending needed to meet emission targets. That’s because a switch away from fossil fuels goes far beyond changes to energy generation alone; it will also require fundamental alterations to transmission, distribution and storage to support the increasing electrification of energy use. This shift will also require lots of technology-driven investment and innovation to improve the efficiency of the entire system and facilitate mass adoption of electricity-based transport infrastructure. Taking the plunge
Building momentum The increasingly apparent threat posed by climate change is encouraging governments all over the world to accelerate this move. The 2016 Paris Agreement set out an ambitious framework for the United Nations, with the central aim being to keep global temperature rises to below two degrees Celsius above pre-industrial levels. Supporting action has subsequently been seen across the world – net zero carbon emission targets have now been set in several US states and many European countries. 8 — Autumn 2019
Overall, the renewables theme provides a very attractive long-term backdrop for investors and we think now is a good time to initiate exposure. Key markets associated with energy transition (as evidenced by battery storage deployment and electric vehicle sales, to name but two) are reaching an inflection point. This is being evidenced in profitability metrics across the clean energy sector, where operating margins and return-on-equity have improved notably over the last two years (chart 3). Meanwhile, aggregate valuations for key businesses involved in renewable energy generation and connected areas remain at a discount to the broader market, despite their superior growth prospects.
Picking winners In order to capture these tailwinds, we recently initiated coverage of the Schroder ISF Global Energy Transition Fund, which invests in a concentrated and highly focused portfolio of companies integral to the global shift to cleaner energy. The management team has the flexibility to invest across the value chain – they can target any company involved in the production and distribution of clean energy, the management of energy consumption, or the production of associated materials and technologies. One caveat with a fund like this, following a new strategy, is that it does not offer much of a track record. We nonetheless believe that given the broad-based move to renewables, alongside the electrification of energy use, is one of the most significant and exciting structural changes underway today. This experienced Schroder’s team should be well placed to filter and seize the investment opportunities it will present. ● Chart 1 – Global Primary Energy by Source as % of total terawatt-hours Traditional Biofuels Oil & Gas
Coal Renewables
100
80
Transition to coal Transition to oil & gas
60
40
20
0
1800 1810 1820 1830 1840 1850 1860 1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 2017
Renewables may still play a relatively small role in the global energy mix, however, big strides have been taken in recent years on their inevitable path to becoming integral to it. Indeed, this ongoing shift looks set to follow in the wake of the structural energy transition to coal in the late 19th century and then oil and gas in the mid-20th (chart 1) but with one big difference – it is primed to happen much faster.
Further, the economics of moving to renewable sources and increasing the electrification of energy use are becoming much more attractive. The benefits of increased energy independence are ever more apparent, including the prospect of lower and more predictable energy bills. The cost of renewable energy production has fallen materially in recent years (chart 2), a decline that means the costs, on an unsubsidised basis, of generating utility-scale solar and onshore wind are comparable to, or below, the marginal average cost of more conventional methods globally. Technological improvements look set to accelerate this trend.
%
Gordon highlights a fund that invests in an increasingly important global theme.
Source: BP, Our World in Data
PERSONAL VIEW
Key fund data and charts
Chart 2 – Unsubsidised levelised cost ($/MWh) of energy across generation types
Conventional Energy
Gas Combined Cycle
$41
Coal
Nuclear
Growth
$143
$112
Gas Peaking
Alternative Energy
This quarter we look at the funds that form constituents of the investment universe of the Technology Innovation Service. To discuss any of these in more detail please contact your Adviser.
$74
$60
$189
$206
$152
Onshore Wind $29
$56
Solar PV: Thin $36 Film Utility Scale
$44
Source: Lazard
Chart 3 – MSCI Global Alternative Energy Index Operating Margins & Return on Equity Operating margin
FUNDS RESEARCH
Growth
Polar Capital Automation & Artificial Intelligence
L&G Cyber Security UCITS ETF (ISPY-LON)
Fund Type
Irish UCITS OEIC
Fund Type
Exchange Traded Fund
Manager
Xuesong Zhao
Manager
GO ETF Solutions LLP
Fund Size
£300m
Fund Size
$850m
Ongoing Charges
0.64%
Ongoing Charges
0.75%
Historic Yield
n/a
Historic Yield
n/a
This fund aims to achieve capital appreciation by investing across four powerful secular themes: Industrial Automation; Robotics; Artificial Intelligence; and Materials Science. The strategy is managed by a specialist team, who leverage their experience to search for opportunities across a broad range of areas. This is an important differentiator at a time when almost all industries are being impacted by technological change. Risk Rating: 5
This ETF aims to track the performance of the ISE Cyber Security UCITS Index, a basket of companies from around the world that are actively engaged in providing cybersecurity technology and services. The fund includes a large range of different businesses, offering software and hardware services plus consulting across fields such as email security; vulnerability management; and security information management. Risk Rating: 6
NAV total return (since inception, indexed)
Share price total return (last five years, indexed)
125 120 115 110 105 100 95 90 2017
Return on equity
12 10 8
2018
240 220 200 180 160 140 120 100 80 60 2015
2019
2016
2017
2018
2019
6
Growth
4 2 0 -2 -4 2013
2014
2015
2016
2017
2018
Source: Bloomberg
Technology Innovation Service update Our fund-based managed service aims to identify areas where technological innovation is creating a structural and transformational multi-year growth opportunity. A fund-based approach is used to leverage the expertise of specialist investors and achieve suitable diversification given the disruptive risks imposed on individual business models within the technology sector. The Schroder ISF Global Energy Transition Fund (opposite) is a newly added constituent – the other funds on this page also follow the type of strategies we look for.
Growth
Syncona Ltd (SYNC-LON)
Scottish Mortgage Inv Trust (SMT-LON)
Fund Type
Closed Ended Inv Co
Fund Type
Investment Trust
Manager
Syncona IM
Manager
J Anderson, T Slater
Market Capitalisation
£1.6bn
Fund Size
£7.6bn
Ongoing Charges
1.84%
Ongoing Charges
0.37%
Historic Yield
n/a
Historic Yield
0.6%
This London-listed investment company aims to deliver superior shareholder returns by investing in and building global leaders in life science. It strives to maximise the value available from the successful commercialisation of life science technology and the delivery of treatments to patients. The company provides exposure to a basket of companies focused on gene therapy innovation, an area which looks set to have a transformational impact on health care. Risk Rating: 7
Another London-listed Investment Trust, this time focused on a high conviction, global portfolio of companies with the aim of maximising total return over the long-term. The trust offers access to an attractive basket of companies offering significant structural growth potential following disruptive technological developments. The fund also provides an increasingly differentiated exposure via unquoted holdings and its investments in innovative Chinese businesses. Risk Rating: 7
Share price total return (last five years, indexed)
Share price total return (last five years, indexed)
280 260 240 220 200 180 160 140 120 100 80 2014
2015
2016
2017
2018
2019
280 260 240 220 200 180 160 140 120 100 80 2014
2015
2016
2017
2018
2019
All chart data source: Bloomberg. Chart data to 7th October 2019. For details of the Killik & Co risk rating system, please refer to page 14.
