Confidant, Autumn 2020 Issue

Autumn issue 2020

Acting for clients as they would want to act for themselves

C O N F I DAN T Save | Plan | Invest

Brewing storms

Building blocks

Dividing the spoils

Coping with volatility

Mark Nelson on the climate change challenge, p8

Gordon Smith discusses infrastructure, p12

Employee share schemes in focus, p14

Peter Day’s views on markets and the virus, p20

Powering up

Our new investment services, p4

C O N TA C T S

Head Office

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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

Esher Paul Martin 9 Esher High Street, Surrey KT10 9RL T: 01372 464877 E: esher@killik.com

Kensington George Harrison 281 Kensington High Street, London W8 6NA T: 020 7603 3618 E: kensington@killik.com

Hampstead Peter Day 2a Downshire Hill, London NW3 1NR T: 020 7794 3006 E: hampstead@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, Julian Chester 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

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.

2 — Autumn 2020

FROM THE EDITOR

Spending wisely Tim Bennett Head of Education In the last issue of Confidant, I discussed the merits of saving regularly. For most investors, this approach offers a better path to building long-term wealth than trying to time the market. It is also the core principle that underpins the firm’s savings app Silo.

But what is the right approach to the opposite challenge of spending money in a way that maximises happiness? A recent article by Jonathan Clements at humbledollar.com suggests that we should take a similar tack. His premise is that the drip-feeding approach that can work so well for long-term saving also works well when it comes to spending.

This is timely advice as we head towards the end of a year during which our ability to enjoy bigger ticket items – whether cars, second homes, long weekends away or exotic holidays – has been curtailed by COVID. A period of lockdown, followed by reduced “rule of six” socialising, has not only reinforced, in many of us, an awareness of our mortality, but has

also offered the opportunity to reflect on what makes us happy.

The key to what Clements calls “mindful spending” lies in remembering, as many studies have shown, that we derive more cumulative pleasure from small, regular treats than we do from splurging on a single, big asset. “Whatever you do with your money, the happiness you receive from spending it will wane, as the initial thrill quickly turns to ho-hum”, as he puts it.

Thanks to what a psychologist would call “hedonic adaptation”, a big new car purchase might generate huge initial excitement. However, this often tails off quickly to the point where indifference, and even disappointment, sets in. But what if the money spent on that car could buy 200 smaller treats, or if choosing a cheaper model would pay for 100 of them? His premise is that this way of thinking is the key to greater long-term contentment, provided we follow some ground rules.

Start by making a plan. Since we often derive as much pleasure from

C OMING UP

SECURITIES IN THIS ISSUE

Scaling back, p7

Legg Mason Clearbridge Infrastructure, p12 Blackrock World Mining Trust, p13 Polar Capital Healthcare Opportunities, p13 Allianz Continental Europe, p13 Baillie Gifford Japanese Smaller Companies, p13 Seeing Machines, p18 Kin & Carta, p18, MP Evans, p19 Portmeirion, p19, Salesforce, p23 Honeywell, p23, Abbott Laboratories, p23 Thermo Fisher Scientific, p23

Sustaining growth, p10 Yielding results, p17 Taking over, p18 Rounding up, p23

the anticipation of something we enjoy as we do from its actual arrival, why not put that next meal out with a spouse, friends, or children in the diary? Next, aim for variety. Repeat the same treat too often, whether buying your favourite morning coffee or pouring a 6pm wind-down drink, and you weaken its ability to satisfy.

Thirdly, buy time – if you can afford a cleaner, get one. The same goes for that occasional holiday nanny if you have young children or grandchildren.

Fourthly, aim to share experiences as widely as possible, remembering that we can get as much personal pleasure from giving as receiving. Fifth and finally, don’t use spending for “social signalling”. Avoid the temptation to deploy the wealth you have as a competitive weapon to impress (and depress) other people. Instead, enjoy the fruits of your success by being generous and creative in the way you spend money. Like Clements, I believe we will all end up happier as a result. ●

Autumn 2020 — 3

VIEW FROM THE TOP

Explaining our new services Paul Killik Senior Partner Paul sets out the vision that lies behind the firm’s full spectrum of investing opportunities and highlights some of their key differentiating features.

At Killik & Co, we work hard to ensure that the range of services we offer our clients is sufficiently broad and deep to be able to meet the needs of all generations of savers and investors.

In a rapidly changing world, we recognise the importance of evolving our offer and innovating to remain competitive in the market.

During 2018 we soft-launched a series of new services guided by feedback from our clients and in recognition of changing client needs both current and future. Having had the opportunity to test and evaluate these with new, and some transfers of existing, clients, we now feel that it is appropriate to offer these services to our wider client base.

The selection of either service was generally made by the client and often based on cost. This frequently led to clients selecting Advisory as the cheaper of the two options, and the one that provided them with more control.

our clients’ long-term aspirations, we can create an investment strategy uniquely constructed to support them.

We invest heavily in integrating Wealth & Financial Planning into our service and this remains a key focus.

Over the years, regulation around Advisory services has tightened and, as we have got to know our clients and their families better, we have been able to enhance our Managed Services to meet their changing needs.

The word “saving” embodies the very essence of our role. We are here to facilitate the concept of compounding which Albert Einstein is reputed to have called, “the eighth wonder of the world.” This is best achieved by pound/cost averaging via saving and investing small amounts on a regular basis over time.

We now find that for many clients, especially those who are busy and do not have the time or inclination to follow markets in detail, a Managed Service is more suitable and can represent better long-term value. It allows clients to entrust the precise mix and timing of investment decisions to highly qualified experts who fully understand and appreciate their personal circumstances.

Our thinking, in designing them, was to better position ourselves to meet the following imperatives, with the services described more fully later.

Investing thematically To bring a more disciplined and thematic approach to portfolio management by treating the whole world as our investment universe and MSCI World as our benchmark.

Achieving the best fit To ensure that the service that we offer to each client is entirely appropriate given their knowledge and experience of investment and financial planning.

Coming from a traditional stockbroking background, as we did at our launch in 1989, our initial offerings were limited to Advisory and Discretionary Services.

This was in line with most firms in our peer group at the time; Discretionary Services only got going from the late 1960s as computing systems started to evolve within our industry.

4 — Autumn 2020

One of Killik & Co’s founding principles was to introduce people to the stockmarket who had never invested in securities before, and enabling them to understand what can be achieved by saving in this way. Helping people to unlock the potential benefits of longterm investing at all stages of their lives remains equally important to us today.

Planning for success To promote the importance of long-term planning, saving, and investing; and to save by means of pound/cost averaging whenever possible.

“Planning is bringing the future into the present so that you can do something about it now” (Alan Lakein).

We believe passionately in the power of financial planning: when we understand

London has long been the centre of international investment. However, over the past ten years the internet has dramatically altered the investor’s view of the world and we have observed that applying a thematic lens to international investment opportunities can prove transformational for our clients’ portfolios.

Investing thematically is only possible if you can be confident that you have a 360˚ view of what is being produced or developed within a given theme

VIEW FROM THE TOP

across the world. In this way one can evaluate the competitive position of each company and product within that theme, to make the right investment choices. As such, extensive research and analysis is essential, and we have invested significantly in building proprietary expertise in this area.

Generating value To deliver optimum value to clients by maximising portfolio performance whilst minimising and simplifying cost to the client.

From the thematic positioning described above, we have developed our Large Cap Global Equity Portfolio Service.

Around 10 years ago, with the growth of passive investing (or “index tracking”), we started to see increasing media attention drawn to the costs of investing. However, we believe that the focus should be not so much on cost as on long-term value to the investor.

We are proud to have demonstrated, over many years, that active investing can outperform passive, not least because it is more forward-looking in its nature. The value we can offer is potentially boosted further by having a client’s interests looked after under one roof as they are at Killik & Co. A more pertinent story may in fact be the rise of costs triggered by the all-too-frequent ‘three noses in the trough’ scenario. This arises where investors use an Independent Financial Adviser (IFA) for their planning, who in turn selects an Investment Manager to handle asset allocation and the funds into which the clients’ monies are invested. A series of fund managers then collect their fee for selecting the underlying securities within each fund.

These costs are, quite apart from the accountancy fees that come with completing a tax return and the many layers of charges involved in running a fund, over and above the Annual Management Charge. As a result, it is not uncommon for investors to be paying over 3% in total. This, in a

world where real long term returns on UK equities may be only 5%, leading to a net return of just 2% under such a scenario.

We therefore tasked ourselves with the challenge of reducing the cost of investment for our clients, to a point where no one pays more than 2%, including VAT, and the majority will pay significantly less. We are doing this by offering a vertical model that combines all of the above in-house.

We are also currently leading the fight against VAT on discretionary fund management fees. Saving for one’s future is something that Governments should be encouraging, not taxing.

VAT is controlled by the EU. So, after we have exited the transition period for Brexit on 1st January, we are asking ours to level the playing field on VAT across the financial services industry, recognising that the funds industry is exempt. I know many of you feel as strongly about this issue as I do, and would encourage you to write to your MP to make your views known, as this is a campaign that will benefit from more voices being added to the call.

If, as we hope, we are successful in exempting discretionary investment management charges, we will achieve a 20% win for such investors.

Further, in a ground-breaking decision within our own gift, designed to make our fees and charges as simple and transparent as possible, we are now abolishing commission entirely within our new services, apart from our Stockbroking Service.

