Confidant Spring 2019

Acting for clients as they would want to act for themselves

Spring issue 2019 Published quarterly

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

Stress-free saving

Tomorrow’s tech titans

Aiming high

Hitting the airwaves

Paul Killik’s tip for the new tax year, p4

Insights from San Francisco, p8

We meet Jamie Beaton, CEO of Crimson Education, p18

Rachel Winter on money and the media, p20

Shaping success How we model your life well lived, p12

C O N TA C T S

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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estimate contained herein changes or subsequently becomes inaccurate, or if research coverage on the subject company is withdrawn.

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PERSONAL VIEW

FROM THE EDITOR

Pursuing early progress Tim Bennett Head of Education “I just want you to be happy”. How many of us remember hearing that line at some point from our parents? I suspect the answer is most of us. However, surprisingly few people ever challenge it. Yet, as comedian Jack Dee once put it after he heard that line from his own father, “come on Dad – you’ve had over 50 years on the planet and that’s the sum total of your wisdom?”

I have two young children and naturally I want them to be happy (in no small part because my day-to-day wellbeing is inextricably woven with theirs, especially at weekends). Whilst they are still relatively small, this is a straightforward matter of clothing, feeding and entertaining them.

However, older children, such as my nieces and nephews, need a lot more than that.

High on their teenage list of concerns is what I call an advice gap when it comes to exploring life after education. Whilst they feel very well looked after at school in academic terms, they and their peers feel varying degrees of helplessness when it comes to working out, “what next?”

They are not alone. On pages 18 and 19 of this issue of Confidant, you can read my

interview with the global CEO of Crimson Education. He agrees that across wide tranches of the education sector, this element of young peoples’ development is often missing on anything other than an ad hoc basis. And yet these years can be critical to shaping their futures.

As for why this gap persists, 30-odd years after I first encountered it at school, perhaps the answer is that teachers are still not being equipped to fill it. This is not a criticism of them – many may feel underqualified to advise on wider career paths having done teaching for most of their professional lives.

Thank goodness, then, for Lucy Kellaway.

A former FT columnist, she recently set up Now Teach, an organisation dedicated to helping mature folk from a variety of careers to get into teaching. Several of her proteges (including an ex-Thomson Reuters Director and a former hedge fund lawyer) are already working at secondary schools in Wandsworth, where I live. If her embryonic mission succeeds, I hope that this trickle of talent becomes an avalanche, as these should be people with

C OMING UP

Social media in the dock p5 Lifting the lid on income p6 Cyber investing p10 Bond market canaries p15 Building yield p16 Evolving the House of Killik p23

the broad experience needed to help young people weigh up their next steps.

I wish her every success.

Meanwhile, my two pennies-worth of advice for parents wondering what they can do to help would be to start their children thinking early about two distinct questions; “what do you like doing?”, and, “what are you good at?”. When they hit the world of work, seeing these as discrete goals will help them to be realistic. In the early stages of most careers, they may be able to deploy their favourite skills, even if they don’t immediately love the job.

Equally, they may find something they love doing, even if they are not very good at it or paid much for their efforts. The problem is that many young people seem to expect to hit both bases at once and walk into something they love and are also very good at doing. Meantime, some hapless souls do the opposite and stumble into something they neither like, nor will ever master, but were probably advised to pursue by an overbearing parent. If we can help young people to avoid both traps, they will be better equipped to shape their future happiness and success. ●

SECURITIES IN THIS ISSUE Facebook p5, Twitter p5, Alphabet p9, Accenture p9, SAP p9, Microsoft p9, Alibaba p9, ASML p9, Visa p9, PayPal p9, L&G Cyber Security ETF p11, Polar Capital Automation p11, Syncona p11, Scottish Mortgage Trust p11, DWF p17, Duke Royalty p17, Walker Greenbank p17, GVC p17, Elegant Hotels p17, Hollywood Bowl p17, Safecharge p17, XPS Pensions p17, Strix p17, Norcros p17, Caretech p17, Adept Technology p17, Sanne p17, Cineworld p17, Eco Animal Health p17, Straumann p22, Align Technology p22 Spring 2019 — 3

VIEW FROM THE TOP

Getting ahead Paul Killik Senior Partner At the start of a new tax year, Paul offers his thoughts on how savers can make the most of their individual savings account (ISA) in 2019/20.

About now, many savers and investors will be breathing a huge sigh of relief. Having beaten the end of tax year rush towards the end of March, their thoughts will naturally turn to forthcoming Easter and summer holidays and the prospect of not having to worry about financial matters, such as using up their individual savings account (ISA) allowance, for another 10-11 months.

However, I think this is a mistake. By putting in a bit more effort at the start of a new tax year, they could reduce their administrative load later. Better still, their money will be working for them a lot sooner, rather than being left languishing in cash, or invested outside the protective shell offered by an ISA. That’s why this quarter I have addressed some common questions about this important savings wrapper in the hope of encouraging people to act sooner.

“Why do I need an investment ISA?” Whilst ISAs are not the only tax-effective saving vehicle available to savers and investors, their simplicity and flexibility makes them a virtual no-brainer. Annually, they will shelter up to £20,000 per person from both income and capital gains tax from the day they are opened until the time the holder decides to make a tax-free withdrawal.

This could be decades away as, thanks to the additional permitted subscription rules, there is now a way to preserve the tax benefits between spouses should one of them pass away. In the meantime, an ISA can be used to protect a large range of assets that can include cash, shares, bonds and funds.

I tend to refer to “Investment ISAs” because, whilst cash can be sheltered within an account, over the long-term savers need to be looking for ways to consistently beat inflation, something equities have proven their ability to do in the past. Whilst no-one, including me, can predict or guarantee the future, I believe that shares should therefore be the home for a decent proportion of anyone’s long-term Lifetime Savings.

4 — Spring 2019

“Where does the non-ISA dividend allowance fit in?”

“Is regular saving better than a lump sum?”

This tax-free allowance for dividends was introduced in 2016, to shelter up to £5,000 of dividends per year from income tax.