Autumn 2019 — 9
EQUITY RESEARCH
Checking up on healthcare Andrew Duncan Senior Equity Analyst Andrew presents the highlights from a key recent Goldman Sachs conference in California and assesses the implications for Killik & Co covered stocks. Did you know that healthcare accounts for roughly 13% of the global stock market? And we believe that even this number understates the importance of, and prospects for, the sector. Against the backdrop of a rising and ageing global population, we anticipate sustained growth in healthcare demand. There is also an ever greater need for new approaches to it that can bring costs down, given the already unsustainable and increasing burden carried by many governments and patients. We recently attended the Goldman Sachs Healthcare Conference on the US West Coast, now in its 40th year, to take the pulse of this increasingly important global industry. This quarter we highlight a couple of the main themes and our top company-specific takeaways. For further detail on any of the stocks mentioned, please contact your Investment Manager.
10 — Autumn 2019
Rising US regulation
Personalising patient care
The first theme that was thoroughly discussed and debated is the increasing expectation of bipartisan support, between lawmakers across the two major US political parties, for better access and lower healthcare costs in the all-important US market. Potential changes include switching the rebates on drugs to consumers, rather than insurance companies. In addition, prices for branded drugs on some government programs may be lowered to international levels, as part of ongoing efforts to reduce their cost in the US compared to rest of the world. As ever, this remains a headwind for many large pharmaceutical companies and, as a result, we deem this specific subsector to be pretty challenging from an investment perspective.
The second big theme raised at the conference was innovation, driven by advances across almost every part of the healthcare industry. On the product side, the development and adoption of new technologies remains a key talking point around drugs and medical devices. Meanwhile, changes in patient access and consumer-facing technologies continue to help in the drive towards patient-centric outcomes. These include moves to allow patients to access treatments away from traditional facilities (typically hospitals and surgeries) as well as the adoption of key innovations such as telehealth. The greater use of wearables and other monitoring devices will further help patients and care providers to make better decisions, in real time, that should improve long-term outcomes.
Interestingly, discussion of the controversial “Medicare for all” bill was notable in its absence in California. We are unsure if this is down to confidence, or perhaps even arrogance, on the part of the major healthcare players. As investors, we will continue to tread with caution during the politically charged run-up towards the 2020 Presidential elections.
We also note that patients are being placed front and centre of this healthcare revolution by being offered greater choice about their individual health journey and ultimately more responsibility for their own well-being. Indeed, the whole idea of “personalised health” continues to gain traction in the industry, aided by technological advances that are driving cheaper
EQUITY RESEARCH
gene sequencing and better, faster diagnostics. Coupled with the increasing ability to target certain parts of the population with patient-specific treatments, the industry is expecting this developing trend to improve individual results and reduce waste. Company insights Several equipment companies highlighted a robust medium and long-term demand outlook, subject to some uncertainty about capital spending by hospitals in the near term. In light of this, firms with high levels of recurring revenue appear increasingly attractive to us, given their relatively predictable demand characteristics. We met with management from Thermo-Fisher Scientific (TMO-USA, Buy), a leading provider of tools and equipment for the healthcare industry. They gave a positive update that was in line with the company’s recent Investor Day, when the firm’s annual organic revenue growth target range was raised from 4%-6% to 5%-7%. We also attended an underwhelming meeting with a peer of Abbott Laboratories (ABT-USA, Buy), but came away with an increasingly bullish view of Abbott’s new range of Alinity diagnostic tools, as it continues to take share in an attractive end-market. Given the ongoing regulatory scrutiny of drug prices, and the inherent difficulty in predicting the success of new product launches, we remain cautious about the investing environment for traditional large-cap pharmaceutical companies. That said, we enjoyed an upbeat presentation from AstraZeneca (AZN-LON, Neutral) during which the company highlighted an exciting pipeline. This includes Tagrisso and Lynparza, two products with significant growth potential that both offer improved results for patients. As mentioned earlier, a topic that we expected to hear more about this year is the package of “Medicare for all” proposals. The potential impact on key parts of the healthcare industry, especially
health insurers, is significant. To our surprise it actually received little attention. This suggests either that the industry (being the companies themselves alongside analysts and industry observers) does not see any plausible threat, or that heads are being buried in the hope that the problem goes away. In that context, we feel that our long-term positive view on UnitedHealth Group (UNH-USA, Neutral) remains fair. However, with the level of political and media noise likely to increase in the run-up to the 2020 election, we think that changing sentiment alone could keep the stock price volatile.
its TV and Lighting businesses. The
We also attended a presentation from Philips (PHIA-AMS, Buy). It is now one of the leading healthcare conglomerates following several non-healthcare disposals over the last few years, including
the ones that will develop successful
long-term opportunity looks positive, given the firm’s leading position in medical imaging and its plans to increase consumer product penetration into large (and fast-growing) emerging markets. Successful execution on both fronts should allow the company to meaningfully expand its operating margins. Lastly, M&A remains a key topic in what are highly competitive, and in some cases fragmented, markets. Investors continue to expect innovative biotech companies to quickly become acquisition targets. However, our view is that identifying products, let alone get acquired, is a very risky business. As such, we continue to recommend a fund-based approach to this subsector. ●
Key data Market cap (bn)
P/E ratio
Yield (%)
Share price
Currency
Risk rating
Thermo-Fisher Scientific
117
23
0.3
292
USD
6
Abbott Laboratories
145
24
1.7
82
USD
6
AstraZeneca
92
21
3.2
6,998
GBp
5
208
14
1.9
220
USD
6
37
19
2.1
41
EUR
6
Name
UnitedHealth Group Philips
As at 7th October 2019. For more information about the Killik & Co Risk Rating system, refer to page 14. Please speak to your Adviser for further information. Autumn 2019 — 11
W E A LT H P L A N N I N G
Making charity count Svenja Keller and Sarah Hollowell
Svenja and Sarah discuss the welcome rise in charitable giving and how they help clients to make sure that it is done efficiently and tax-effectively. What’s behind the rise in charitable giving over recent years? Svenja: I think there is an increasing awareness, amongst people of all ages, of the importance of giving something back to society. This is especially true, in my experience, of those who have done relatively well financially over their lives. I talk to increasing numbers of people who, for example, have decided not to have children and are keen to find a way to make a meaningful contribution with their wealth. Equally, I meet clients who have large families and are happy to earmark funds for a cause that they cherish, in addition to setting aside money for children and grandchildren. For many, there is also a prominent tax-efficiency agenda and a desire to find ways to minimise the amount that they will pay over their lifetime and that their estate will end up suffering in the event of their death. Whilst some people seem happy to leave a chunk of their hard-earned assets to the government, via inheritance tax, plenty others are not and want to know about the alternatives – charitable giving can be a good option in that context. Sarah: I agree that awareness of the sheer range of charitable causes available has increased massively in recent years. Many people are now prompted by news stories – recently, for example, Oxfam received something like £40m in the wake of an awful helicopter crash involving Richard Cousins and his family. That’s because he’d put a “disaster clause” in his will to that effect. The publicity it attracted made other people think about where their money would end up in similarly tragic 12 — Autumn 2019
circumstances. Naturally no-one wants to contemplate such a thing happening to them but equally, it is important to give at least some thought to whether the default recipient should be the Crown. Furthermore, high-profile tragedies like that sometimes spur people into making gifts earlier in their lifetimes, rather than waiting to give it all away as part of a death estate. What factors do people weigh up when picking a cause? Svenja: As an Adviser, I don’t feel that it’s my place to tell people where they should direct their money. That said, I will help them to come to a conclusion, by acting as an intelligent sounding board, if they are struggling to decide. I will often discuss how much control people would like to retain over when and how their money is spent. If they set up their own charity account, for example, they can direct funds more easily than via a donation to a big well-known organisation where they may feel a gift can get a little lost. A lot of clients I meet like the idea of having that extra bit of control and the ability to set the agenda in terms of the range of causes they support and the timing of any cash payments to them. Sarah: My experience is also that many clients are already happy with their personal charitable mandate and don’t
want an Adviser to amend it. These can be quite prescriptive – for example, I have just completed accounts for an estate where charitable gifts were being made to a dozen animal charities. Ten are well-known national organisations and the remaining two are local ones that the donor clearly had an affinity with. That said, I often find that once a group of people have set up a joint vehicle in the form of a charitable trust, we often receive letters and calls in our capacity as their trustees from people looking for support. As part of our role, we can approach the original donors selectively and see whether a cause that we think might fit within their overall mandate is of interest to them. For example, where a charitable trust has been set up to support classical music and someone appeals for funds to back a series of concerts, we might flag that up and give them the choice about whether or not to get involved. At what point do people tend to talk to you about charitable giving? Svenja: The topic often comes up naturally in broader planning discussions. A while ago, I was talking about estate planning with a couple who were both very successful in career terms but were struggling with what to do with their considerable wealth, given that they don’t have any children and lead a modest lifestyle. They want to leave a meaningful legacy and they are already donating a property to the National Trust so that it can be preserved after their death and enjoyed by other people. They have substantial other wealth and as part of their financial plan, we set up a charity to receive further funds to enable them to direct gifts to the causes they have chosen. The regular gifts into this charity also improve their income tax efficiency which is an added bonus.