Integrating technology To embrace digitalisation and the opportunities that it offers to deliver data and enhance communication with our clients, and encourage saving.

Many of you will have already heard about Silo, our beautifully simple, phonebased app, which facilitates saving from £25 each month with no upper limit.

With different strategies, depending upon the level of risk, the underlying portfolios are under the management of my long-time Partner Mick Gilligan, who is well known to many of our clients for having built our Multi Manager Service so very successfully over 17 years.

Silo is entirely controlled through a mobile phone, which allows clients to easily pause or change their monthly subscriptions, initiate ad hoc boosts and, if they wish, connect Silo to their bank account for, what we call, Intelligent Saving.

Silo was soft-launched in 2019 and is rapidly approaching 1,000 users, with very little marketing spend. We have recently introduced a Junior ISA service into the app, making it even easier to save for the futures of the next generations. We also have a range of initiatives lined up that will make saving and investing even more straightforward for Silo users.

We recognise the limitations of MyKillik.com and the Killik Portal and are currently in the process of a single rebuild. We hope and expect that the first iteration will be available early next year. Our challenge is to deliver information to this new portal in such a way as to make our clients feel the necessity to visit it, ideally daily and at least weekly.

It is also important to us that we do not lose the essence of what our clients seek from us. We hold this to be a personal service, delivered by well qualified individuals with whom our clients can build long term trusting relationships, covering all aspects of financial planning and investment management, through our Managed or Advised Services.

Autumn 2020 — 5

VIEW FROM THE TOP

An overview of our new services Killik Complete Our new flagship proposition, this combines our specialisms into one simple, transparent service. These include, Investment Management, Wealth Planning, Personal Taxation, Wills and Lasting Powers of Attorney.

This means that we can look after the interests of all generations of a family within one relationship in a way that protects and smooths intergenerational wealth transfer.

Fees: 1.75% all-inclusive* (including VAT) on the first £1m and 1.6% on the excess

Managed Investment Service (MIS) This is the managed portfolio route to our various segregated service offerings. Each provides direct investment into the underlying securities, bonds, shares and some specialist funds. Barring Large Cap Global, which is managed by your Investment Manager, these are managed by our in-house specialists, thereby obviating the need for funds for the larger part of a portfolio.

Our main services are Fixed Income, offering direct access to the bond market, and Large Cap Global. The latter offers modelled access through UK companies capitalised at over £10bn and international companies over $20bn that all play to our global themes.

6 — Autumn 2020

Fees: 1.35% all-inclusive* (including VAT) on the first £1m and 1.2% on the excess. This fee includes an Annual Planning Check-Up with one of our financial or wealth planners. Our more comprehensive ongoing Wealth Planning service is available for an additional fee of just 0.25% for the first £1m and 0.2% thereafter.

Advised Investment Service (AIS) An Advised version of our Large Cap Global Service that offers those clients with the appropriate knowledge, experience and time, the ability to participate in the decision making surrounding this key part of their portfolio. Other Segregated Services may be added but only as Managed Services.

Fees: 0.95% all-inclusive* on the 1st £1mn and 0.8% on the excess.

The Segregated Services are charged as above. Comprehensive and ongoing wealth planning is available for an additional 0.25% on the first £1m and 0.2% thereafter.

Portfolio Management Services (PMS) We recognise that many clients prefer to invest via funds, rather than by direct investment. Our PMS offers this route by leveraging the expertise of our in-house funds team.

Fees: 1.35% all-inclusive including VAT, on the 1st £1m and 1.2% on the excess.

*Foreign Exchange charges may also apply.

Please consult your Adviser for more information and if you would like further and more detailed explanations of all our New Services, including lists of all the Segregated Services.

Wrapping up As we expand the provision of these services, it may be that some clients consider one of the newer, integrated managed services, such as Killik Complete or MIS, to be more suited to themselves and their families. For example, although MIS provides less flexibility than Managed Portfolio Service, some clients may find that, with the inclusion of our Annual Planning Check-Up and no commission charges, MIS resonates more.

When considering MIS it is important to note that it is a different and more restrictive service, particularly in the matter of funds, which goes to controlling costs. It may therefore require some significant changes to an established portfolio to bring it into line. Please bear with your Investment Manager in recognising that there is more involved than simply a change of account title.

Acknowledging that circumstances and specific requirements change over time, we would always recommend regular consultations between client and Adviser to ensure that the service we offer remains the one that is the most appropriate for your individual needs. ●

OPINION

Returning home Matthew Lynn Columnist and Author Matthew argues that recent events have accelerated some key long-term shifts in the global economy and considers how investors should react.

At the start of this year, there were already plenty of reasons to think we might have reached ‘peak globalisation’.

Trade wars were breaking out across the Atlantic and the Pacific, Britain had committed to leaving the European Union and populists were riding a wave of global nationalist rhetoric. That was before the coronavirus ripped around the world at lightning speed, sparking the deepest quarterly crash in UK GDP since 1955. The upshot is that the dominant theme of the post Cold War era – that the world would become ever more inter-connected – is firmly under the microscope.

Shifting trade A tectonic shift in the way we view globalisation is now a given, even if the coronavirus pandemic burns itself out for good and leaves few permanent economic scars. Those still hopeful of this “V-shaped” recovery expect the prospect of an immediate sharp slowdown to galvanise efforts to conclude existing trade wars in a bid to allow global trade to bounce back.

But even if this rosy scenario plays out, we will start to see a much greater emphasis on national, rather than international, business. That is because it is not going to be as easy (or even desirable in the case of countries such as China), for companies to trade globally as it has been for the last two decades.

This shift will create opportunities for investors who get the right side of a big change in sentiment.

The challenge will be working out which industries, and what types of companies, will benefit the most. Here are three trends to keep an eye on.

Staying home Over the last two decades, giant multi-nationals have been the big winners from globalisation. Commercial behemoths have been able to create complex supply chains to ship in goods from the lowest-cost producers.

In doing so they have reaped the rewards of cheap wage bills for migrant labour, profited from the ability to move revenues around to reduce tax bills, and stormed their way into new markets as trade deals opened them up.

However, as that tide ebbs, it will be the smaller companies, built around domestic consumers and dependent on local suppliers, that will come to the fore. That, in turn, suggests that the FTSE-350 (or, perhaps, the All Share) is likely to remain a better benchmark for UK corporate performance than the FTSE-100. This is a pattern that I see being repeated in other countries, such as France, Germany and the United States.

Whilst global giants in areas such as pharmaceuticals, online payments and technology will undoubtedly continue to prosper, investors should not overlook smaller, local champions.

Diversifying differently Next, although investors will want to stay globally diversified and carry on increasing the international element of portfolios, their demands will start to shift. For most of the last two decades, someone wanting exposure to, say, high-growth emerging markets, North America, or East Asia, did not necessarily need to venture far into them. By buying the major multi-nationals in the FTSE or the DAX instead, they could achieve an exposure to firms that were expanding aggressively into those territories.

With globalisation waning as a force, that will not hold as true anymore.

To share in the rising wealth of the

developing world, investors will want information about, and access to, the equivalents of the kinds of firm that they can see thriving at home.

Coming on shore For years now, ‘off-shoring’ has been one of the biggest trends in business.

Companies have boosted margins by moving factories, designers, and even call centres away from their home markets. In the decade ahead, however, the focus is likely to shift to bringing that know-how back home.

Technology will have a key role to play here and in some quite unexpected ways. The boom in vertical farming is a case in point. Instead of shipping fruit and vegetables hundreds or thousands of miles overseas, supermarkets will be able to grow supplies locally in giant, light-controlled onshore greenhouses.

That is just one example of how a combination of robotics and Artificial Intelligence will throw out opportunities to lessen our reliance on global supply chains by boosting local ones.

No going back It remains to be seen exactly how far globalisation retreats. Even the doomsayers concede that we are not likely to go back to the world of the 1950s and 1960s. Dominated, as it was, by currency controls, most production took place in local countries and regions. By contrast, 2020’s supply chains and trade flows are too deeply embedded to be easily unwound, and consumers will not give up the huge choice and cheaper prices that international trade has created.

Nonetheless, we are going to see a re-balancing. Smart investors will therefore stay sanguine and start to position themselves to take advantage of a “next normal” for the global economy. ● Autumn 2020 — 7

THE BIG PICTURE

Acclimatising to change Mark Nelson Senior Analyst This quarter Mark returns to the key theme of climate change and looks at how governments around the world are gearing up to tackle it post-pandemic.

It is easy to forget that just as the coronavirus crisis struck around the turn of the year, the world was gearing up to tackle a different crisis altogether – that of climate change. 2019 marked a year in which this critical issue grew in the public conscience, after a string of extreme weather events and a host of demonstrations across various parts of the world, calling for greater action to tackle global warming. According to the Met Office, 2019 was the second warmest year on record, at 1.05˚C above pre-industrial temperatures. Further, no fewer than 19 of the 20 hottest years are thought to have occurred since the turn of the century (see chart).

Unsurprisingly, governments were already starting to sit up and act – in June 2019, the UK became the first major economy to pass a net zero emissions law while the European Union presented its “Green Deal” in December.

As the coronavirus spread across the globe, governments naturally diverted their attention to the more immediate challenge of protecting public health and trying to save lives.

Efforts were also made to address the short-term economic impact of the outbreak and measures were taken to limit the spread of the virus.