However, that amount has already been reduced to £2,000 which, for many investors, won’t be enough. Furthermore, many savers won’t necessarily trust the government not to further reduce, or simply abolish, this allowance in the future. ISAs, on the other hand, are well established and also offer protection from capital gains tax. Given that the allowance works on a “use it, or lose it” basis, ISAs therefore remain an essential part of any annual saving strategy.

In many cases, yes. Even assuming they can lay their hands on the money in one go, investors contemplating a lump sum investment often prevaricate, especially when markets are choppy. The great thing about making smaller, regular contributions is that they don’t need to worry about timing the market as they are investing consistently through its ups and downs. Further, thanks to “pound cost averaging” this will usually deliver a better overall performance during periods when markets are volatile.

“How can an ISA help to beat the end of tax year rush?”

Rather than leaving everything until the last minute and investing a lump sum, investors should weigh up the benefits of saving regular amounts each month. Our forthcoming app, Silo, will help to make this simple and effortless. Starting at an affordable level, the amount invested can be subsequently increased at any time, as and when someone’s finances allow. The beauty of this approach is that day-to-day an investor can then just forget about their ISA, knowing that they have removed the risk that they either somehow miss the end-of-tax-year deadline completely (including all of our various prompts as Killik & Co clients!), or face a scramble to find the cash that they need to use up their full allowance.

“How much will I need to save?”

That depends on personal circumstances. If the goal is to invest the full £20,000 adult ISA allowance by the end of the year, a saver could set their monthly contribution at, say, one twelfth of it, so £1,667 per month. Or, they could start at a much lower amount and then top up the account when they have spare funds available. They may, for example, receive a bonus during the year which could be put towards their £20,000 investment target. Again, this is something that will be straightforward to manage via Silo.

“Will my money be working hard for me?”

When they open a Killik & Co ISA, investors are tapping into our investment expertise. What sits within the tax wrapper will depend on the overall size of the ISA account and our understanding of what they want to achieve, not to mention their attitude to, and appetite for, risk. Investors should always aim to put their money to work in a way that offers the best potential upside, subject to their objectives and risk tolerance. They should also always obey basic investment principles such as diversification (never having “too many eggs in one basket”). The flexibility of an ISA means that the underlying investment strategy can be changed later as personal circumstances and objectives evolve.

“What if I need my money back?”

ISAs are designed to offer tax-effective saving over the long-term. However, funds can be withdrawn at any time. Provided they are replaced within the same tax year, they do not form part of the annual allowance for that year and the tax benefits can be preserved. A permanent withdrawal of ISA funds on the other hand, must be weighed up very carefully, as that will terminate any future tax advantages. This is therefore one of several decision points where I would recommend the input of an Investment Manager or Wealth Planner. ●

O P I N I O N

Will our social media giants be de-installed?

Matthew Lynn Columnist and Author The tech tycoons of Silicon Valley don’t let their children use it. Governments around the world are planning new controls over it. Regulators are probing its role in elections. Meanwhile, anxious consumers may not yet be deleting its apps from their smart-phones en masse, but, in the wake of some high-profile privacy breaches, and the broadcasting of the recent atrocity in New Zealand, they are growing increasingly hostile.

I refer, of course, to social media. Whilst it has been one of the great commercial success stories of the last decade, the next one could be a lot tougher. And if they hope to retain anything like the dominance they have enjoyed, the giants of this field will need to change tack fast.

Digital domination The rise of the app economy has been one of the biggest recent trends to transform global business. Firms that were once unheard of are now household names, with market capitalisations to match. In 2019, a stock portfolio is likely to contain names such as Facebook, Alphabet or Apple where once it would have been dominated by banks, oil giants and manufacturers. Personal fortunes have been minted and brand-new jobs created as traditional industries from media, to advertising, travel and retailing, have been turned upside down. Indeed, if you remove these huge social media firms from the main stock market indices, you knock a decent chunk out of the recent growth we’ve seen – they have been nothing less than the engine room of a lot of recent wealth creation. Now, however, these disruptors are under threat themselves.

The bigger they are…

Thanks to an avalanche of adverse disclosures, concerns are rising over everything from profile privacy to the security of data and the way that adverts are targeted across the internet. Facebook, for years the main driver behind a booming industry, has been the biggest casualty. Over the last twelve months alone, Mark

carelessly, or that fail to adequately protect their privacy. This is creating rising disquiet at the critical grass roots level of the social media giants’ user base.

Zuckerberg’s behemoth has been under constant attack, accused of having a role in everything from manipulating elections to facilitating abusive behaviour online. The consequent sharp share price fall has wiped tens of billions from its market value.

Twitter too has come under greater pressure and investor scrutiny, as have many smaller platforms. Even the smart-phone and internet companies that provide the tools we use to communicate with one another via these platforms have not escaped.

As their share prices have stuttered and user numbers have plateaued, or even fallen, the key question is whether the current difficulties facing these firms represent a mere blip or are evidence of something more serious.

“Peak social media”?

With an estimated 2.7 billion users around the world, or about half the world’s population, some analysts were calling a natural ceiling on the rate of future profit growth for this sector in its current form, even before more recent problems emerged. After all, much of the remaining world’s population don’t yet have access to phones, the internet or even electricity.

There is also plenty of momentum left in the current regulatory clampdown too. As Facebook fends off a string of accusations (most recently over the use of user phone numbers offered as security checks on accounts) governments around the world are under pressure to get a lot tougher. President Macron of France, for example, is already arguing for the creation of a European Agency to combat fake news online. This will all come at a margin-dampening price.

At the same time, consumers are waking up to the fact that they need to be a lot more vigilant when it comes to digital security and are increasingly prepared to abandon sites that use their data

Just as importantly, advertisers – who, let’s remember, pay the bills that keep many a platform afloat – are getting a lot more cautious about who they associate with.

Disrupting the disruptors Although the long-term strength of these headwinds is not yet clear, there are immediate dangers aplenty. Whilst social media is not about to fade away, individual companies that can’t adapt quickly might. Whole new business models may start emerging if consumers decide, for example, to pay a modest subscription for messaging and picture sharing apps rather than just giving away their data to get access “free”.