PERSONAL VIEW
In other cases, I am approached by clients of all ages who have a very firm idea of how much they want to leave, and to whom, but are keen to engage with us to work out the most tax-effective way to do it. These conversations can take place at any stage of life but where lifetime gifts are involved, the earlier the better from a planning perspective. Also, setting up something like a charitable trust can take a bit of time so it helps to have the initial conversations as early as possible. What can people leave to charity? Sarah: Cash is the most straightforward asset. Property and shares are amongst the more common examples too. Some families leave more exotic assets, such as antiques and works of art. The bottom line is you can leave almost anything, provided the charity you have in mind will have some use for it. Over the years, I know I have left everything from clothes to children’s toys at my local charity shop. What are the basic tax reliefs available? Svenja: On a straight cash gift, the charity can claim Gift Aid on the amount and the donor can then claim additional relief via a tax return if they fall into the higher, or additional, rate tax brackets. That makes regular cash gifts a pretty tax-efficient route, but it applies to goods too. Another common option is payroll giving, on a give-as-you-earn (GAYE) basis. Plenty of employers allow their employees to take that route, which makes charitable giving easy as the administration all happens automatically. Sarah: GAYE is efficient because any amount you give is taken from your gross salary, so an employee automatically gets the tax relief by the simple fact that they are never taxed on it. In effect the charity gets that gross (pre-tax) amount at the net (post-tax) cost to the employee. Where people decide to make gifts of other assets such as land, property, shares or pieces of art, the reliefs get a bit more complicated and we may need to consider the inheritance tax implications alongside the income and capital gains tax position.
How do people decide how much to give? Svenja: Some clients are very disciplined and set themselves an annual budget, which might come out of their payroll. Others are more likely to react when approached – a charity will make an appeal for, say, £10 a month and they will respond there and then. Other people just make one-off gifts on a periodic basis, perhaps after a strong billing period if they are self-employed for example. Sarah: I tend to find that people are most willing to respond to an appeal when the cause is clearly defined and so is the amount – that’s why it is increasingly common to see a fund-raising target for a specific purpose via a site such as JustGiving. Svenja: Ad-hoc responses are obviously better than doing nothing but I generally find that charitable giving works best when it is built into a financial plan, as that gives people more of a sense of how much they can afford and means they feel as though they have some control over it. It can also reduce the moral pressure that can be put on them to agree to one-off requests. We can help them to identify an amount that is both meaningful, in terms of their income and the causes they want to support, but also affordable on a continuing basis. Incorporating gifts into a financial plan can also help us to focus on tax efficiencies. What are those efficiencies? Svenja: There are several. For example, if you gift at least 10% of your estate to charity in a will, there is a reduction in the rate of inheritance tax to 36% that applies to the whole estate. The rate is otherwise 40%. However, there are other income and capital gains tax reliefs that can apply to gifts made during a lifetime and those need to be weighed up too. Sarah: Another example would be someone who has a large portfolio of shares, including many with sizeable, unrealised, capital gains that would normally be subject to tax (CGT) if they are not to be retained until death. By giving those shares to charity they can mitigate any future tax liability as what HMRC call an “exempt deemed disposal”. This can also help
W E A LT H P L A N N I N G
families who are holding onto an asset, such as a property, purely because they don’t want to sell and trigger a tax liability. By making a gift to charity instead, they can pass it on and minimise tax at the same time. They may even be able to retain some limited use and enjoyment, subject to them not falling foul of the gifting rules. In other situations, where people have a very small number of shares that are not worth a lot, they might consider making a share gift so that they avoid the transaction costs and hassle of liquidating them whilst allowing a charity to benefit (for more on this, please visit sharegift.org). Svenja: The beauty of charitable giving is that anyone can do it, for almost any amount, whether £10 per month or £1,000 and make it tax-efficient. As such, it can play a part in anyone’s financial plan.
At what point do people decide to set up their own vehicle? Sarah: As a guide, all charities with income of £5,000 or more, whether set up by a family, a group of friends or between business partners must register with the Charity Commission. It is worth noting, in this context, that all donations received are deemed to be income for the charity. Sometimes we find that like-minded people want to give to charity but can’t decide on a common cause, in which case a charitable trust can offer a practical solution. It might also suit someone who wants to leave a charitable legacy after their death, with regular payments continuing after their estate has been finalised. Svenja: There is a trade-off here between the level of complexity someone is prepared to take on – a personal charitable account does require a bit more set up work than making one-off donations – versus the ability to direct money to a defined cause and to Autumn 2019 — 13
W E A LT H P L A N N I N G
continue doing so. There is something nice about having a bespoke arrangement so that, for example, a family can sit down at the start of the year and discuss what specific events and causes, both national and local, they want to support and how much they want to give. Sarah: Clients may find that there isn’t a specific charity set up for something they want to help with locally and that’s where having their own vehicle can help. Once a charitable trust is set up to support, say, sporting opportunities for young people in a given area, it can be approached by any group looking for local funding. Svenja: I agree – a lot of people get a sense of greater personal satisfaction from being able to help their community directly rather than giving money to a much larger charity where the end impact of a donation is often hard to track. Many of my clients want to have face-to-face contact with the people who are involved in running local causes and to be thanked directly by those who benefit. How much work is involved in setting up a trust? Sarah: It can be quite complex and requires a decent understanding of the Charity Commission rules. For example, it’s important to be specific about the end cause that will benefit as they can reject a mandate if it is too broad. Naturally they also don’t want to authorise a vehicle that will be used purely for tax avoidance or as a way of sheltering money. The Commission will also want to see evidence of funding and a plan in terms of whether the money received will be invested, or just be held in cash. A good adviser should be able to get a client over these various hurdles and the paperwork then isn’t too onerous, especially in the more straightforward cases. I have seen plenty where an application is approved in a matter of weeks. What about the investment angle? Svenja: This aspect requires some thought – if a trust will be holding onto funds for several years before paying them out, then at least some of the money may be invested in bonds and equities to maximise the chance of making a return on it. Equally, if 14 — Autumn 2019
Killik & Co Security Risk Ratings
Credit: Howard Lake
a trust will never call on its capital and pay out just the income (or “natural yield”) it generates, then that should be reflected in the way its assets are allocated. Remember that while an asset is held within a charitable vehicle, any returns such as dividends, should escape tax and will be available to gift in full. The underlying investment strategy is something that an Adviser can help with.