These included furlough schemes, loans to small and medium sized businesses, and tax reductions. Now, alongside efforts to tackle the ongoing short-term public health and economic challenges posed by Covid-19, governments are beginning to look to the future and how best to foster an economic recovery from the crisis.

8 — Autumn 2020

Source: showyourstripes.info

Joining the dots Against such a backdrop, there was the risk that environmental policies could have fallen by the wayside due to the sheer size of the required investment at a time when economic uncertainty is at elevated levels.

Additionally, the sharp fall in oil and gas prices this year has weakened the economic case for alternative sources of energy.

However, although it is a very different crisis from that caused by global warming, Covid-19 has provided a stark lesson in the susceptibility of societies to major global shocks. Such events are expected to become more frequent should the world continue to heat up.

The pandemic has also shone a light on public health. According to the World Health Organisation, air pollution is linked to 4.2 million premature deaths globally, with initial studies indicating a correlation between areas of high pollution and elevated Covid-19 mortality rates. Little wonder that support for policies to tackle global warming has, if anything, strengthened since the beginning of the year.

Mark Carney, former Bank of England Governor and now the UN Special Envoy for Climate Action and Finance, has urged all governments and businesses to see Covid-19 as an opportunity to take decisive action

on climate change, warning that it poses a threat from which “we can’t self-isolate”. His views are supported by a recent Ipsos-MORI poll which found that 71% of participants from around the world felt that climate change is as serious a crisis as the pandemic.

Gearing up The European Union has undoubtedly put the environment at the heart of its recovery plan. On 21 July, EU leaders agreed a €1.8tn recovery package.

One third of this will target climaterelated projects that are in line with the Union’s objective of achieving carbon neutrality by 2050, as part of its Green Deal. More recently, Ursula Von der Leyen, the President of the European Commission, provided greater clarity on the trading bloc’s path towards net zero. She proposes that it adopt a target of reducing greenhouse gas emissions by at least 55% by 2030, up from the previous target of 40%.

That objective, which would be signed into law and bind all 27 member states, will see an almost doubling of the share of renewables in the power mix within the next ten years, from current levels of around 35%.

Beyond investments in renewables, EU initiatives will see funds go into a range of other areas, including electricity transmission and distribution networks, electric vehicle charging infrastructure, green building, and hydrogen.

Through the Green Deal alone, at least €1tn of investments are expected to be mobilised over the next decade from both the public and private sectors, boosting employment and the European economy.

Meanwhile, the UK government is also targeting an environmentally-friendly economic recovery from the current crisis. In July, Chancellor Rishi Sunak unveiled a £3bn plan which will see grants given to improve the energy efficiency of homes and public sector buildings. The UK also has net-zero ambitions, with a 2050 deadline.

Given that the residential sector accounted for approximately 20% of all carbon dioxide emissions in 2019, the grants will make up to 650,000 homes more energy-efficient, as well as helping to support 140,000 green jobs, according to the Chancellor.

Over in the US, with less than two months before the presidential election, Democratic candidate Joe Biden is ahead in the polls, so his views increasingly matter. Biden has proposed an ambitious environmental policy which promises to put the US on an irreversible path to achieving net-zero emissions, economy-wide, by no later than 2050. He aims to create millions of “good-paying” jobs in the process.

The Build Back Better plan, which draws heavily from the Green New Deal supported by left-wing members of the Democratic party, including Alexandria Ocasio-Cortez and Bernie Sanders, will see $2tn deployed during the first term of Biden’s potential presidency.

Funds will be targeted at a variety of areas, including infrastructure, the auto industry, public transport, the power sector, buildings, housing, innovation, agriculture and conservation, and environmental justice.

Selecting winners We expect these huge fiscal programs to benefit a range of businesses, across a variety of sectors. The most obvious are the renewable power generators – Joe Biden’s Build Back Better plan targets a total decarbonisation of the US power sector by 2035, while the EU is aiming to achieve the same goal by 2040.

Given that significant growth in solar and wind generation is forecast over

THE BIG PICTURE

the coming decades to meet these targets, businesses that make up the supply chain of developers of renewable projects (such as wind turbine manufacturers or copper cabling producers) also appear well placed.

Operators of electricity transmission and distribution networks should also benefit. This infrastructure will play a crucial role in decarbonising the power sector by supporting renewables growth. It will also underpin the build out of electric vehicle charging networks and the decarbonisation of buildings. This latter objective will be met in part by improving their energy efficiency. That means companies which can provide products such as insulation, to prevent heat loss, or smart applications that enable the control and programming of lighting,

Battling it out The policy dividing lines have been drawn for the forthcoming US election. Here is a snapshot of the main areas of difference for investors.

Climate change and the environment – Donald Trump has backed the US shale industry, pledged his support for coal, made a variety of claims against wind turbines, and challenged some of the science behind global warming.

– Joe Biden, meanwhile, favours his $2tn Build Back Better plan, vows to re-join the Paris Agreement and has questioned the long-term future of fracking in the US.

The technology sector – A political football in recent years, with accusations of anticompetitive practices and concerns surrounding privacy and misinformation – greater scrutiny is possible under either President.

heating and other areas of electricity consumption, will have an important role to play. The way buildings are heated may also change – whilst gas is the fuel of choice in many parts of the world, alternatives include electric heat pumps or the use of hydrogen power.

Overall, like several other trends that predate Covid-19, decarbonisation has grown in importance in the wake of the current crisis, rather than being derailed as a result of it. Investors should be in no doubt that green energy, along with other products, technologies and applications that will support the move to net zero, are no longer considered “nice-to-haves”. They now represent the cornerstones of not just the short-term post-pandemic recovery, but the global economy of the future. ● – However, Biden has a tech-friendly past and during the Democratic primary refused to join calls for a break-up of companies such as Amazon, Facebook and Google.

Corporation tax – Trump is campaigning to continue his administration’s 2017 tax cuts, which he credits with supporting robust economic growth in the US during 2018 and 2019.

– The Democrats, meanwhile, have questioned the role that they have played in fostering economic growth, and are proposing increased taxes on corporations and high-income households.

China – There is broad bipartisan agreement in Washington on the competitive threat, albeit the Biden camp has criticised the erratic nature of President Trump’s trade war.

– Nonetheless, the former vicepresident favours maintaining the pressure on Beijing, but through a coordinated global campaign.

Autumn 2020 — 9

EQUITY RESEARCH

Investing responsibly Nicolas Ziegelasch Head of Equity Research Nic highlights the growing importance of a “responsible investing” approach to security selection and explains how it will be addressed within the firm’s Sustainable Service.

Responsible investing describes the integration of environmental, social and governance (ESG) factors into our screening processes and security selection. The term ESG was first coined in 2005 and builds on the idea of Socially Responsible Investment, an approach that has been around for much longer. The latter adopted a set of ethical and moral criteria to apply mostly negative screening to stock selection (for example, avoiding investments in alcohol, tobacco or firearms). The newer ESG approach, on the other hand, is based on selecting factors that have a positive financial impact, unconstrained by more traditional analysis. These include; the effect that companies are having on the environment, how they engage with key stakeholders, such as employees, clients and communities, and the way in which they are governed or managed. In that context, here are the answers to three key questions about our new Sustainable Service.

How do ESG criteria help to deliver performance?

Significant empirical evidence suggests that firms which score well for ESG factors also outperform other firms based on financial metrics. Those that manage their environmental impact (the “E”) also tend to limit their risk of regulatory or reputational issues, whilst a focus on reducing waste can also bring down operating costs. Meanwhile, companies that treat employees well (the “S”) 10 — Autumn 2020

often also build strong cultures that drive productivity and attract talent.

As for the “G”, mounting evidence suggests that management teams who implement strong governance structures are more likely to treat shareholders fairly and face fewer major legal challenges.

What is the firm’s approach to responsible investing?

We integrate ESG risk into our overall equity analysis process as we evaluate potential investments. That means weighing up the extent to which ESG factors could negatively impact financial performance. Our approach uses a combination of proprietary research, as well as data from external providers. This rates companies across a wide set of metrics to assess the level of ESG risk as we do our early evaluation. We then monitor them on an ongoing basis to determine whether we need to change our recommendation on a stock. The direction of travel is as important as a firm’s historical track record, given that many companies are working hard to improve their ESG scores from a relatively low base. By actively investing in companies that have a positive impact on sustainability, we will target those that are trying to improve their profile, rather than merely maintain it at its current level.

How do you screen for sustainability?

Referencing the UN’s Sustainable Development Goals, we have created our key themes. These can be divided into three main categories relating to the environment, health and empowerment. The following sections sum up how we then sub-divide these to identify specific investment ideas.

The environment Decarbonisation: Carbon dioxide (CO2) emissions have increased by 63% since 1990, driven not only by global population growth but also a 14% increase in emissions per capita. To limit global warming to 1.5˚C by 2050, a key goal of the Paris Agreement, greenhouse gas emissions must begin falling by 7.6% each year, starting in 2020. With 44% of emissions coming from electricity and heat generation, significant investment needs to be made, not only to decarbonise energy generation but also to reduce energy losses, improve energy storage and allow greater electrification across other sectors. Therefore, we seek to invest in companies that are driving renewable energy generation, energy storage, and smarter grids.