It is worth remembering that over the past few decades, the technology market has thrown up a lot of seemingly dominant monopolies that turned out not to be “too big to fail”. IBM once dominated computing, until it was overthrown by Microsoft. It then looked all-powerful until it was, in turn, challenged by Apple. Yahoo was once the go-to search engine until Google came along and so on. The conclusion? Controlling positions in any market can be disrupted and then crumble.

In 2019, it can happen faster than ever.

That’s because building a world-beating app requires less capital than it used to, as more bright entrepreneurs and engineers flood into the space. Meanwhile, the network effect, coupled with the right marketing, means that once some people start to switch from one app to another, a trickle could become a stampede.

Only time will tell us whether Facebook, in particular, has been mis-managed beyond repair. Either way, I am pretty sure that we will all still be messaging, alerting, and “liking” one another in ten years’ time. However, I have a hunch that the platforms we use may be completely different. Meanwhile investors should get ready for digital fortunes to be made, and lost, all over again. ● Spring 2019 — 5

THE BIG PICTURE

Why income investors shouldn’t chase yield Patrick Gordon Head of Research As interest rates hover above recent historically low levels, Patrick reiterates some important advice for income seekers.

potential problems for investors following a high dividend yield approach to achieving income is, therefore, the risk of becoming pinned in a very crowded space – to achieve an income above the market average, many fund managers are being forced to buy the same stocks.

Low for (even) longer

The US Federal Reserve (Fed) has been at the forefront of taking steps towards normalising monetary policy by raising rates. However, it has now paused, spooked by a falling stock market at the end of 2018 and a backdrop of slowing global growth. In March, the Fed announced that, from May, it intends to slow the pace of quantitative tightening and then stop it altogether in September.

Expectations are now that it may even cut interest rates before the end of the year.

Meanwhile, in the Eurozone, the European Central Bank (ECB) has pushed back its guidance for increasing interest rates. It now doesn’t expect to raise them from their current negative levels at all this year, having previously indicated a possible hike after the summer.

This all suggests that an already long period of low interest rates may persist for some time yet. In this sort of economic environment, demand for higher yielding assets, including certain equities and high yield bonds, is therefore likely to stay strong.

Lifting the bonnet on dividend yields For most of the period since the financial crisis, UK income investors have been drawn to equities thanks, in part, to the 6 — Spring 2019

enticing opportunity created by the difference between the dividend yield on the FTSE All-Share Index and the redemption yield on the 10-year UK government gilt. At the time of writing, this differential is a chunky 360 basis points (3.6%), as the chart below shows.

FTSE ALL-Share Yield and 10-Year Gilt Yield FTSE All-Share dividend yield

UK 10-year gilt yield

8 7 6

Another potential pitfall that arises here is the potential lack of diversification within an income-focused portfolio. Certain sectors such as utilities, tobacco, telecoms and parts of the healthcare and commodity sectors have traditionally included stocks with above-market yields.

However, a focus solely on the higher yielding sectors may leave an investor overly concentrated in certain parts of the market. This could not only increase overall risk within a portfolio, but it may also mean that investors miss out on potential total return opportunities (income and capital growth combined) if faster growing areas of the market are excluded as a result. Furthermore, a ‘high yield only’ approach may also mean that companies with relatively low starting yields, but with the potential to significantly grow their dividend pay-outs over time, are overlooked.

Getting a grip on stock-specific risk

5 4 3 2 1 0 Apr 97 Apr 98 Apr 99 Apr 00 Apr 01 Apr 02 Apr 03 Apr 04 Apr 05 Apr 06 Apr 07 Apr 08 Apr 09 Apr 10 Apr 11 Apr 12 Apr 13 Apr 14 Arp 15 Apr 16 Apr 17 Apr 18 Apr 19

A decade on from the financial crisis, the economic environment for an income seeking investor is still challenging. The interest rates offered on many sterling bank and building society accounts persist at very low levels. Meanwhile, although the yields on developed market government bonds have left their lows, they remain largely suppressed. The main cause: accommodative Central Bank policies.

Source: Bloomberg

However, a look under the bonnet of the headline 4.6% FTSE All-Share yield (as at 1st April 2019), reveals that just 10 stocks account for around half of it, measured by the market capitalisation weighted contribution of the individual constituents of the index. One of the

Looking below the level of the broader market, it is important that investors also take a stock-specific view and properly understand the possible reasons behind individual high dividend yields.

For example, a cash-generative company, that has perhaps reached a more mature point in its life-cycle, may have less need to retain that cash to expand its operations.

Returning it to shareholders may be the best course of action if the alternative is value destruction via unwise investments or spurious M&A activity. It may, however, also point to the fact that the scope to grow the dividend in the future is more limited.

Equally, although a high yield may be an indication that a share is undervalued, it

THE BIG PICTURE

may also be a ‘red flag’ to potential investors that all is not well with the company. The yield may be high simply because the share price has fallen significantly (thereby shrinking the denominator in the yield calculation), or it may be that the company is over-distributing cash to shareholders, raising questions over dividend sustainability. A dividend may be particularly vulnerable if it is only thinly covered by earnings, or cash flow, and the company’s balance sheet is too weak to support a high pay-out during a period of weak corporate performance. A dangerous double whammy could then be created should management decide to cut, or rebase, the dividend. Not only will investors suffer a reduction in their income but there is also the risk of a deterioration in the share price, should demand from other income-seeking shareholders drop away.

In the UK, the Bank of England is unlikely to raise rates until greater clarity emerges over Brexit. Even when rates do rise, the increments are likely to be modest.

Avoiding tunnel vision Income-seeking investors should also not lose sight of the overall asset allocation within their portfolio. For example, including some individual corporate bonds in the mix can offer an investor a predictable and visible income stream from an asset class that ranks higher in the corporate structure than equities. Whilst this fixed income element of a portfolio provides limited scope for either income growth or capital appreciation, combining this with a more growth-orientated equity component could produce an attractive overall total return. This blended approach may allow an investor to augment the income generated by their fixed income elements by realising part of any capital growth that the equity portion of a portfolio produces over time.

In conclusion, income-seeking investors should be wary of investing in stocks purely based on a high dividend yield.

Income paying stocks can have an important part to play in a portfolio, particularly where the companies have a strong pay-out-record and dividends are well covered by earnings or cashflow.