All research recommendations are issued with a security specific risk rating, represented by a number between 1 and 9. Assessing the relative risk of any security (specific risk) is highly subjective and may change over time. The Killik & Co Risk Rating system uses categories which are intended as guidelines to the specific risks involved, as follows: 1. Restricted Lower Risk Securities in this category are what we believe to be lower risk investments such as cash, cash equivalents and short dated gilts, and the collective investment vehicles that invest in those instruments.
What are the trust’s main obligations?
2-3. Restricted Medium Risk
Sarah: As long as the relevant formalities are met when the trust is created (including the creation of a formal trust deed), the main obligation is to ensure that returns are made and filed on time, both to satisfy the Charity Commission and HMRC. It is important to seek advice here as there are a few potential pitfalls. For example, the Commissioners frown on fees for professional services being taken from the charity’s own funds. The government also takes a dim view of money that has attracted gift aid being used for that purpose. Most charitable trusts therefore make separate provision for these sorts of costs. Then there are the other obligations that come with being a trustee, including filing the relevant accounts. Again, that’s why we are often brought in to take on that role, or at least advise on it.
Securities in this category are what we believe to be medium and lower risk investments including medium and long-dated gilts, investment grade bonds and certain collective investment vehicles investing predominantly in these securities.
Any closing tips for someone giving to charity this year? Svenja: If you are making small, regular gifts throughout the year, don’t forget to keep a record and declare them on your tax return to get the relevant tax relief. Sarah: For many clients, charity begins at home – if a family, or group of friends, want to make an impact in their local community, we can help them find the best way. ●
4-9. Unrestricted Securities in this category are what we believe to be higher risk and are drawn from across the United Kingdom and international markets. These are normally direct equity investment and collective investment vehicles which predominantly hold securities other than investment grade bonds and money market instruments. The vast majority of the Killik & Co Research recommendations are likely to fall in the unrestricted/ higher risk category (4-9) above.
For further details on the Killik & Co Risk Rating system please see the Killik & Co terms and conditions.
PERSONAL VIEW
BONDS RESEARCH
Grasping negative yields Mateusz Malek Head of Bonds Research Matt looks at why yields have fallen below zero across swathes of the bond market and considers the implications for investors. These are truly extraordinary times in bond markets. Never has such high a proportion of global debt offered negative yields. Somewhat unusually, this means investors are paying someone else to take their money on loan. According to the Bloomberg Barclays Global Negative Yielding Debt Index (chart 1), the total global value of bonds offering negative yields reached 17 trillion dollars at the end of August. By some estimates, this represents around 30% of the market, including corporate issues. So, why is this happening and what’s in it for investors? Heading south Yields on the highest quality, shorter-dated European government bonds first turned negative towards the start of the decade. Back then, central bank quantitative easing combined forces with a desire for safety amongst investors amidst the turmoil of the Eurozone debt crisis. More recently, the latest round of central bank monetary policy stimuli, coupled with fears about slowing global growth, heightened geopolitical risks and persistently low inflation, have created the perfect environment for yields to turn negative again. This time around, however, the phenomenon has not been limited to short-dated German and Swiss Chart 1 – Bloomberg Barclays Global Aggregate Negative Yielding Debt Market Value, USD 20,000,000 15,000,000 10,000,000 5,000,000
2019
2017
2018
2016
2014
2015
2013
2011
2012
2010
2009
0
government bonds. These have been joined by longer-dated issues (German bonds now offer negative yields for up to 30-years’ maturity), bonds from less fiscally prudent Eurozone countries (Spain, Portugal and Italy are all home to negatively yielding bonds in up to seven, five and three year maturities respectively) and even some emerging markets government bonds (for example, 2-year Indonesian government paper yields -0.2% in euros). Meanwhile, in the corporate space, we have witnessed yields turning negative not only on some of the better quality, investment-grade issues but also on sub investment grade “junk bonds” (from issuers such as Brazilian Petrobras and Telecom Italia). For investors perplexed by this topsy-turvy world, the obvious question is: who is buying these bonds and why?
relevant bank deposit ‘charge’, helps to limit an investor’s losses. Further, some investors, with a pessimistic outlook on other asset classes, may be prepared to accept a small loss on a bond with a negative yield, rather than risking a much bigger one elsewhere. They may even invest because they expect deposit rates to go lower still, bearing in mind the European Central Bank cut rates again just recently.
Four reasons to invest
The final category of buyers, who may be attracted to euro-denominated bonds in particular, are overseas investors. This group would typically also engage in currency hedging in order to insulate their portfolios from currency risk. As interest rates in many jurisdictions are higher than those in the eurozone, these hedges often generate positive returns in excess of the negative yields on the related bonds. For example, a US investor who buys 2-year Italian government paper in euros, at a negative yield of -0.25%, can lock into an overall return of more than 2% after swapping back into dollars.
Firstly, there are investors who buy with no intention of holding these bonds through to maturity. Instead, they plan to sell them to someone else at a higher price than they paid and therefore worry less about the headline yield on offer. Consider the German 0% 2026 government bond, issued in July 2016 – perhaps the first one to ever come to the market with a negative yield – investors paid 100.48 to receive zero income over the bond’s 10-year life and £100 on the bond’s redemption date. That’s a yield to maturity of -0.05%. Yet, although this bond was guaranteed to lose money if held to maturity, three years into its life it is trading at 105.10 . So, despite the negative yield on offer when it was issued, anyone who bought this bond back in 2016 could have made a capital gain of 4.6% to date. Secondly, we need to remember that, unlike in the UK, Eurozone deposit rates are negative, meaning that investors are paying a bank for the privilege of holding their money. In that context, a bond with a negative yield, that is less penal than the
The third category of investors are those with no other choice. This group typically includes; overseas central banks, who hold sovereign paper as part of their foreign exchange reserves; pension funds that need to match future liabilities; banks that buy government bonds to meet their liquidity requirements and use them as collateral for money market transactions; and insurance companies who need to make up their statutory reserves.