Energy efficiency: Transforming the energy sector is not, by itself, enough because it will only get the world one-third of the way towards net-zero emissions. Given that industry accounts for 39% of CO2 emissions (when measured by end-user consumption of electricity and power) and the fact that the decarbonisation of energy supply is expected to take decades, improvements in energy efficiency will also be critical to achieving emissions targets. In addition, there are parts of the industrial complex that cannot simply switch from carbon-based fuels to the direct use of electricity. For them, hydrogen is expected to play a part.

That is why we also screen for companies that can improve the efficiency of overall energy

EQUITY RESEARCH

consumption and facilitate the use of hydrogen as a specific energy source.

food production more sustainable and improve nutrition.

research companies that can improve access to it and offer skills training.

Green transport: According to the International Energy Agency, the transport sector is responsible for over a quarter of CO2 emissions globally and is therefore a major contributor to climate change. Further, a significant proportion of these emissions occur in cities, with an associated impact on air quality and the general health of their populations.

The way out of this is via efficiency improvements, coupled with a shift to alternative forms of propulsion. As such, we are interested in firms that are involved in; driving the shift to electric vehicles, helping to improve transport systems and reducing other connected forms of pollution.

Healthcare: The World Health Organisation (WHO) estimates that half the world lacks access to essential health services. Investments in health are therefore critical to building human capital and enabling sustainable and inclusive economic growth. For us, that suggests companies which are involved in improving access to healthcare, developing new medical technologies and eradicating disease.

Financial inclusion: A lack of access to suitable financial products is another challenge for even the most advanced developed markets. The US Federal Reserve, for example, estimated in 2018 that there were 55 million Americans (over one in five), with little, or no, access to basic banking facilities. Further, in developing countries generally, only one in three small businesses have access to credit. We therefore look for companies that are addressing a lack of access to financial products, or that are able to extend their range of available services outside of traditional banking.

Sustainable production: The UN has estimated that the “global material footprint” – the amount of pressure that current production levels put on the environment – grew by 17% between 2010 and 2017. If we continue at this level, and global population growth climbs to reach an estimated 9.6 billion by 2050, the equivalent of almost three Planet Earths would be required to provide the natural resources needed to support our current lifestyles. We therefore need to do more with less by protecting the environment, improving resource usage and promoting more sustainable lifestyles. Companies that help to cut pollution levels, improve efficiency in production, reduce scarce-resource waste and enable the product recycling are therefore on our radar.

Health Food: The UN estimates that nearly one in 10 people globally (i.e. over 690 million people) are undernourished. Given the pressure on land and water, a significant change in the global food and agriculture system is needed to properly feed them, let alone the estimated further 2 billion people that will inhabit the world by 2050. We are therefore interested in finding the firms that are helping to increase agricultural productivity, make

Fitness: Better health is about more than just healthcare systems. WHO data also suggests that 40% of adults globally are overweight, whilst 13% are obese. This significantly increases the risk of many serious health conditions and can shorten life expectancy, by up to 10 years in extreme cases.

Meanwhile, better awareness of mental health conditions now makes that area just as important, especially in 2020’s high-stress environment. So, we invest in companies that will encourage and enable improved mental and physical well-being, both today and in the future.

Water: Despite significant recent progress, the UN estimates that one in three people still do not have access to safe drinking water. Further, two out of five do not have a basic hand-washing facility that offers soap and clean water and over half the world’s population lack safely managed sanitation. Given the obvious health impact of all these deficiencies, we seek out the firms that are working to improve water access, quality and usage.

Empowerment Education: The UN believes that over 22% of young people globally are neither employed, nor in education or training. Meanwhile, over 60% of the people that do have jobs work in informal employment. Since the key to improving this situation is better education (which studies show leads to higher economic growth, not to mention happiness levels) we

Sustainable infrastructure: Cities occupy just 3% of the world’s land, but account for over half of its total population, 60% of its energy consumption and 75% of all carbon emissions. The need to build them in a way that encourages economic activity, whilst minimising their environmental impact, is therefore paramount. To us, that makes the case for firms that can improve urban energy efficiency, reduce pollution, deliver energy-efficient public transport, and enhance public safety.

Technological enablement: Modern society is built on technology. At a social level, it helps people to stay in touch with family and friends. Meanwhile, at the business level, it allows entrepreneurs to start small enterprises, accept payments and advertise their products or services. Firms that can offer widespread, cheap and secure access to technology, or offer the tools that will help individuals and small businesses, are therefore attractive.

Launching our Service We favour an actively-managed, direct equity approach to what we call responsible investing. The Killik Sustainable Service will give our clients access to the very best investment opportunities in this space. Please contact your Investment Manager to find out more. ● Autumn 2020 — 11

FUND RESEARCH

Keeping the lights on Gordon Smith Head of Fund Research Gordon highlights a sector that has proven relatively resilient so far this year and flags a fund that is well-positioned for challenging times.

Glamorous it may not be, but the listed infrastructure sector covers the sorts of businesses, services and facilities that are vital to a functioning economy.

Nonetheless, the rapid economic slowdown wrought by the COVID-19 pandemic had such a dramatic impact on vast swathes of global industry, that even this stalwart did not escape unscathed – transport-related areas, such as toll roads and ports, were obvious casualties.

However, other large parts of the sector have experienced something close to “business-as-usual” conditions.

This resilience has shown up in US corporate results. During an extremely challenging second quarter, earnings numbers from the utilities sector proved the most resilient of all the industry groups. Meanwhile, dividend expectations for the year are also far more robust than for the broader market. There are a few other reasons too for investors to remain optimistic.

Opening wallets In the shorter term, we expect economic stimulus measures to continue to provide a useful tailwind. Investment in infrastructure remains a highly popular tool for politicians hoping to boost slowing economic growth rates and reduce unemployment. We further believe that the global shift towards renewable forms of power generation and the electrification of energy use looks set to accelerate following this pandemic.

Many governments have already 12 — Autumn 2020

expressed a willingness to use new “green” policies as a key element of stimulus packages aimed at reviving economies once social distancing measures are relaxed.

The European Green Deal, expected to be one of the largest economic stimulus packages in EU history, is just one example. The forthcoming US election is also worth watching for any potential change of government policy.

A Joe Biden-led government could well unleash extra support for work that is already well underway at a state level and we believe that the infrastructure sector will be well placed to benefit.

Consequently, many businesses within it ought to deliver improved earnings growth, as old energy infrastructure is replaced with newer technology and a regulated return is generated from a larger, more sustainable, asset base.

Underpinning growth Looking further out, the long-term structural growth drivers that supported the investment case for the infrastructure sector prior to the latest crisis remain firmly in place.

Indeed, in many cases, they have been enhanced and accelerated over recent months. For example, electric utilities and power grid related businesses are well-placed to benefit from the investment needed to continue the transition to renewable forms of power generation and the increasing electrification of energy use. Meanwhile, telecommunications infrastructure projects, such as mobile towers and data centres, will remain a high priority thanks to increasing data usage and the exponential growth in connectivity needs.

Substantial parts of the sector also provide a useful defence against other potentially challenging economic scenarios. Many investment commentators believe, for example, that the extraordinary monetary and fiscal policies we are seeing will eventually spark a rise in inflation. This is a side effect against which long-term inflation-linked infrastructure contracts can provide useful protection.

Buying in 2020 may have reinforced the investment case for the defensive attributes of these businesses, but this has not been fully reflected in relative valuations. The global utilities sector, for example, has traditionally traded at a premium to the broader market (applying earnings-based valuation metrics over long-term time periods) to reflect its

FUND RESEARCH

G Powell, D Mahony

Market Cap

£736m

Fund Size

£1,304m

KIID Ongoing Charges

1.59%

KIID Ongoing Charges

1.17%

Historic Yield

5.2%

Historic Yield

n/a

This UK investment trust aims to maximise total returns through a worldwide portfolio of mining and metal securities. The strategy includes investing in royalties derived from the production of metals and minerals. With the global movement towards renewable forms of energy generation accelerating, as many governments express the desire to use new green policies as a key element of stimulus packages to revive economies, the mining sector will continue to play an important role. Risk Rating: 6

This fund aims to preserve capital and achieve long-term growth by investing in a globally diversified portfolio of healthcare companies. The strategy is well aligned with our own view that there are significant changes underway in the health care sector, as the industry looks to deliver more efficient and cost-effective treatment to a growing and aging population. PCHO is our preferred way of gaining exposure to this trend via a fund-based approach.

Risk Rating: 6

Share price total return (last five years)

NAV total return (last five years)

Growth

Oct-20

May-20

Jul-19

Dec-19

Feb-19

Apr-18

Sep-18

Nov-17

Jan-17

Jun-17

Aug-16

Oct-15

200 180 160 140 120 100 80 Mar-16

Oct-20

Oct-19

Oct-17

Oct-18

300 250 200 150 100 50

Growth

Allianz Continental European

Baillie Gifford Japanese Smaller Companies

Fund Type

UK OEIC

Fund Type

K UCITS OEIC

Manager

T Winkelmann, M MorrisEyton

Manager

P Kumar

Fund Size

£136m

Fund Size

£844m

KIID Ongoing Charges

0.53%

KIID Ongoing Charges

0.63%

Historic Yield

n/a

Historic Yield

n/a

300 275 250 225 200 175 150 125 100 75 Oct-20

NAV total return (last five years)

May-20

NAV total return (since launch) 225 200 175 150 125 100 75

Dec-19

This Fund aims to produce attractive capital growth by investing in Japan. The focus of the strategy is on high growth businesses, often in the earlier stages of developing innovative products and services. Within this framework the portfolio is exposed to a number of different industries and revenue pools. We believe that the small-cap market contains a rich opportunity set for growth investors, and has the potential to deliver superior returns compared to the broader market. Risk Rating: 6

Jul-19

The Allianz Continental European Fund targets capital growth via a portfolio of Continental European companies (so excluding the UK). The team run concentrated portfolios (40-60 stocks) with their stock selection focused on companies which they believe enjoy long-term, sustainable competitive advantages. We think that the overall strategy has been structured to successfully navigate the changeable economic and political environment in Europe. We further believe that the fund is positioned well for the future. Risk Rating: 6

Feb-19

Jul-20

Apr-20

Oct-19

Jan-20

Jul-18

Oct-18

Apr-18

Jan-18

Jul-17

Oct-17

Apr-17

Jan-17

Jul-16

Oct-16

Apr-16

Oct-15

Jan-16

Source: ONS – Retail Sales Index Time Series. Past performance does not guarantee future returns.