However, a stock’s current yield is just one consideration, rather than a standalone reason to invest. ●

If you would like to find out more about dividends and how to test their sustainability, please try Tim’s short educational videos at killik.com/explains. As a starting point, under the shares tab you will find Five Vital Words for Dividend Investors killik.com/explains/five-vital-words-for-dividend-investors.

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.

Spring 2019 — 7

EQUITY RESEARCH

Talking technology Nicolas Ziegelasch Head of Equity Research Nic recently attended a key technology conference in the US. Here, he sums up his key findings and gives a short update on the Killik & Co covered stocks that were discussed.

To find out more, please contact your Investment Manager.

What was the focus of your trip?

The Goldman Sachs Technology Conference. This annual three-day event features presentations and keynote speeches from the leaders of some of the world’s largest and most important technology companies, including a number that are on our Buy list. Whilst in San Francisco, I got valuable insights and updates on names such as; Alphabet, Alibaba, Cisco, Oracle, Salesforce, Softbank, Twitter and Visa. In total, there were over 120 companies present.

I focused my time on 38, some of whom were unlisted but interesting nonetheless.

In addition to gaining company-specific insights, I also wanted to get a feel for the dominant underlying investment themes that these companies and their investors were discussing. As such, the questions that were being asked were as instructive as the answers, as they gave me a feel for the sorts of issues that are at the top of investor priority lists right now.

Overall, I came away with a positive view on the current state of the technology sector.

It was also clear that it is being driven by four key themes: Artificial Intelligence (AI), Cloud Computing, Software as a Service (SaaS) and Corporate Responsibility.

How far has AI evolved?

Having been once the stuff of science fiction, it is now fast becoming reality.

Machine Learning, a subset of AI, was mentioned most often in open forum, given its potential effect on business models. It is clear that it will impact every type of business, as it can be deployed to make better decisions, improve customer service, automate processes and reduce costs. That’s why companies are rushing to introduce it in order to remain competitive.

8 — Spring 2019

The conference view was that the big cloud players would be obvious winners – firms such as Amazon, Microsoft and Google – as they have already built many AI tools, such as voice and image recognition, that can be used to underpin specific applications. We should also see a positive impact on semiconductor players, as AI drives spending on high power processors, performance memory and the large amounts of storage needed to handle the data generated.

What is software as a service (SaaS)?

SaaS is about supplying software on subscription, where the end user generally pays a monthly fee, sometimes on a “per seat” basis. In exchange, they get access to the relevant software, including updates.

This differs from a traditional model, where the customer typically makes a single upfront payment for ownership. Whilst SaaS can be housed on site, it is mostly delivered via the cloud.

Killik & Co clients are well positioned to take advantage here via ASML, the leading lithography player with a monopoly on next generation extreme ultraviolet (EUV) technology.

The big opportunity lies in the fact that in order to innovate and digitise, organisations need to modernise and better integrate their legacy systems to improve performance. In many cases, these legacy systems are old and have been heavily customised, resulting in highly fragmented software markets.

Since the smaller software vendors don’t have the R&D budgets required to either create SaaS versions, or consistently update them, there is a big opportunity for the bigger players to take market share.

Beneficiaries should include traditional integrated systems suppliers that offer SaaS versions, such as SAP and Oracle, alongside pure players such as Salesforce, ServiceNow, and Workday. All are leaders in their respective markets.

Has the cloud computing theme still

Why is corporate responsibly such

got legs?

I came away from the conference feeling that we have moved through the first phase of cloud computing (the adoption phase), since many organisations have already migrated at least some of their workload to the cloud. However, overall penetration levels remain low, with a significant growth opportunity as applications are modernised or moved to “software as a service” (SaaS) models. Companies are still being incentivised to cut legacy costs and enable increased spending on digitisation and AI. Meanwhile, large enterprises will go multi-cloud, which puts firms such as Microsoft and Amazon in the driving seat, with Google following closely behind them.

Our Buy ratings on all three stocks put our clients in a great position to benefit.

a hot topic?

The widespread adoption of social media and smartphones has seen many technology companies become more consumer-facing, with resulting access to vast amounts of personal data. Increasingly they are being scrutinised in terms of how this is obtained, used and sold. As a result, business models will need to adjust to the pace of changes in both regulation and user preferences. Social media has also changed the way that people consume news, and there is now big pressure on firms in this space to validate the information that is being carried on their networks. Further, with diversity now such a key issue, social media firms are being forced to revisit their responsibilities to employees and the wider community.

EQUITY RESEARCH

The electric vehicle revolution – a Tesla update What impressions did you get from your factory tour?

I was fortunate enough to be able to visit the production site in Fremont, about 50 miles outside San Francisco, which included a test drive of the crucial Model 3 and a meeting with the Head of Investor Relations. This massive factory contains the production lines for the Models S and X as well as the Model 3. Whereas the first two of these are built on something resembling a traditional production line, with just some areas applying robotics, the Model 3 process is largely automated. What struck me was the intricacy of some of the wiring harness work – it is hardly surprising that Tesla has had issues with fully automating Model 3 production as a result.

huge amount of information, alongside a graphical 360-degree birds-eye view of the car and others around it. My overall impression was of a very well-made car, with a lot of space, fantastic handling and exciting performance. It rather confirms my long-term view that the age of the traditional combustion engine is over, once electric vehicle charging infrastructure catches up with demand.

Is Tesla also a good investment?

It is certainly a very polarising stock.

Tesla has great products, with more in the pipeline such as the Model Y (a mid-sized SUV), followed by a pickup. Demand for the Model 3 in the US should stay strong – many early adopters have bought in and there will be ongoing replacement demand for luxury mid-sized sedans from existing BMW 3 Series, Mercedes C-Class and Audi A4 owners. At $35,000, this model will allow Tesla to tap new buyers from more mass market brands.

Internationally, sales are just starting in Europe and the construction of a Chinese factory will dramatically increase Tesla’s competitiveness in that key market.

Meanwhile, the Model Y will tap into demand for compact SUVs. This key market is set to overtake that for mid-sized sedans, as evidenced by the fact that rival Volkswagen’s best-selling model is now the Tiguan, a compact SUV.