Seeking sanity For now, at least, UK investors still have somewhere to take refuge. With the Bank of England base rate at 0.75%, UK government bonds across all maturities still offer positive yields and the Bloomberg Barclays Sterling Investment Grade Corporate Bonds Index quotes 2.1%. Although close to the lowest level on record, that is still comfortably higher than the meagre 0.5% available from its European counterpart. ● Autumn 2019 — 15
S P E C I A L S I T U AT I O N S
Screening for sustainability Peter Bate Portfolio Manager Peter highlights three Special Situations stocks that play to the rapidly growing theme of environmental, social and corporate governance (ESG) investing. Investing driven by ESG principles has been mainstream for a number of years and is growing in popularity. Indeed, according to recent research quoted in the Wall Street Journal, it is now thought that “sustainable investing”, as it is also broadly known, accounts for around one in every four of the $46.6tn in US assets under management (see footnote). Whilst we accept that, for many investors, the pure financial case for committing their money remains paramount, we also believe that even the most returns-focused increasingly recognise that the application of ESG principles carries benefits. These include a reduced overall portfolio exposure to companies that have been slow to adopt ESG tenets and are therefore more likely to face the PR headaches and costs associated with future legal challenges. These can come in many forms, ranging from pollution-related claims to lawsuits involving the rights of key stakeholders, whether consumers or employees. Meanwhile, many firms face a less certain future as they adjust to the reality of material and persistent rises in their input costs where they still rely heavily on a depleting global reserve of a key commodity. Recent events in Saudi Arabia have served to remind everyone about the long-term perils of an over-dependence on perhaps the most obvious of these – oil.
A looming stampede However, even leaving these important and growing concerns, there is another clear benefit to investing in firms that are adopting ESG principles and that is the potential gains that could come from a long-term re-rating of shares that display strong ESG characteristics. The reason for this is simple – as money is attracted to this type of mandate, it creates a self-fulfilling momentum as more investors want to get involved and are forced to chase a finite number of qualifying stocks that meet the relevant criteria. All other things being equal, this demand/supply imbalance alone could push prices up over time. That’s why this quarter we have turned our attention to an area where we think there is the possibility of a big resulting uplift – the smaller companies’ space. Up to now, we believe that ESG concerns have tended to be more of a focus for larger cap stocks and less of a priority for their smaller, faster-growing peers. This creates an opportunity within our area of expertise as the relative lack of liquidity amongst smaller cap stocks could act to magnify the valuation impact should we see increased demand for the more ESG focused firms. That said, we remain selective for now in our ESG positioning within the Special Situations Service. We only look for the purest exposure possible – we are not merely seeking companies that exhibit a token few positive characteristics, which
are outweighed by more negative ones. To avoid this sort of “box-ticking” approach, we research only those companies whose business models show an overt focus on ESG concepts. Here are three that we currently favour. Mind Gym – boosting employees’ brains
This share plays to both the “S” and “G” in ESG (social and governance). Mind Gym is a provider of corporate training solutions, grounded in behavioural science. The crux of the business model is that by applying the best principles from that field, the company develops and delivers training courses that help corporates solve a range of employee issues much more quickly than they otherwise could. An outsourced delivery model, whereby carefully chosen,
Killik Explains To find out more about ESG investing principles and some of the difficulties facing investors when it comes to picking stocks that meet the criteria, please go to killik.com/learn and put “ethical investing” into the search bar. To receive a copy of Tim’s guide, “How to invest in equities” please contact your Adviser.
16 — Autumn 2019
PERSONAL VIEW
S P E C I A L S I T U AT I O N S
self-employed experts deliver training content, makes the model very scalable. In that context, the recent increase in the firm’s pure online delivery is very exciting as this will provide a significant further boost and should drive margins higher. At current levels the shares trade on 15x CY20E, with an 8% FCF yield and a 2% dividend yield. You can read more about Mind Gym in an interview with its CEO, Octavius Black, on pages 18 and 19. Hydrodec – refine, recycle, reuse Now we turn to the “E” in ESG (environmental). Hydrodec is a chemicals company that refines used transformer oil. This oil is used to cool, and provide insulation within, a key part of the electricity distribution infrastructure in the US. As with any oil, over time this type degrades and needs to be replaced. Hydrodec has patented a method of re-refining it so that its users do not need to buy brand new oil each time whilst incinerating their older stocks in the process. A key part of the investment case is that the group will be able to secure premium prices for its recycled product from US utilities whilst also taking in their old waste products as part of a “closed loop” process. A further win is the fact that the company operates out of a single factory in the US, making it essentially “Brexit-proof ”. It currently trades on a very low earnings multiple and high free cash flow yield, reflecting the market's scepticism regarding the delivery of earnings forecasts, following a recent profit warning. The group has also been in restructuring mode for some time. However, we believe that the shares offer value to investors who are prepared to see beyond these challenges.
Inspired Energy – profiting from efficiency Our second “E” underpins a firm focused on improving energy usage. Inspired Energy is a provider of consultancy on a huge range of aspects of energy use by its corporate clients. In power intensive businesses, even a fractional percentage saving on energy use can have a material impact on overall profitability. For this reason, the group generally engages directly with senior management, which is the key to generating cross-selling opportunities once the scale of a potential saving becomes clear. Indeed, the business model has been built on just such a “buy and build” strategy to date. So, whilst on one level, the company’s primary purpose is to ensure that its large corporate clients are engaged in the most effective energy purchasing strategies, recent acquisitions have taken them
deeper into the energy procurement supply chain. As a result, they increasingly focus on ways to help companies to reduce their energy expenditure (for example, via the installation of LED lighting) or CHP (combined heat and power installations). Investors should note, however, that Inspired is not an asset-heavy seller of technology, nor is it a blue-sky developer of the latest new power saving device. It is best seen as an independent third-party advising corporate on the best ways to save energy. We feel that the shares are exceptionally cheap, trading on 10x earnings with an attractive (3.5%) dividend yield. Given recent private equity interest in the sector, we would not be surprised to see this firm become a takeover target should the rating remain at what we believe is a depressed level. ●
Footnote: Full article is at https://www.wsj.com/articles/beleaguered-money-managers-findbright-spot-in-esg-11562846400
Key data Name
Market cap (m)
P/E ratio
Yield (%)
Share price
Currency
Risk rating
Mind Gym
122
16
2.1
122
GBp
9
Hydrodec
3
n/a
n/a
10
GBp
9
110
8
4.7
15
GBp
9
Inspired Energy
As at 7th October 2019. For more information about the Killik & Co Risk Rating system, refer to page 14. Please speak to your Adviser for further information. Note: the Special Situations service is higher risk. Please also note that the shares above, which are held within the Special Situations Service, are not on the Killik & Co Research Team’s covered stocks list.