Manager(s)

Sep-18

-40 -50

E Hambro, O Markham

Apr-18

-30

Dublin UCITS OEIC

Manager(s)

Nov-17

-20

Fund Type

Jan-17

0 -10

Investment Trust

Aug-16

10

Polar Capital Healthcare Opportunities

Fund Type

Oct-15

30 20

Growth

BlackRock World Mining Trust (BRWM-LON)

Mar-16

Relative Price/Earnings Ratio – MSCI USA Utilities Index/MSCI USA Index

Growth

Oct-16

The strategy is run by the specialist management team at RARE Infrastructure. Part of Clearbridge Investments, this New York-based investment firm is owned by Legg Mason but enjoys investment independence. As a result, its mandate fits well with our own preference for gaining exposure to areas of the market that will benefit from key structural trends, such as the move towards renewables. At the same time, we seek to avoid some of the uncertainty that surrounds long-term power and commodity prices alongside other potentially unhelpful headwinds. ●

Recent months have seen bouts of significant, but so far relatively short-lasting, rotations within markets as investors continue to digest high levels of uncertainty around the economic outlook. This environment continues to lend itself to portfolios that are well diversified by geographic exposure, investment style and performance drivers. Therefore, this quarter we are highlighting four funds with strong, but distinctly different, investment cases. Please speak to your Investment Manager for more details.

Oct-15

That is why we recently initiated coverage of the Legg Mason Clearbridge Infrastructure Income Fund. It aims to deliver attractive and stable returns by investing in a diverse range of global listed infrastructure securities across a number of geographies and sub-sectors. These include, gas, electricity, water utilities, transport and communication infrastructure.

Key fund data and charts

Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Apr-18 Jul-18 Oct-18 Jan-19 Apr-19 Jul-19 Oct-19 Jan-20 Apr-20 Jul-20

stable return profile. Nonetheless, the sector switched to trading at a significant discount earlier this year as the chart below reveals. We believe this is somewhat at odds with both the recent operating performance during the latest crisis, as well as the fact that the growth outlook for many firms has vastly improved over the last 12 months.

All chart data source: Bloomberg. Chart data to 6th October 2020. For details of the Killik & Co risk rating system, please refer to page 22.

Autumn 2020 — 13

W E A LT H P L A N N I N G

Sharing it around Svenja Keller, Head of Wealth Planning and Sarah Hollowell, Tax and Trustee Services Director Svenja and Sarah discuss share-based remuneration schemes and some of the key considerations for employers and employees.

Why are employee share schemes popular?

Sarah: Employers often like them for the simple reason that they may help to retain and reward key employees.

These days, younger members of staff may expect to change jobs every few years, so anything that keeps them loyal is valuable. In fairness, this is increasingly a two-way street as more employees look beyond just their salary and bonus when it comes to their financial well-being. Any incentive that helps to align ambitious employees with their employer is therefore generally welcome.

These schemes can also help with cash flow, in so far as shares or share options (depending on the scheme) can be given away instead of a cash bonus. Typically, a business will offer its staff a slightly higher equivalent, say £2,500 worth of shares in lieu of a £2,000 bonus, in the expectation that the share offer will be taken up.

Svenja: I agree with all of that. Further up the food chain, at the executive level, there is another motivation which is to try to prevent senior managers from taking huge cash bonuses out of their businesses. By paying them in shares, the hope is that their personal appetite for risk will be better aligned with that of the firms they manage, and key investment decisions will be taken accordingly.

14 — Autumn 2020

What should someone think about before joining a Save-As-You-Earn (SAYE) scheme?

Sarah: One of the key benefits of SAYE is that it must be made available to all employees. As such, these schemes open the possibility of tax-efficient share ownership to staff who may not have been previously exposed to investing and demonstrate that a firm is not limiting such participation to just its executives. SAYE is also a great way to get people who may otherwise have limited themselves to cash saving, interested in markets and investing.

For most employees, the limit on contributions of £500 a month is plenty high enough, and many opt to pay in much lower, regular amounts of say £50-100. After a three, or five, year term, they can buy shares in their employer at a price that was agreed at the outset, which is usually at a discount to the market price. In a worse-case scenario, where a firm’s share price performs very badly, an employee can opt to receive back the amount they have invested plus some interest.

This helps to cap their downside risk.

Meanwhile, because any contribution they make comes out of their gross salary, SAYE contributions are tax efficient. In effect, they enable someone to make a gross contribution at its net (post-tax) cost.

From the perspective of an employer, as these schemes provide a constant stream of equity to employees, they should help to build their loyalty to, and pride in, the firm they work for.

Svenja: These schemes can certainly provide good value to employees and a great incentive for most people to save and invest. I would nonetheless encourage anyone thinking of joining one to compare the benefits they may receive via SAYE to other opportunities to save and invest tax-efficiently.

For example, I would like to know whether someone is contributing to their firm’s pension (when they would usually also get a contribution from their employer) or any other tax-effective vehicles. It is important to weigh up the associated tax breaks alongside other factors such as the degree of investment flexibility, plus the overall costs and benefits.

Sarah: That is why it is vital that people understand all the terms associated with something like SAYE. For example, a lot of people I talk to don’t realise that once they take shares out of such a scheme at the end of the minimum term, they can transfer them into another vehicle, such as an ISA or a SIPP, but only if they do so within 90 days. A lack of knowledge about these sorts of quirks can limit the full benefit an employee should receive.

PERSONAL VIEW

How does SAYE compare to a share incentive plan (SIP)?

Sarah: Again, to be HMRC approved, these schemes must be made available to everybody and not limited to a firm’s executives. In that sense, they are similar to SAYE schemes.

However, with a SIP the key difference is that an employer gives away shares, subject to a cap on their annual value. An employee also has the opportunity to buy further shares, and if the employer then wants to match them, they can do so on a two-forone basis. So, if an employee bought one thousand “partnership” shares, their employer could give away two thousand matching ones on top. As such, under a Share Incentive Plan, there is scope for an employee to end up with quite a large number of shares in their employer, some of them free and some paid for. These need to be held in trust for five years, until an employee withdraws them or leaves the firm, to negate any income tax consequences.

As for capital gains tax (CGT), the key principle that people should be aware of is that when the shares are withdrawn, the base cost for any future liability is their market value on that day. Since CGT is the main tax to worry about, knowing what the bill

might be and understanding how to mitigate it are both important aspects.

When firms operate a rolling program, whereby shares are issued and released annually, all at different base costs, it can create quite a complex CGT history. Clients quite often start a conversation with, “I have built up 40,000 shares but I have none of the related paperwork and now I need to sell some”. Sorting out the CGT position can then be quite fiddly. More people should be made aware of this since the responsibility for reporting any personal tax consequences lies with them, not their employer.

Svenja: Added to that, employees also need to realise that every scheme is different and so it is important to make sure that they have read the terms and conditions before signing up. Whilst the principle behind these schemes is sound, it is important to know, for example, how matching shares will be allocated and any associated conditions. Once again, it is a good idea to weigh up any other tax-efficient saving routes before jumping in.

Sarah: The minimum lock-up period must also be properly understood.

Yes, a SIP offers the chance to build up a serious pot of shares but equally they are not touchable for five years.

As we have seen this year, a lot can happen in just six months and the point about one of these schemes is you are committed for a minimum period. In short, this is not a way to build a pot of accessible rainy day capital. Sometimes companies make quite clever use of these schemes to keep key people, especially if they are running a SIP program on an annual, rolling basis. With a substantial benefit in the offing, employees will often stay a little longer than they would otherwise have done to take advantage and minimise the final tax bill.

Svenja: Careful consideration also needs to be given to the timing of any eventual share sale. These plans not only lock someone in for five years at

W E A LT H P L A N N I N G

the start but potentially for much longer – shares are unpredictable, and they may have to wait a while to achieve the best outcome when it comes to a sale.

Another problem can sometimes arise when an employee departs a firm and does not make the “good leaver” grade for whatever reason. In a worst case, an employer may withhold any shares awarded by them. That is why I would urge anyone to look at the conditions attached to these sorts of share awards and weigh up the likelihood that they could cause a problem in the future. A “bad leaver” could simply be someone joining a direct competitor – it does not have to involve misconduct as such.

What makes share option schemes different?

Sarah: First off, they are flexible – firms can grant options (the right to buy shares cheaply in the future) to selected employees, executives, directors, or a combination. The limit per employee is £30,000 under an approved scheme, however many firms offer more than that.