How good is the new Model 3?

The performance is undoubtedly impressive – its 0-60 time is faster than a Ferrari 488. The absence of a normal dash board display takes some getting used to but the screen that replaces it can carry a

So, the main issue for investors is not a lack of great products and growth opportunities, but rather whether the firm can balance its ambitions and manage the expectations of key stakeholders. Whatever your view, Tesla is undoubtedly a game-changer and will feature in our big review of the auto space later this year. ●

Key data Name Alphabet

Market cap (bn)

P/E ratio (12m fwd)

Yield (%)

Share price

Currency

Risk rating

817

20

0.0%

1173

USD

6

Accenture

112

23

1.7%

176

USD

6

SAP

126

21

1.5%

103

EUR

6

Microsoft

905

25

1.6%

118

USD

6

Alibaba

472

29

0.0%

182

USD

7

71

29

1.3%

167

EUR

7

Visa

314

28

0.6%

156

USD

6

Paypal

122

36

0.0%

104

USD

7

ASML

As at 1st April 2019.

For more information about the Killik & Co Risk Rating system, please refer to page 7.

Please speak to your Investment Manager for further information.

Conference snapshot on Killik & Co covered stocks Alphabet Google Cloud is building out its sales ability to compete better with AWS and Azure and believes it has the technology and infrastructure to do so Accenture Digital transformation continues to dominate the spending intentions of its clients, with a commensurate desire to fund this through reducing legacy spending SAP The firm continues to see strong demand at the higher end of the enterprise software market and is benefitting from a broad solutions set across multiple verticals and geographies. Its move to SaaS and cloud is bringing in new customers and driving increased spending by existing customers Microsoft While most companies have adopted some cloud products, overall penetration remains low.

Microsoft has a strong presence in enterprise and on-premise solutions and therefore enjoys a competitive advantage in cloud computing Alibaba This e-commerce giant is unfazed by short-term Chinese economic growth rates, given the country will be creating hundreds of millions of middle class consumers over the next decade. Alibaba wants to be nothing less than the operating system/ platform for retail. Alicloud continues to grow strongly, and is now much bigger than its rivals ASML Short-term issues in the memory market have not altered the long-term opportunities for this supplier to the semiconductor industry Visa The company sees continued strong growth in consumer electronic payments globally. Meanwhile, Visa Europe presents technology platform opportunities, with business to business (B2B) payments a long-term growth area PayPal Global payments are far from being completely digitised. PayPal has the technology needed to take advantage of big changes in the way they are originated and executed.

Spring 2019 — 9

FUNDS RESEARCH

Securing cyberspace Gordon Smith Senior Fund Analyst

10 — Spring 2019

1,400 CAGR: +16%

1,200

1090

1,000 781 779

800 662

656 600

614

498

446 400

421

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321

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0

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200 157

Source: Identity Threat Resource Centre

Chart 2 – US Spending on Cybersecurity ($bn) 70

66.0

60 54.8

CAGR: +12% 49.0

50 43.5 40.0

40 34.5 30 27.4

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20

Source: Atlantic Council

2018

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0

Regulatory creep The reputational and financial risks associated with cyber-attacks are enough to keep most CEOs awake at night. However, there is another concern – mounting data ethics and privacy regulation. The European Union’s General Data Protection Regulation (GDPR) is perhaps the best-known example of this, but it is far from being the only one. This vast piece of regulation aims to protect all EU citizens from privacy and data breaches from whatever source (including, but by no means limited to, financial services firms) and imposes significant penalties on organisations for violating its core stipulations. The risk of significant fines for data breaches (up to €20m, or 4% of annual revenues, whichever is higher in the case of GDPR), not to mention the associated adverse publicity associated with them, provides a further incentive for firms to spend on security.

Given the breadth, speed and crossindustry nature of global digitalisation, the complex and ever-changing threat from cyber criminals and an evolving regulatory environment, the digital security industry is in a constant state of evolution as it develops new and more sophisticated tools that can address the different security needs of individuals, companies and governments.

A safe play

60.4

2013

Sharp increases in the frequency and severity of data breaches over recent years (see chart 1), have made cybersecurity a key priority for businesses. An annual survey of IT executives from 100 of the largest global companies, by investment bank Goldman Sachs, revealed that it remained their top spending priority for 2019. Indeed, the percentage of respondents intending to increase spending on security software and appliances rose compared to 2018. Within the key US market, spending

1632 1,600

2012

Digital defences

1,800

2011

What’s more, this digital transformation is engulfing ever more parts of society, leading to greater levels of interconnectivity and a growing reliance on data. Leading consultancy Gartner have estimated that the number of connected devices worldwide (owned by both consumers and businesses) will increase from around 8.4 billion in 2017 to over 20 billion in 2020. This growth is adding to our overall reliance on computer systems, as more digital data is collected and stored and we increase the use of digital payments. Inevitably, this is all creating massive demand for better security.

Chart 1 – Total Recorded Cyber Security Breaches

2005

The ongoing growth of digitalisation is eye-popping. A recent white paper, published by market intelligence firm IDC, estimated that the number of consumers interacting with digital data on a daily basis will increase from five to six billion by 2025. That will represent 75% of the world’s population. By then, every connected person will have at least one data interaction every 18 seconds. It is also increasingly clear that vast areas of industry are transitioning to more automated and connected systems as part of a trend known as “Industry 4.0”. This, in turn, is driving the application of data analytics and cognitive computing to improve decision making.

2006

Always connect

on cybersecurity is estimated to have grown at a compound annual growth rate of over 12% across the last decade (see chart 2). That is why we continue to believe that this area remains one of the most attractive opportunities for investors looking for exposure to growing global technology budgets.

2010

With data privacy a hot topic, Gordon looks at how investors can bring cybersecurity into their portfolios.

The sheer breadth of the cybersecurity problem and number of firms engaged in solving it, leads us to think that investors should have access to a basket of companies across the sector. We therefore like the L&G Cyber Security UCITS ETF (ISPY-LON). This exchange traded fund (ETF) tracks an index made up of companies actively engaged in, and generating a material proportion of their revenues from, providing cybersecurity technology and services. As such, it provides a well-defined exposure to both Infrastructure Providers (businesses developing hardware and software for

PERSONAL VIEW

safeguarding computer systems and networks) and Service Providers (businesses providing consulting and secure cyber-based services). This subset of the broader technology sector currently includes 44 businesses that we believe share several attractive attributes.