Autumn 2019 — 17
ENTREPRENEUR IN FOCUS
Changing behaviour in 90-minute bursts Octavius Black CEO of the Mind Gym Octavius reveals how his unique approach to organisational development helped his firm achieve a first on the Alternative Investment Market (AIM). Where does your passion for behavioural science stem from? I started out as a management consultant at the global strategy, technology and engineering giant, Booz Allen Hamilton. The focus then was very much on data and process. I realised that, impressive as it was, their approach failed to properly incorporate the human side of corporate change. I wanted to explore this aspect of organisational development and put the focus on equipping individuals to flourish. That’s why my next move took me to a small pioneer in the world of employee communications. I was the eighth person to join and it subsequently grew to about 100 people. I became a director and we eventually sold the business to Omnicom. However, as good as that deal was for us, something still bothered me afterwards. I thought back to a big programme we had run at Allied Irish Banks (AIB). I remembered the CEO commenting, “It went down incredibly well but I’m not sure how much lasting effect it will have”. I began to consider how I could deploy the people who are best equipped to really change human behaviour - psychologists. I wanted to tap into their expertise to create lasting personal and organisational change. That’s why, in 1999, I decided to start the Mind Gym. It was a brave move. Back then, psychology was considered pretty fringe, especially in business circles. Nowadays, on the other hand, if you look at internet-based TED talks, it is hugely popular. An army of authors has also sprung up around it that counts Malcolm Gladwell and Daniel Kahneman amongst its ranks. 18 — Autumn 2019
What makes the Mind Gym different? In the old world of “learning and development”, a subject expert would choose a topic that they liked, sell the concept and then deliver it. The result could be very scattergun and totally unscalable. We disrupted that model completely by splitting out product design, management, sales and delivery into separate functions. They demand different skills, so our approach was to find people who excelled in one of those areas and let them focus on it. We also set out to create a brand that was totally focused on the individual. Our expertise in marketing communications helped. By way of a parallel, when cable and satellite television were first being launched, the big program makers wanted to create some sort of “Learning Channel”. Yet when they tested that concept via research, it bombed. Then they came up with a “Discovery Channel” instead and the rest is history. That informed the thinking behind the Mind Gym. We also had a raft of research showing clearly that people are more likely to change their habits and behaviours when they learn little and often and then apply new techniques quickly. Once we engage people with their choice of personal development topic, based on
what they will find interesting, practical and insightful we then deliver it with the maximum impact. We do that by taking the equivalent of a normal day’s content and concentrating it into 90 minutes. Studies show that this is about the length of time someone can give focus and concentration before their brains want to move on to something else. It also broadly accords with the length of a typical company meeting; any longer and you start to lose attention but any shorter and you lose impact. The BBC once measured the effectiveness of our short sessions versus a day-long programme and discovered that our approach outperformed and saved huge amounts of time. The last stage in our process uses techniques designed to make sure participants reflect on what they have learned, apply it and then come back to learn more. The proof of our pudding lies in the fact that we were the first ever behavioural science firm to achieve an AIM quotation last year. We continue to innovate. For example, we have been busy building a suite of digital products so that we can offer a fully blended solution, incorporating live-instructor-led sessions alongside online “nudges”. Once again, we want to stand apart as the only behavioural science business that can offer this type of integrated approach.
Who can become a Mind Gym coach? We need to deliver at a consistently high-quality level to large numbers of participants across multiple jurisdictions. We achieve that through a rigorous certification process for our coaches based around five core disciplines; spirit, individual focus, affinity, credibility and navigation, with 50 behaviours sitting underneath each one. Anyone who can exhibit them all to a good level will deliver a bite-sized session effectively. Another foundation stone of our approach is our willingness to take people from a wide spectrum of backgrounds. Since we started, we have employed everyone from archaeologists and artists, to the poker advisor on the James Bond films. The common link is that most of them have had some grounding in corporate life and many have run seminar-based sessions before. They come and work with us because they know that they will be engaged in a way that best fits their skills. Many like the fact that we let them do what they love best, whether that is product design or running coaching sessions. We have a big range with titles such as, “how to influence and persuade” and “courageous conversations”. The fact our coaches are all self-employed means we can offer them flexibility too – one of our tutors will phone up and say, “I’ve got to do an archaeology dig in Sicily for two months but then I will be ready for a new project”. We work around him in order to get the right person for our clients. Why start the Parent Gym? Thanks to our Mind Gym Chair, Joanne Cash, we have been involved with several Youth Charities. We learned that one of the key reasons young people drop out and stop engaging is their parents. For example, when one boy was asked why he hadn’t shown up to a soccer session, offered as part of a youth program, he replied, “my dad took me thieving”. The research in this area shows that the single factor that is most likely to determine a child’s life success is the quality of the parenting that they receive. Yet this remains an area that politicians shy away from. We decided to tackle it head on via a “not-for-profit” programme and a new
ENTREPRENEUR IN FOCUS
brand. Our expertise in psychology and behaviour allows us to help parents to become more confident and better able to support their children, whilst doing one of the world’s most challenging jobs. The program lasts six weeks and is built around our bite-sized sessions. We now run about 100 programmes a term around the UK and have had fantastic results, in terms of achieving better parent-to-child relationships and improving mental health. What can behavioural science teach investors? If I could pick out one thing, it is to recognise that people are often not rational, but they are predictable. For example, we know that fining people small amounts for minor misdemeanours increases the probability they’ll carry on, rather than desist, whether the problem is a late pickup after nursery, cheating in exams or not following financial rules and regulations. That’s because once a decision becomes financial, rather than ethical or social, it is legitimised. Investors need to be open to opportunities to better understand behaviour like this as that is the key to being able to predict outcomes and ultimately beat the rest of the field. Equally, when it comes to specific businesses, how many people reflect on whether their investment decision rests on an assumption that the firm’s customers will behave rationally? Many of the decisions we make are, in fact, contextual. One famous study tested advertising campaigns for a popular museum on the US West Coast. It ran one advert that pushed the idea that it was the most popular museum in the area and that people should come rather than miss out. Another focused on it being an amazing place for unique people seeking an unrepeatable experience. They showed both adverts during the commercial breaks in romantic comedies (“romcoms”) and then again during action and horror movies. What they found was that when the adverts were run in the middle of a romcom, people were more inclined to respond to the second style as their brains subconsciously reasoned that they should favour something that would let them stand out in order to find a partner. Placed within a horror or action film context, on the other hand, the first advert proved
more impactful because when people are threatened or scared, they tend to want, instinctively, to feel part of a crowd. That just shows how important environment and context are in decision-making. Investors therefore need to study the backdrop against which the companies they invest in operate to better understand the behaviour of key stakeholders. What is the key to a life well-lived? To paraphrase Aristotle, a good life is one you lead in accordance with your values. For me that means doing something that will nudge the world in a slightly better direction for lots of people. That’s why I remain so committed to this business after 19 years - I have never been more passionate about helping people to make better use of their brains. What piece of advice would you give to the 18-year-old you? Understand that life is about compromise. Every time you choose one path, you reject another. Living well is therefore about enjoying the one you are on and not constantly worrying. I think that is why the psychology of exclusion – fed, in part, by a social media-induced “fear of missing out” – is such a rapidly growing discipline. However, I will leave that huge topic for another day! ● Autumn 2019 — 19