For example, they may prefer to give options away in place of cash bonuses, in which case the scheme becomes automatically “unapproved”. There is nothing illegal, or even shady, about this: it just means that any options granted are immediately subject to income tax Autumn 2020 — 15

W E A LT H P L A N N I N G

and national insurance on exercise.

The tax rules can be quite complex for unapproved options, and so people need to make sure that they inform HMRC straight away and ideally get an adviser on board who can help them with the tax aspects.

As for the tax collection, most quoted companies do it all via PAYE, whereas employees working for unquoted firms will usually have to declare taxable gains via self-assessment. Either way, it is important that they realise that any gain will be subject to tax which means they will lose a decent chunk of it, either straight away (quoted) or with a time lag (unquoted). I have seen a few cases where employees have forgotten all about the tax liability and committed capital – in one case to a house purchase – that should have been earmarked for HMRC. Svenja: I come across many situations where someone has seen the chance to make a lot of money via share options but not given the tax and related cashflow consequences enough thought. These schemes can be complicated and when we build them into wider financial plans, we find out that people often don’t know anything about how and when they will be taxed.

Another point to consider is concentration risk. Being offered share options confers a good benefit and comes at no cost to the employer.

However, an employee who loads up on shares or options this way has to remember that they are putting a lot of eggs in one basket – their income and possibly a large part of their investments may be fully dependant on the fortunes of a single firm. I therefore encourage anyone contributing to this kind of scheme to consider what else they are doing with their savings and the extent to which they are diversified.

Having the full picture about our client’s financial affairs helps here. Sometimes they will tell me “I do have funds elsewhere” but will not reveal the 16 — Autumn 2020

source of them, at least not to start with. As someone who once worked for Lehman Brothers, I know how fast a nest egg can be wiped out when it is all linked to the performance of one business!

It also helps if a client will share information about all the benefits they expect to receive so that we can form an opinion on the level of overall risk they may be facing. People often come to us for advice around, say, their employer pension in the first instance and we only find out later that they have additional exposure to the same firm via a share scheme.

My final piece of advice for any employee is to try to gain a good insight into the financial robustness of the firm they work for. Although I think many people assume all is well when it comes to their industry and employer, there is no such thing as a firm that will never go bust. Clearly the risks are higher in some sectors than in others, especially at the moment. Whilst I do not want to come across as a doommonger, I think employees should do their homework before committing what could be a sizeable chunk of their future financial wealth to the organisation that employs them. ●

Share scheme snapshot

Save-as-youearn (SAYE)

Share Incentive Plan (SIP)

Share option scheme

All employees?

Yes

Yes

No

You pay in (max)

£500 pcm

£1,800 p.a (plus “dividend” shares)

Nothing initially

Employer offers (max)

No contribution

£7,200 p.a. as shares (£3,600 plus 2 for 1 in “partnership”)

Free options up to £30,000 if “approved” and unlimited if not

Minimum term

Three/five years

Five years

Three years

Potential tax benefits

Income tax, NI and CGT

Income tax, CGT

Income tax, CGT (if approved)

Be aware of…

Lock-in period, over-concentration, tax complications, share volatility, “bad leaver” clauses, tax-efficient alternatives

Killik Explains To watch Tim’s educational videos on all of the basics of SAYE, Share Incentive Plans and Share Option Schemes, please speak to your Adviser or go to Youtube and type in Tim Bennett, followed by “Save as you Earn”, “Share Incentive Schemes” or “Share Option Schemes”.

If you would also like to receive a copy of any of Tim’s short, educational guides on a range of saving, planning and investing topics, please email editor@killik.com or contact your Adviser.

BOND RESEARCH

Debunking junk Mateusz Malek Head of Bond Research Mat offers a short guide to the world of high yield debt and explains the different ways in which “junk bonds” can be useful to investors.

The term “junk” is a derogatory way of saying “sub-investment grade” or “high-yield” and is attached to bonds that are usually issued by entities with relatively weak financials. These might be corporate or government issuers that the credit rating agencies view as being at higher risk of missing a coupon or repayment of principal. This is expressed through a non-investment grade credit rating below “BBB-” in the cases of Standard & Poor’s and Fitch, and “Baa3” when issued by Moody’s. However, weaker credit fundamentals and a higher vulnerability to changing economic conditions, can sometimes bring higher coupons and overall returns for investors who can look past the “junk” label.

Making history The word itself can be traced back to early 1980s when many bond issuers were mired in the sorts of scandals and regulatory violations that explain the lingering negative connotations. Their popularity soared back then thanks to their usefulness in financing leveraged buyouts. The now infamous starring role in many of the most predatory deals was played by the controversial American financier Michael Milken (the “Junk Bond King”) with the help of investment bank Drexel Burnham Lambert.

Although he ended up in jail, while his employer filed for bankruptcy, financial markets had, by then, developed a taste for junk. Fast forward to 2020 and high yield bonds trade in a large, liquid marketplace, across all the main currencies, which attracts a

broad range of issuers and investors.

So much so that in the US, the largest market for corporate bonds, high yield debt represents roughly 30% of all outstanding corporate debt.

Selling hot cakes As for the sterling high yield market, many of its issuers come from cyclical sectors such as retail (Matalan), and restaurants (Wagamama). Others are in capitalintensive industries such as telecoms (Virgin Media), energy exploration (EnQuest), automobiles (Jaguar Land Rover and Aston Martin), or sectors exposed to higher regulatory risk, such as gaming (William Hill). There are also notably fewer financial companies in this space compared to the “investment grade” universe, which is dominated by large banks and insurance companies.

The trait that most junk issuers therefore tend to have in common is a high debt load relative to their profitability.

So, why do so many companies issue this type of bond? Most do it for standard corporate reasons, such as to refinance existing debt. Others may use it to fund an acquisition, or a large investment project. Another motivation is to finance fast growth at a point where a firm has yet to achieve profitability. Some of the biggest US technology champions, including Netflix and Tesla, have debt that is ‘junk’ rated. The market also includes bonds issued by companies that once enjoyed investment grade status but then lost it – the so-called “fallen angels”.

This year’s big-name UK examples include Rolls Royce, Marks & Spencer, and British Airways.

Choosing carefully Investors in high yield bonds therefore need to recognise the vast disparities

that exist in this part of the market.

When it comes to individual credit ratings, there are at least six “notches” of grading difference between the highest and lowest rated junk bonds (BB+ versus CCC in the case of, say, Standard and Poor’s). This has a direct impact on volatility and default probabilities.

Individual bond characteristics also vary hugely, with some bonds being secured and others subordinated.

Companies such as Heathrow Airport or Centre Parcs may therefore issue secured bonds which are rated investment grade and subordinated ones which are classified as high yield.

Further, some of these may not even pay their coupons in cash but instead offer more bonds.

None of these quirks should, however, cause an investor to shy away. Firstly, high yield bonds have historically delivered attractive returns with less volatility than equities. They also tend to have a low correlation with other segments of the fixed income market and can therefore offer diversification benefits. Relatively short “durations” are another beneficial feature at this stage of the interest rate cycle.

And although they are often issued by weaker entities, the associated covenants and structures are typically stronger than those of their investment grade peers. In the event of a bankruptcy or liquidation, high yield investors stand a greater chance of recovering some of their investment as a result. In summary then, “buyer beware” is more appropriate than “buyer be scared” in today’s junk bond market. ● Autumn 2020 — 17

S P E C I A L S I T U AT I O N S

Taking aim Peter Bate Portfolio Manager Peter highlights four stocks that he sees as potential acquisition targets and explains how investors are likely to benefit. Please note that these are not covered by Killik Equity Research.

When we analyse a new potential investment, we are always interested in considering, as part of the wider process, whether there is a logical takeover angle. Whilst this is in no way a prerequisite – we are not looking to make a quick turn on our investors’ money – it can, nonetheless, put a floor under company valuations during difficult times.

As the Managers of a Service that specialises in smaller companies, we have seen significant takeover activity over the years, with 25 of our portfolio companies having been bought since January 2015. By dint of their size, it is easier to take over a smaller company than a larger one: at the top end, few if any predators would have the ability to swoop on a “FANG” stock, with a value of $1trn or more. Descend the market capitalisation scale, however, and the number of potential acquirors and targets increases dramatically.

In a post-coronavirus world, we believe that the conditions for smaller company takeovers are as strong as ever – growth has been disrupted (and therefore needs to be bolstered), listed companies have access to capital and smaller companies are generally still trading on lower valuation multiples than their larger peers. By way of a recent example, in early September we received a cash bid for one of our largest holdings (worth more than £5m to our Special Situations clients, based on the offer price), and a company we had a declarable interest in: Wameja. This cross-border payment processing technology provider’s 18 — Autumn 2020

core asset was a joint venture with MasterCard, who paid what equated to a 39% premium to the closing price on the day before the announcement. We had been shareholders in the group for several years, and always hoped that this would be the outcome. Against that backdrop, here are four other names that could ultimately be takeover candidates.

Seeing Machines – visualising sales This technology business is focused on the field of computer vision. Having invested over $100m in research and development over the last 15 years, the company first made its name in the mining industry. Its systems were mounted on the inside of huge vehicles, providing safety equipment designed to monitor the eyes of the drivers to

will become a legal requirement in Europe from 2022. As a result, it has already set up contracts with six original equipment manufacturers (OEMs), including two premium German firms.