Investors may note that the weighted average valuation multiple is at a premium to the wider IT sector. However, this has been more than compensated for to date by faster earnings growth (of around 20%) over the last three years. Given the strength of the wider industry drivers, we believe growth rates could continue to exceed those of the broader market. ●

FUNDS RESEARCH

Key fund data and charts Each quarter we look at the funds that we feel should be cornerstones in a Technology Innovation Service portfolio, subject to your aims and objectives.

To discuss any of these in more detail please contact your Investment Manager.

Growth

Income & Growth

L&G Cyber Security UCITS ETF (ISPY-LON)

Polar Capital Automation & AI

Fund Type

UCITS ETF

Fund Type

Irish UCITS OEIC

Manager

L&G ETFs

Manager

Zhao, Evans, Rogoff

Market Capitalisation

$851m

Fund Size

$369m

KIID Ongoing Charges

0.75%

KIID Ongoing Charges

0.94%

Historic Yield

0.0%

Historic Yield

0.0%

Numerous high-profile cyber-attacks in recent years have seen security become a priority for organisations globally. This ETF tracks an expertly curated index of public companies that are actively involved in providing cyber security technology and services. The industry is seen as divided into two categories: Infrastructure Providers who develop hardware and software for protecting data; and Service Providers who provide consulting and secure cyber-based services. Risk Rating: 6

This fund aims to achieve long-term capital growth by investing in global equities that are exposed to industrial automation, robotics, artificial intelligence (AI) and material sciences.

As well as investing in companies directly involved in these themes, the fund also seeks exposure through companies which may stand to indirectly benefit from the relevant technologies through efficiency gains. It also looks to avoid firms whose competitive edge may be eroding.

Risk Rating: 5

NAV Total Return (since inception, indexed)

Total Return (last five years, indexed) 120

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2018

Growth

Our Technology Innovation Service The four funds summarised opposite are all current constituents of Killik & Co’s Technology Innovation Service.

This fund-based managed service aims to achieve long-term capital growth via a portfolio of investment strategies across the global technology sector. The service invests in strategies run by dedicated technology specialists and will aim to benefit from the structural growth potential stemming from productive innovation. A fund-based approach is used to leverage the expertise of specialist investors and achieve suitable diversification from the disruptive risks posed on individual business models within the technology sector. Investors should be aware that their capital may be at risk and that past performance does not guarantee future returns.

To find out more, please contact your Investment Manager.

80 2017

2018

2019

Growth

Syncona Ltd (SYNC-LON)

Scottish Mortgage (SMT-LON)

Fund Type

Fund Type

UK Investment Trust

Manager

J Anderson, T Slater

Fund Size

£7.3bn

KID Impact on Return

0.81%

Historic Yield

0.6%

Close-ended Investment Co

Manager

M Murphy and team

Market Capitalisation

£1.6bn

KID Impact on Return

2.18%

Historic Yield

0.9%

This listed investment company aims to achieve long term capital growth from a portfolio of life sciences investments, alongside a strategic capital pool of collective investments and fixed interest securities. The fund is gradually transitioning to a life science investment company.

Syncona (and its unique capital structure) offer an attractive method of accessing the ‘Third Wave’ of treatments using cell and gene therapies.

These are becoming commercially viable following decades of development. Risk Rating: 7

NAV Total Return (last five years, indexed)

This London-listed investment trust aims to outperform the FTSE All-World Index over rolling five-year periods. It invests in a highconviction portfolio of global equities, with up to 25% invested in private companies. The managers look for strong, well run businesses.

The portfolio is weighted towards companies which have disrupted their respective industries.

Unquoted holdings have added significant value in recent years, as the allocation to this segment has risen. Risk Rating: 5

Total Return (last five years, indexed)

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All chart data source: Bloomberg. Chart data to 1st April 2019. For details of the Killik & Co risk rating system, please refer to page 7.

Spring 2019 — 11

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

Creating a financial road map Svenja Keller Head of Wealth Planning Svenja discusses how she uses cash flow modelling to help clients visualise their life well lived and make better financial decisions.

What does cash flow modelling do?

In a nutshell, it provides clarity. A properly constructed model factors in a client’s income, expenditure, assets and liabilities and clearly maps out their financial position over the rest of their lives. Whilst the result is never fully accurate, thanks to the number of assumptions needed, it can nonetheless offer an individual, a couple or a whole family, a sense of financial direction, help them to formulate their future strategy and make key decisions about how they want to live their lives.

This is very much a big picture exercise, rather than a scientifically precise one, but we find that it can really give people a sense of where they are heading and can focus them on how they can achieve their dreams.

Since most of us would struggle to map all the variables that underpin an often-complex financial future, our models make heavy use of visualisation, via graphs. These can be really powerful because they reveal potential pressure points and shortfalls. If a client can see these well ahead of time then they have a better chance of planning for them, by thinking about how they could save more, or make different future choices.

It is vital that people realise, from the outset, that this is a living document and that even a small change in the assumptions can change the outcome quite dramatically. This shouldn’t therefore be viewed as a one-off exercise but something to be returned to, typically annually or as circumstances change, whether through marriage, separation, having children or a host of other life events.

12 — Spring 2019

Who needs one?

Anyone who wants to take control over their finances and better understand how they will achieve their goals will benefit.

Even if somebody has no savings, this exercise can help them to understand how much money they will need to put aside every month to fund their objectives.

It also forces them to think about those objectives, rather than burying their head in the sand, or perpetually putting everything off until another day.

Everyone I meet has personal goals that vary hugely depending on their age and circumstances. My younger clients are quite often focused on paying off loans and then funding their first home. Later, they might look at how they will cover a sabbatical from work or reduce their hours to look after small children. Once people become established parents, I quite often get asked about financial protection and what they need to do to take care of their family if they become ill, or worse. The challenge of covering school fees is another hardy perennial. As, increasingly, is divorce I am sad to say – a cash flow model can help one party, or both, to work out how a particular asset split will work for them going forward, or whether the lump sum they have been offered will fund their future.