MAKING A DIFFERENCE
Don’t retire, teach! Justin Abel Science teacher and former financial services senior manager Justin popped into House of Killik, Northcote Road, to explain how a newfound passion for teaching has transformed his perspective on stopping work, aged 58. What is your current role, and how long have you been in it? Over the last year I have been supported through teacher training by ex-FT columnist Lucy Kellaway’s organisation Now Teach, which specialises in giving mature folk like me the opportunity to enter the classroom. As a result, I am just about to start my first year as a newly qualified science teacher at the Bolingbroke Academy in Battersea. I have been in front of pupils from day one, teaching ten lessons of chemistry, physics and biology a week to children aged around 11-12, as well as completing the required post graduate certificate in education (PGCE). It has been full on, challenging and enormously rewarding. What have been the biggest challenges? For a new teacher, they are many and varied. For example, knowing what you need to teach and then actually doing it for the first time are so different. There is the lurking fear, unfounded as it has turned out, that having done a physics degree 35-years ago, I might not remember enough of the relevant science. I last studied biology at O-level in the early 1970’s so when I discovered I would be teaching that too, I was terrified until I realised I knew enough. However, that technical challenge pales in comparison to the classroom management issues that come at you. For example, I started out with a class of nearly 30 beautifully behaved, top set pupils at the beginning of the year. One day they turned a lot rowdier when they were joined by three children who had 20 — Autumn 2019
been added to their class for poor behaviour in another group. I was so naïve in those early days that it took me a while to twig what had happened to my carefully curated classroom dynamic. Once I did, I was able to restore order fairly fast, but I went up a whole new learning curve in the process. Fortunately, the expectations placed on trainee teachers when they start out are low and the support I have received has been incredible – everyone wants you to succeed. I had a coach for the whole of the last year, a wonderful guy aged 25, who only has a few years of teaching experience but is nonetheless incredibly good at what he does. He gave me lots of open and honest feedback, which I have found hugely valuable. That said, it’s been a while since anyone started a review session with, “well Justin, that didn’t go too well but here is how we are going to make sure it goes better next time”! Why science? It’s the subject I read at university, and it’s what I have always really wanted to teach. One of the main reasons I got into this job, even relatively late, is that I think it’s very important that children are taught science well. Although I have enjoyed a long and varied career in financial services, teaching is something I’ve always held in the back of my mind. A longstanding passion for the subject is vital as you must engage children first and foremost by communicating your own enthusiasm in the classroom. When did you decide to make the switch into teaching? I could have ended up in something closer to it much earlier in my career. I loved science at school and went on to do a physics degree. Prior to university I worked at the Royal Greenwich Observatory as a trainee astronomer. At that stage I was already
seriously thinking about becoming a research scientist. However, while I was at university, I concluded that it was just not the right working environment for me, and I also wanted to earn more money than was on offer back then. My first career move was therefore into BP and then the City via reinsurance – in both cases they were IT-based roles. The trouble was I quickly found reinsurance a bit stodgy and yearned to be closer to the stock market, which I perceived to be more dynamic. When a job came up at Reuters in the mid-1980s, I grabbed it and ended up staying with them for the next 20 years. The Big Bang of 1986 initially created all kinds of opportunities in project management and technology – it was very exciting. I ended up running teams of developers and even spent some time in Sydney managing a company. Eventually I ran the entire technology team in Asia, and then the equivalent one in America. After about 10 years, I made a big change and moved into the part of the business that collects and manages financial data. I led that area for another decade. Then one day I got made redundant. That wasn’t quite as traumatic as it sounds. Although I still enjoyed the job, by then I’d realised that I was not going to go much further in the role. I felt a bit stale and was happy enough to go. I then passed two happy early retirement years doing lots of travelling with my wife, including a long spell in New Zealand, walking South Island.
It was when we got back that it dawned on me that I wasn’t perhaps ready to fully retire and so I began looking for something completely different to the job I had been doing at Reuters. Around that time I spotted an article by FT columnist Lucy Kellaway about Now Teach. It was a “lightbulb” moment – suddenly I could see a path to doing something I had always wanted to try, with the right support from day one. The thing I love about Lucy is that she has never sugar-coated the reality of teaching, especially for older starters like me. Nonetheless, when I was sent out to my first school, having gone through their selection process, I remember returning after a couple of days with a huge smile on my face. Despite her warnings, I was hooked. What do you enjoy most and least? Firstly, I have loved the challenge of doing something completely new and being able to start again. It’s a real privilege to go into a new job from scratch at 58 and be offered the chance to learn from fantastically committed people. The second, and most important perk, is the children. At the risk of sounding trite, you shouldn’t become a teacher unless you like working with them, because that’s what it’s all about. Since the subject matter is important to me, I was always likely to end up at a secondary, rather than primary, school but the buzz you get from engaging young people is similar in both environments. As for what keeps me awake at night, in the early days it was the feeling of responsibility – I felt as though I was flying a jumbo jet with other people’s children on board. It was not so much the subject knowledge that worried me as the classroom management challenges and my fear of letting pupils and parents down.
PERSONAL VIEW
doing. I think I cope quite well with the stresses of teaching as a result. I have also found dealing with parents a lot easier than some of my younger colleagues. Newly qualified teachers can find this aspect quite daunting but for me, in the first term especially, it was a bit of a relief to talk to adults whose behaviour can be largely predicted. The fact that I am a parent myself also means that I have sat on both sides of the table, so I almost have a sixth sense for their concerns. Finally, I think my former career equipped me to handle almost any type of presentation. That said, pure teaching and classroom management, are different and demand other skills too. An experienced teacher probably spends 20% of their brain power on presenting their material and the other 80% on judging what’s going on in the classroom and responding to it. In the corporate world you can often reverse those percentages. Another difference is that whilst in my previous job I might have delivered 30 or 40 presentations in a year, in this one I expect to be teaching for around 600 hours – it’s a different scale of challenge. In what ways have Now Teach helped? At the beginning of the programme they got me through a lot of basic admin, such as the tricky online grammar and maths tests you need to pass to become a teacher. More important, however, is the strength and breadth of my Now Teach peer group who offer a great forum for talking about some of the frustrations faced by maturing wannabe teachers. My peers include a tech entrepreneur, who sold his company for a fortune last year, a management consultant, an ex-airline-pilot, a couple of ex-military
MAKING A DIFFERENCE
folk and a number of people who have come in from corporate roles, particularly in the City. I’m at the slightly older end of the spectrum – I’d say the range is mid-40s to late 50s. Whilst it is wonderful going back to being a trainee, there are also headaches. You start at the very bottom of the organisation in a new school, so it’s great to be able to talk to people who understand your gripes and can share theirs in a safe environment. How have your pupils reacted to you? I received differing advice initially on whether I should tell them that I’d done something different prior to entering the classroom. Some teachers cautioned, “Don’t tell them – as you’re older they’ll assume you’re an experienced teacher so why come clean?” Others disagreed, “No, you should tell them for the simple reason that they’ll be really interested.” The conclusion I’ve come to is that with the younger kids there’s not much point; eleven-year-olds are not in the least bit impressed by the fact that I have worked in the City and telling them that I have only been teaching for a short while is probably not helpful. With older children though, it’s different. I’ve started teaching some sixth formers now, and many find my career path very interesting, even if they usually respond with, “So, why on earth did you go into teaching?” What would you say to the 18-year old you? Whilst I am broadly happy with the way my career worked out, I think I would say to myself, “take a risk and be prepared to change”.