The company has issued three stock exchange (RNS) announcements since 2nd September based around its ability to get a driver monitoring system to market as quickly as possible. Following some great initial success with, we believe, Mercedes Benz, BMW, Ford, Fiat Chrysler and General Motors, new client wins have slowed materially over the past year. However, a new sales strategy will see Seeing Machines supply its technology to automotive manufacturers and their suppliers in the most straightforward and efficient way for them. A tie-up with Qualcomm has particularly piqued our interest, as we believe it would ultimately make a very logical bidder for the firm.

Kin & Carta – digitising growth

The firm subsequently moved into “on highway” applications, where its key market is now fleet vehicles.

Hardware is retrofitted on the inside of long-distance lorries, again with the aim of monitoring driver distraction to boost safety and lower insurance costs.

Kin & Carta (formerly St Ives), derives three quarters of its revenue from technology consulting and operates what we view as a legacy marketing communications business. The company has shifted into its main area of expertise via acquisition and in doing so has entered the field of digital transformation – converting nondigital, or manual, business processes to reduce costs and risk, or to drive sales. Indeed, this area now accounts for around 60% of group revenue and represents a £100m franchise for the group, generating double the EBIT margins of other divisions.

The final (and potentially largest) market segment is passenger cars, where Seeing Machine’s technology

The crux of our investment case is the valuation. The shares trade on 8.4x July 2021 earnings, which is around

ensure they were not falling asleep.

one third of the average multiple across its large international peers (Accenture, EPAM and Capgemini).

Although a discount is warranted to reflect its smaller size, we view the current one as anomalous. We think that it has come about as a result of the market missing a fundamental shift away from the legacy St Ives print business towards technology consulting.

Another issue holding back the rating is the level of debt in the business, currently around twice EBITDA. That said, the group still has around £45m of unused facilities and the covenants on its debt have been relaxed to five times EBITDA for another year.

Meanwhile, recent trading commentary suggests that the firm may be exiting a COVID-induced trough. In addition to further positive updates, we believe the other key catalyst could be a disposal of the legacy marketing communications business. With more than 50% of group revenue coming from the US, we would not be surprised to find US-based competitors taking a keen interest in the business given the depressed rating.

MP Evans – planting profits Also highlighted in the Summer issue of Confidant as a key food stock, MP Evans is an Indonesian palm oil producer that manages 54,400 hectares of plantations and three palm oil mills.

As the most widely used vegetable oil in the world, the majority of palm oil use (around 70%) is in food – it is, for example, a staple cooking fat across Asia. Also used extensively as an ingredient, around 25% of global supply is accounted for by the personal care sector to produce shampoo, laundry detergents and soaps. The balance goes into the production of biofuels, a process that sees it blended with conventional diesel. Meanwhile, demand is growing in the mid-single digit percentage range whilst production languishes in the low single digits.

In 2016, the firm was subject to a cash offer from Kuala Lumpur firm

PERSONAL VIEW

S P E C I A L S I T U AT I O N S

We have followed the company from a distance for some years now and have always been attracted by a strong return on capital employed, the high-quality, yet competitively priced, brand portfolio and well-invested manufacturing facilities which still appear to have significant excess productive capacity.

Kepong Berhad (KLK), Malaysia’s third largest producer. Despite raising its offer, the bid was still rejected by shareholders. Somewhat unusually for a spurned suitor, KLK has remained a shareholder and has continued to increase its holding (most recently in July 2020) to 21.2%. We believe that KLK’s presence will put a floor under the firm’s valuation. Given that the current implied value of KLK’s plantations, on an EV/hectare basis, is just under $22,000, even if it ends up paying a decent premium for the part of MP Evans that it doesn’t yet own, the opportunity here is considerable.

At the time of writing, MP Evans trades on less than $11,500/planted hectare.

We believe the group is most vulnerable to a bid over the next two years, whilst it builds mills at the two newest plantations. Once this project is complete, the firm will be substantially vertically integrated, a fact that will drive significant margin accretion. That’s because the group will then no longer have to sell some of its production to a third party and give up some of its milling margin. It should also be cash generative. As such, we think that KLK should declare its hand soon before the market starts to properly cotton on.

Portmeirion – firing interest This designer, manufacturer and distributor of homeware products owns brands that include Portmeirion itself (ceramics), Spode (Blue Italian and Christmas Tree designs), Royal Worcester (bone china), Pimpernel (placemats), Wax Lyrical (home fragrance) and Nambe (premium US homeware). In total these names are backed by more than seven hundred years of history.

The company recently undertook a fund-raise, which we think should provide bona fide growth capital. The new money is being used in part to invest in the group’s higher-margin online retail proposition. Sales here doubled during lockdown, albeit the company’s own online offering accounts for just 10% of sales. Total online sales are running at around 30%, taking account of third-party hosting. The funds will also be used to invest in UK manufacturing sites to drive efficiency as the firm currently only makes around half the products it sells. They will also help to extend Wax Lyrical brand lines that have seen it pivot from home fragrances towards the production of hand and body products, including hand sanitiser.

At the time of writing, the shares trade on just 10.5x December 2021 earnings, (whilst offering a 9% free cash flow yield and a 3.5% dividend yield). This represents a discount of about 30% to its long-term average prospective price to earnings ratio, as well as to that of the group’s largest listed peer, the Fiskars Group. This Helsinki-listed firm is a one billion dollar (market capitalisation) Finnish consumer goods company that owns the Royal Copenhagen, Royal Doulton, Waterford and Wedgwood brands. If Portmeirion can successfully continue its strategy of achieving greater online sales penetration (a goal it shares with Fiskars), we see an obvious takeover angle. Aside from the valuation arbitrage opportunity, we believe that significant sourcing, manufacturing and distribution synergies would emerge from such a deal. ● Autumn 2020 — 19

PERSONAL VIEW

Bouncing back Peter Day Head Partner in Hampstead Peter offers his thoughts on a tumultuous year and weighs up the implications for clients and investors.

What have we learned from 2020 so far?

When asked what kept him awake at night, former Prime Minister, Harold MacMillan, is supposed to have replied, “Events, dear boy, events”. However, if this year’s extreme stock market volatility has reminded investors of one thing it is that financial events – even when the one in question is a market rout triggered by a global pandemic – should not keep them awake, provided they plan correctly and adopt the right mindset when facing a worst case scenario.

COVID-19 was certainly in that category.

It is worth remembering that at the start of this year, there was a general feeling that we were perhaps on steadier ground than we had been previously.

Whatever your political views, the general election result did at least finally break a long spell of uncertainty around Brexit. Meanwhile, a decadelong bull market in stocks looked set to continue. But then a few weeks later, the COVID pandemic hit the world and tore markets to shreds in a way that very few people foresaw. The huge 20 — Autumn 2020

drops – 35% in some markets – and equally large bounce we subsequently experienced over a relatively short space of time just served to remind us that market timing is nigh-on impossible. Not for the first (nor, no doubt, last) time in my career, I found myself falling back on fund manager Terry Smith’s old adage that there are two types of investor – those who know that they cannot time markets and those who have yet to find that out.

Another, more specific, lesson that investors have learned this year is the extent to which markets can polarise.

We have seen a massive discrepancy in terms of the returns that have been delivered by different groups of stocks.

Clearly, another sizeable correction cannot be ruled out for the dominant technology stocks that have been driving the market but nonetheless I have never seen such a large and persistent gap open up between these types of firms and many of the more traditional ones.

I accept that if we go back 20 years, there was plenty of similar-sounding debate going on about “new economy” versus “old economy” stocks. As the stock market climbed a wall of worry thanks to the millennium bug, we lived through a boom in everything IT and internet related. Everyone knows how that ended with the big “Dotcom” stock market crash. But whilst I am always wary of the “this time will be different argument”, it does seem that in 2020 we have experienced a genuine and probably lasting divergence. Some firms have not only managed to get through the pandemic unscathed, they have prospered. Take electronic payments firm PayPal – in April they opened a record 250,000 new accounts.

Meanwhile, other firms, in say the leisure and tourism sectors, have been dragged to their knees by falling customer demand and widespread disruption to their operating models.

For me, the key takeaway from all this is that investors should continue to focus most of their time and energy on identifying the dominant themes that are driving the way the world will work in the future and position themselves in the corresponding sectors and stocks. By all means be a little bit “greedy when others are fearful” as Warren Buffett has put it by topping up core holdings when those around you are running scared (a.k.a. “buying on the dips”). However, the most sensible investing approach for most people is to drip-feed sums of money regularly and consistently into the market once they have been safely earmarked for long-term equity investment.

Have your clients’ priorities changed this year?

One of the few positives to come out of this pandemic has been the way in which the family networks I deal with have tightened. I think this has happened for two reasons. Firstly, having spent a lot of time within their immediate bubbles, I find that people are giving their own mortality a lot more thought than they perhaps once did. Not being able to see wider family members and friends for an extended period, other than via something like a web-based call, has focused people’s minds on what is important and what would happen if they were no longer around.

As a result, I come across more and more clients who want to put a financial plan into place that properly caters for them and their families and answers

PERSONAL VIEW

some of the most difficult questions we all face. I am having conversations that perhaps I would not have been privy to in the past, or that would have been parked in the “too hard” basket.

It is good to see more parents starting to tackle longer-term planning for their children, grandchildren, and other relatives as well as for themselves.