Regardless of age, most people want to build some sort of post-work fund, so I also get all kinds of questions around this challenge. For example, I might be asked to review the financial impact of a decision to transfer a pension out of a defined benefit scheme and into money purchase. The latter route can sometimes leave a more flexible pot when it comes to inheritance, but at the cost of less certainty about the level of income and the potential loss of some guarantees.

Cash flow planning can help to weigh all of this up.

Amongst my older clients, other common questions centre around later life issues such as how much they can afford to give away as gifts for inheritance tax purposes whilst still leaving a financial buffer for themselves, for example, to fund future long-term care costs. Whatever the goal, a cash flow model gives people a structure and helps to answer the question that crops up a lot, “If I do X, when will I be able to achieve Y?” Every now and then, this exercise can throw out surprising results – my work has resulted in the occasional marriage proposal (to reduce inheritance tax) and the odd person walking into work and resigning a day after seeing their cash flow projection! Or, I might get to say to a couple who have worked and saved hard “why don’t you go and spend some more money?” – those are great conversations.

It is therefore a pity that cash flow modelling is sometimes seen as the preserve of accountants, working for wealthy clients, as it can be relevant to almost anyone, at any level of income and assets. Some projections are very simple and quick, whilst others factor in a complex array of inputs that take account of various different taxes and scenarios – there is no minimum level of assets or complexity at which it is appropriate as we can adapt it to almost any circumstances.

PERSONAL VIEW

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

What sort of information is required?

That depends. The basic rule is, the less information we get, the lower the quality of the end-result and the less accurate the model will be – “garbage in, garbage out” as programmers like to say. As a minimum, we typically need a clear picture of someone’s income, expenditure, assets and liabilities.

These can be rough amounts – it is better to include an estimate than to leave out, say, an important liability altogether. If we miss a mortgage, overdraft or car loan, then the model will assume a client has more funds available to them than they do in reality.

We also need to include some important assumptions about future inflation and investment growth rates. Cash flow forecasts are quite sensitive to those two inputs, because thanks to the power of compounding over long periods, if those are tweaked even a little, it can change the outcome quite substantially.

It is a pity that cash flow modelling is sometimes seen as the preserve of accountants, working for wealthy clients, as it can be relevant to almost anyone, at any level of income and assets.

In order to assess what future investment growth rate to use, we need to get a handle on a client’s risk tolerance – that’s not just a function of how much risk they think they want to take, but also how much they can afford to take, given their objectives. We can project everything from a mega-cautious scenario, where someone holds mostly cash and bonds, through to a riskier proposition involving mostly equities. The point we try to convey is that the initial asset allocation choice will have a massive impact on the overall financial position over time periods that range from 20-40 years in many cases – it can be expensive, for example, to sit in cash for too long.

We often do sense checks too, by asking, “Would this client be able to execute on their plan if their investment growth rate was much lower, or if there was a market crash?”

This way, we can stress test the financial plan, and build in worst-case scenarios.

At a glance – 2019/20 tax changes

Why can’t people do this themselves?

In theory they can do the numbers bit, if they are comfortable enough with Excel or are happy to buy an off-the-shelf modelling package. However, most people will only feel comfortable building out a simple projection.

For complex clients and their families, we have a much more sophisticated tool that requires some pretty detailed inputs and isn’t suitable for someone without the appropriate training and experience.

Besides, inputting data is a pretty mechanical exercise – it’s what someone does with it that counts in terms of building out a financial strategy. The most powerful meetings are where we show a client dynamically on the screen what we’ve modelled. Then the client will say, “What if we tweak X? What if I move the timing of Y? What if we assume Z?” Even for quite sophisticated clients, building the model is barely 50% of the story – it’s the advice that comes with it that is really valuable. The result requires quite a bit of careful analysis and interpretation, which is often hard to do alone – I find that people tend to only ask themselves the questions they already have an answer to, or want to hear the answer to, and they can therefore miss some of the important ones that we would ask.

One of the bigger buzzes I get from doing this is when we hit a moment where the client’s face lights up because we’ve asked the challenging questions and got to the one scenario that works for them. They go away happy thinking, “I can achieve what I want to achieve, and I’m comfortable.”

This is where what some might see as a mechanical forecasting exercise morphs into nothing less than a route map to the life they have always wanted to live. I get clients who suddenly realise, for example, that the difference between an inheritance of £2m and £2.13m isn’t worth sacrificing their time and enjoyment for – they have already done enough and can afford to relax a bit.

The last Autumn Budget and Spring Statement signalled relatively few tax changes for the start of this new tax year on 6th April. We have highlighted the key ones for private investors below. If you have any questions about these, or would like to find out how they affect you, please speak to your Killik & Co Investment Manager or Wealth Planner. ●●

The personal allowance for income tax will increase to £12,500

●●

The threshold for basic rate tax at 20% will rise to £37,500 of taxable income

●●

This means the threshold for higher rate tax at 40% will rise to £50,000

●●

The standard ISA allowance remains unchanged at £20,000, however the allowance for Junior ISAs will increase to £4,369

●●

The annual exemption for Capital Gains Tax purposes will increase to £12,000

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The Pensions Lifetime Allowance will increase to £1,055,000

●●

Whilst the Nil Rate Band for Inheritance Tax will remain unchanged at £325,000, the additional Residence Nil Rate Band will increase to £150,000

●●

There have been a few changes to the Entrepreneurs’ Relief rules, which give relief on the Capital Gains Tax rate for certain company owners. These tighten the qualifying criteria and the period during which these conditions must be met.

Spring 2019 — 13

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

What common mistakes do you come across?

Then there is the “what next?” issue, as I call it. Even if someone comes up with an answer, “I can afford to save £X” they often don’t know what to do with it – which fund to invest in for example and for how long.

That’s probably why most of my clients have not attempted this stuff by themselves and are more than happy to seek our help.

I sometimes come across hideously detailed models that are pretty hopeless for practical use. Some people try to map every single item of income and expenditure in minute detail, with a myriad of micro-assumptions to match.