Has your previous career experience been useful? Yes, but perhaps less than I imagined and only in some quite specific ways. Having done a whole range of different and demanding jobs over the course of my career, I am undoubtedly less flustered in situations where I don’t know what I’m
Autumn 2019 — 21
MAKING A DIFFERENCE
During my career I wandered around taking a mixture of the paths of least resistance and the best opportunities available at the time. I think that’s fine, but I would probably advise myself to try a few different things along the way. For example, I sometimes wish I’d been a bit more entrepreneurial and gone out by myself. Quite a few of my Now Teach peers stayed in jobs they didn’t love and now rather wish they’d left sooner. I have not completely ruled out setting something up independently in the future as I now see a lot of opportunities in technology within education. In some ways the British system is still in a pre-industrial stage since the way classrooms currently works means a maximum of 30/40 pupils can be looked after by one teacher. Technology introduces an opportunity to do some of this differently. Whilst the personal interaction between teachers and pupils is important, it is more so for some aspects of learning than others, where it can even be inefficient. Within university education, there are huge strides being made to progress their offering with the advent of massive online courses, for example. I think there are opportunities to do something similar within secondary education too. I also have lots of discussions with teachers about the fact that the last time a child will have to write a serious bit of text is when they do their A-levels. All our exams are based around sitting down with a piece of paper and a pen for an hour and a half. To a large extent, therefore, our children are learning a skill which is practically useless. We’re going to have to move on soon to a form of teaching that allows people to use technology in the way that they will be expected to later in life. When will you stop teaching? Although it still feels very challenging, I am much more comfortable with teaching now than I was a year ago. I suspect that in another year’s time I’ll feel even more attuned to it. On that basis, I think it’s too soon to say. My expectation is that my second retirement will come in about five years’ time – unlike Lucy, I don’t think I’m going to be still doing this when I’m 70. That said, I never say never! ● 22 — Autumn 2019
Bringing commercial experience into the classroom
Lucy Kellaway, a former FT columnist, offers her vision for the organisation she founded, Now Teach What do your teachers add to a classroom?
In a nutshell – up to 30 years’ experience per head of the world outside education. Sometimes this is directly relevant – we may have a software engineer teaching IT, or a doctor teaching science. However, even when a Now Teacher has been working in a different field, experience of any employment and knowledge of what the working world is like, is useful and interesting to students. Amongst other things, I have taught my pupils how to shake hands! How should someone weigh up a move into teaching?
There are two vital questions to ask yourself: firstly, would you like spending your days surrounded by teenagers and secondly, do you love the subject you are planning to teach? If the answer to both is yes, then teaching is right for you. You also need to relish the idea of starting all over again and understand that at the beginning most new teachers are not great at what they do. Has your former career helped you in this one?
Being a journalist was all about communication and getting messages across clearly. I think that has helped a bit. It also taught me how to cope in the firing line – journalists get used to the rudeness of the “green-ink brigade” and must learn not to take it personally. That is very useful in dealing with hostility from a class full of 14-year olds. Where do you want Now Teach to be in five years?
I want us to have built up a large network of brilliant older teachers who can bring their life experience into the classroom and get involved in running schools. I would like it to be perfectly normal for a professional in their 50s to retrain as a teacher. I would also like to see us working with a greater number of schools in parts of the country where teacher shortages are especially acute.
Q U A R T E R LY S N A P S H O T
Rounding up market news Rachel Winter Associate Investment Director Our weekly Market Update presenter analyses the latest quarter’s key corporate news and sums up what it means for investors. Trouble in cyberspace It is becoming abundantly clear that the UK’s data regulator, the Information Commissioner’s Office (ICO), fully intends to use the new powers granted it to by the General Data Protection Regulation (GDPR) legislation that came into force last year. At the start of July, British Airways was hit with a £183m fine for a data breach that occurred in 2018. Shortly afterwards, hotel group Marriott was fined £99m for one that took place back in 2014. Both fines were significantly higher than expected. Companies failing to protect personal data can now be fined up to 4% of global turnover (or 20 million euros, whichever is higher), a sobering thought when you consider that retail giant Walmart’s global turnover for 2018 was $514 billion. Cyber security has therefore never been more important, and tracker funds such as L&G Cyber Security UCITS ETF continue to be an attractive way to gain exposure to this theme. China’s new star Beijing has long been unhappy with the fact that two of its largest and most successful companies, Tencent and Alibaba, have opted not to list on the Chinese stock exchange. The former trades in Hong Kong and the latter in the US. One of President Xi’s long-term goals is to become a global technology leader, and with this in mind China has launched a new market called the Shanghai Stock Exchange Science and Technology Innovation Board (the “STAR” market for short). Its objective is to support Chinese technology start-ups with the eventual aim of rivalling the US NASDAQ. This is yet more evidence that China is becoming difficult to ignore for global investors. Sustainable momentum Huge forest fires in the Amazon attracted global criticism this quarter, highlighting
a growing concern for environmental welfare. Consumers and investors alike are keen to see action taken on climate change and as a result the momentum behind the sustainable investing movement continues to build. More and more capital is flowing into funds that are labelled as sustainable, with 168 new such funds being launched in the first six months of 2019 alone. Environmentally friendly stocks, such as Danish wind farm developer Orsted and water technology company Xylem, should continue to benefit from this trend. Central Bank largesse The European Central Bank (ECB) has reduced interest rates yet again and has also announced a further round of quantitative easing. However, ECB President Mario Draghi has made it clear that loose monetary policy alone will not be enough to generate economic growth. Governments around the world must start to loosen the purse strings if real growth is to be achieved. The head of the International Monetary Fund echoed this view, banging the drum for more spending. With government bond yields at record lows, large-scale fiscal expenditure has arguably become more feasible – the German government has just issued a 30-year bond with an interest rate of zero. Armed with the ability to essentially borrow money for free, the case for big State-funded infrastructure projects such as roads, bridges and airports is becoming more compelling.
Saudi’s oil shock Tensions between the US and Iran continue to build following America’s withdrawal from the Iran nuclear deal and US-focused defence stocks such as Northrop Grumman have rallied in recent months. In mid-September, the US accused Iran of being responsible for a drone strike against Saudi Arabian oil facilities. Despite global progress in the development of renewable power alternatives, the world is still heavily reliant on fossil fuels and this episode served to highlight the lack of short-term flexibility in the global oil supply. The damage to Saudi Arabia’s facilities was initially estimated to have reduced it by 5%, resulting in a 20% spike in the price of Brent Crude. Shares in integrated oil majors such as BP, Shell and Total that are geared positively to the higher oil price remain our favoured plays in the sector. An Apple update The new iPhone was launched in September, marking the first time that Apple has released a new phone without a significant hike in prices. Updated versions of older models have also been issued at lower price points. Increasingly it appears that technology giants are focusing on subscriptions and services rather than devices, and Apple’s latest move suggests it is following suit. Raising the overall number of iPhone users should allow the technology giant to sell more subscription services such as Apple TV and Apple Music. We continue to maintain a positive view on companies with strong consumer subscription services, such as Amazon (via Prime) and Spotify. ● Autumn 2019 — 23
Big things start small When it comes to nurturing your savings, there’s a lot to be said for having a little patience. How given time, something small can grow to become something significant. Speak to your Adviser about giving your savings the best chance to grow.
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