The other ripple effect of what has happened this year is that more people can now see how futile it is to try to predict and precisely time everything in life – even some of the best investing brains failed to spot the havoc that a random pandemic might wreak. The best approach has always been to devise a comprehensive financial plan. This may, of necessity, include some “best guesses” and need regular flexing and adapting as circumstances change but the point of it is to put people in a position where they can weather all market conditions and eventualities.

Our basis for this is a three-pronged approach. Everyone needs a rainy-day fund first. Then they need a framework that will allow them to identify and estimate the amount and timing of any foreseeable calls on capital, so that they can think about the right asset allocation needed to meet them. The remainder of what we call lifetime savings can then be put to work in the equity market. 2020 has been a test case for this framework – I would hope that our many clients who have adopted it have been able to sleep relatively easily in the knowledge that even if the market falls steeply again, it won’t be the end of the world for them financially.

Some have even taken this a step further and are now asking me some quite fundamental questions like, “should I work for another five years to build up a bit more pension income, or can I afford to spend more of that time with my family?” Our cash flow planning tools help us to work out the answer. We can model the various choices in front

of our clients and quantify the financial trade-off involved in taking one path as opposed to another. In one or two cases, this approach has helped people to call time on stressful careers early!

Should investors worry about the outcome of the US election?

Up to a point, it is quite natural to do so. Donald Trump creates opinions like few other world leaders and his unpredictable actions have been shown to be capable of moving the markets. His political future therefore naturally generates a lot of discussion and opinion.

I nonetheless try to reassure clients by reminding them that we have been here before. When I look back to the last US election, people were debating the impact of Trump beating Hillary Clinton. Everyone foresaw a catastrophe for markets if Trump won.

Sure enough, on the day the result came though the US Dow Jones dropped 1,000 points. And yet, by the end of it, most of that lost ground had been recovered and we subsequently experienced one of the strongest periods for US markets on record.

The two candidates this time – Trump and Joe Biden – are, once again, chalk and cheese in policy and personal terms. Even so, I would still urge investors not to spend too much time trying to predict the outcome of the election, or its potential impact on markets.

Is anything else keeping you awake at night?

Young children notwithstanding, I generally sleep well. I do, nonetheless, harbour a couple of market-related concerns. One is the future direction of the US dollar. As portfolios have become much more globally positioned so, inevitably, has their exposure to it.

In the short-term, any dollar weakness or sterling strength) would have an impact for UK investors who are internationally diversified.

Set against that, however, is my huge faith in the underlying companies in which we tend to invest. Take Microsoft – in my eyes, it is possibly the best company in the world, but as a US-listed firm a significant part of its revenue stream is in US dollars. However, the global nature of its business model means that it hedges quite a bit of this exposure by being exposed to so many different regions around the world.

My conclusion is that when it comes to understanding the impact of currency movements it is more important than ever that we educate our clients and manage their expectations. That means guiding them through any short-term risks and what I call the market’s “what if?” questions, whilst also explaining why they should not get too distracted by them.

Perhaps the bigger longer-term unknown for me is inflation. We have not really had to worry about it much in the West over the last few decades thanks, in large part, to our ability to import cheaper goods from developing economies. Should it make a comeback, it could therefore be quite a shock. Paul Killik has often reminded me that if you had a pound and kept it in your pocket during the inflationary period we saw from 1970 to 1990 it would have lost 86% of its purchasing power and shrunk to around 14 pence in real terms.

The potential trigger for a bout of inflationary pressure is easy to pinpoint in the sheer scale of the Autumn 2020 — 21

PERSONAL VIEW

stimulus packages we have seen from the world’s central banks.

Some G20 countries have committed as much as 20% of their GDP to support their economies post-COVID. It does not take an economics expert to see that in a bid to ward off a recession and various deflationary pressures in the short term, central banks might be setting the scene for inflation to return further out. I do have some sympathy with the argument that a bit of inflation is useful when it comes to eroding the real value of what is now a colossal corporate and sovereign debt mountain.

However, history reminds us that letting it out of the bag can be dangerous.

That’s because it is notoriously difficult to subsequently control.

How have you adapted to new ways of working in Hampstead?

During my first 21 years with this firm I never worked from home so to find out in March that we would be all doing it for the foreseeable future was daunting.

Fortunately, my fears were misplaced.

Thanks to a combination of flexible technology and the speed and agility with which our clients and staff adapted, we quickly established a “new normal”.

Operationally very little changed beyond the fact that we were suddenly all conversing with each other and our clients via a screen rather than face to face. The initial fear factor therefore quickly faded as people of all ages 22 — Autumn 2020

– from 19 to 90 – started requesting online meetings. In some ways, I have rarely been busier as a result.

Looking ahead, I think certain clients will never return to the old ways of working – they have told me that they prefer not having to make the effort to come into the office for a meeting.

Others, however, are much keener to get back to doing everything in person.

That may be because it is what they are used to and still prefer, or they may be getting fed up with the technology and its various quirks. As one client said recently, “I thought the old methods worked really very well and there is something about personal contact that is difficult for something like Webex to replicate.” Whatever a client’s individual preference from here, my job is to ensure that we can meet their needs in the way that suits them best.

As for me, I find using online forums to talk to clients and colleagues, whom I know well and have an existing relationship with, straightforward.

What is harder is establishing a proper rapport with clients and staff that I do not know as well. Given the importance we place on getting to know our clients and understanding their full financial circumstances and ongoing needs, I will always prefer hosting these meetings in the real, rather than the virtual, world. Naturally, we will continue to offer both as we position people for 2021 and beyond. ●

Killik & Co Security Risk Ratings 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.

2-3. Restricted Medium Risk 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.

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.

Q U A R T E R LY R O U N D U P

Tracking technology Rachel Winter Associate Investment Director Rachel casts a critical eye over some of the key events from the last quarter and assesses the implications for investors.

This quarter it was made abundantly clear that the economy and the stock market are not the same thing. The OECD is predicting that the global economy will contract by 4.5% this year and yet many major stock indices have hit record highs.

One possible explanation for this is that stock markets are forward-looking.

Investors buy shares based on what they expect to happen in the future, rather than what is happening now. As such, a rising stock market, against a challenging economic backdrop, could suggest that they have faith in the long-term strength of the recovery.

Another is that the constituents of a specific major stock market index may not reflect the structure of the underlying economy. The US NASDAQ Composite index is a case in point. It has a technology weighting of 50%, whereas, according to a study by the Consumer Technology Association, that whole sector represents more like 12% of US GDP. Finally, an economic slowdown does not affect all companies in the same way – whilst it has triggered an existential crisis for some, it may represent an opportunity for others. For example, many businesses will look to implement efficiency gains, leading to greater demand for digital technology firms.

Trading places The growing importance of technology was duly reflected in a major reshuffle of the Dow Jones Industrial Average in August. Three former constituents were replaced, a significant move considering that the Dow contains just 30 companies that are chosen to represent the US economy. A shuffle

like this arguably therefore reflects the scale of the upheaval brought about by the coronavirus. With more of us homeworking, video calling, and online shopping, our lives are increasingly centred around the internet. No surprise then that cloud computing and software solutions company Salesforce was promoted into the Dow Jones alongside Honeywell which offers expertise in industrial automation.

Faltering FTSE The lack of technology in the UK’s FTSE 100 index, on the other hand, continues to hinder its performance.

A milestone (of sorts) was reached recently when US tech giant Apple’s valuation overtook that of all the companies in the UK index combined.

Meanwhile, GDP data published in August revealed that, during the second quarter, our economy officially entered a technical recession (defined as two consecutive quarters of falling economic output) for the first time since 2009.

This slump was not entirely surprising given that the UK’s lockdown restrictions prevented many people from working.

Recent data, however, is looking more positive. Consumer spending rose in August, with the pubs and restaurants sector receiving a boost from Chancellor Rishi Sunak’s “Eat Out to Help Out” scheme. His stamp duty holiday declared in July also encouraged a flurry of post-lockdown activity in the housing market. Nonetheless, further substantial economic progress will depend on how fast the UK is able to extend its coronavirus testing capabilities.

Despite signing agreements with test manufacturers Abbott Laboratories and Thermo Fisher Scientific, the NHS is struggling to administer and process them in the necessary numbers. Many UK workers are still based at home as

a result and may remain there for the foreseeable future.

Baking Brexit After a long period of absence, Brexit is back in the news. Covid-19 has disrupted trade agreement negotiations to the point where the UK remains in danger of reaching the December deadline with no firm deal in place. Prime Minister Boris Johnson has drawn criticism for his plan to try and override part of the withdrawal agreement, with his seeming willingness to break international law putting pressure on sterling. One bright spot for investors is that a weak pound tends to benefit the FTSE 100, as most of its constituents earn revenue overseas but report profits here. The recent fall in the currency helped the index to test the 6,000 points level.

Continued sterling weakness will also benefit UK-based investors holding overseas investments.

Interesting times Although US interest rates remained at the same low level throughout the quarter, the Federal Reserve has made a major change to its guidance on future policy. Previously it adhered to a strict inflation target of 2%. However, in August it announced that it will now aim for a “long-term average inflation rate” of 2%.

Given that it has been below this level for much of the last decade, the change in policy suggests that the central bank will not take immediate steps to raise interest rates should inflation exceed 2%. Further guidance was provided at the bank’s September meeting when it said it expects rates to remain at their current low levels until at least the end of 2023. Investors may note that over the last decade low interest rates have been generally positive for equity markets. ● Autumn 2020 — 23

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