Much of this effort is wasted, in my opinion, as it can obscure the bigger picture. This is where pure spreadsheets are not helpful – without the appropriate visualisation, multiple rows and columns can be difficult to interpret meaningfully.

A specific blind spot that many people have is they don’t understand the huge impact of inflation over long periods.

For example, they will look at their house and tell me it will be worth £X in

30 years’ time, based on annual growth of Y%, not realising that even if general inflation is running at just 2-3% the purchasing power of that sum will be much reduced. The rule of 72 tells us that a rate of just 3% can halve the real value of your money in 24 years. That means the bricks and mortar piggy bank that some people are relying on in later life may be nowhere near as big as they expect by the time they need to draw on it.

The sooner we can help them to see that, and start a conversation about their Plan B, the better. ●

Cash flow model example The graph shows an inflation-adjusted (“real”) projection for a fictional client aged 42 who is planning to retire at 65 on a monthly income of £5,000. He already has £150,000 invested and can afford to save £1,500 per month. Having discussed his risk preferences, he decides he would prefer a steady growth investment mandate (see box). In a decade’s time he expects to receive an inheritance and would like to gift £100,000 to his son in 20 years’ time to help him to fund a property purchase. £2,000,000 £1,800,000 £1,600,000 £1,400,000 £1,200,000 £1,000,000 £800,000 £600,000 £400,000 £200,000 £0

43

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50

Cash only (0.7%) All entered figures show the buying power of your savings in today’s money. The aim of this calculator is to give you an indication of how much you might need to contribute each month to reach your savings goals and takes account of any anticipated lump sum additions or withdrawals. The calculations will vary depending upon the Investment Approach selected. Each Investment Approach represents a different level of risk that you would need to be willing and able to take. A description of each Investment Approach is available below. The calculator should not be regarded as personal advice.

The actual returns (amounts) available will depend on factors including the growth your investments achieve, contributions you make in future, charges and inflation.

Read more about the assumptions behind these calculations below. Charges on investments could be higher or lower than assumed in the calculation, which will affect the investment return.

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Low-case return (2.8%)

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Assumptions For the purpose of this illustration we have assumed: • Annual investment growth of 4.0%. This is based primarily upon long term real returns for various asset classes from the Barclays Equity Gilt Study 2018 Asset allocation will vary based upon the investment approach.

• Growth rates are after estimated advice and investment management fees of 1.0% per annum. (Any additional costs and taxes are not reflected in the calculation.

If applicable, they would impact the overall return) • Growth rates are real returns and do not include inflation • There is no charge for holding cash outside of your portfolio

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High-case return (4.5%) Steady Growth Investors using this approach are seeking to achieve capital appreciation from their portfolio and as a result are comfortable in the knowledge that the value of the portfolio will fluctuate. By investing in pursuit of higher returns, you accept that there could be declines in value, and in some years these declines in value could be significant. With the steady growth approach, investments will be predominantly, but not entirely, in equities, or funds that invest in equities, and may well include exposure to UK and international companies.

You will be less exposed to other asset classes, such as bonds, funds that invest in bonds, and alternative investment funds. Though investing in equities improves the possibility of your portfolio achieving higher returns, it can increase the likelihood of fluctuation in value.

The investment returns shown in this illustration are a guide, are not guaranteed and could be more or less than those shown. The forecast is not a reliable indicator of future performance. The value of investments can fall as well as rise, so you may get back less than you invest.

14 — Spring 2019

PERSONAL VIEW

BONDS RESEARCH

Weighing up warning signs Mateusz Malek Head of Bonds Research This quarter, Mat provides his perspective on the performance of the sterling corporate bond market over the last two decades and highlights the changes in certain key risk metrics.

Sterling Corporate Bonds vs FTSE 100 Total Return 300

FTSE 100 Total Return Index Bloomberg Barclays Sterling Corp. Bonds Index

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More for less The performance of sterling denominated, investment-grade (IG) corporate bonds over the last two decades has been truly remarkable, particularly relative to UK equities (see chart). The total return (assuming reinvestment of coupons) of the Bloomberg Barclays Sterling Corporate Bond Index over this period was 192% (that’s 5.5% annualised), compared to 124% (4.1% annualised) for the FTSE 100 Index.

Furthermore, corporate bonds delivered that performance with lower volatility, generating much better risk-adjusted returns; the annual volatility of sterling IG corporate bonds over this same period was less than 6%, compared to 13.4% for the FTSE 100. Even during the global financial crisis, the drawdown on sterling corporate bonds was 18%, compared to the 40% for the FTSE 100 Total Return Index. What’s more, they took just five months, from the trough, to stage a full recovery. Little wonder, investors are asking whether such a strong run can continue.

Yielding to central bank policy Although the performance of a bond can vary greatly between issue and maturity, when it comes to investment grade securities with low default risk, starting yields are generally good predictors of future returns. And here lies the problem – yields are not what they used to be because central bank policies have been very accommodative for years and interest rates remain low by historic standards. 20 years ago, the Bank of England’s base rate stood at 5.5% – now it is just 0.75%. That unusually low interest rate has suppressed the yields on longer-dated securities, such that the average yield-to-maturity on a sterling IG corporate bond currently stands

100

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at just 2.6%, compared to 5.6% two decades ago. Over the last 20 years, yields on sterling corporate bonds have only been lower during 18 of those 240 months.

As yields have fallen, some key risk metrics such as duration and credit quality have deteriorated. The former, which measures a bond’s sensitivity to changes in underlying yields, has increased over the last 20 years from 6.4 to 8.5 years for the average sterling corporate bond. Longer average durations make corporate bonds more sensitive to changes in interest rates and credit spreads (a measure of corporate bond quality).

That, in turn, may result in higher volatility at a time when duration compensation is at, or close to, record lows. In 1999, investors in UK corporate bonds were ‘getting paid’ 87 basis points (0.87%) for each year of duration risk. That level of compensation has since fallen to just 30bps.

Quantity threatens quality Meanwhile, credit quality across the entire corporate bond market has worsened.

According to the OECD, since the financial crisis in 2008, non-financial companies have dramatically increased their corporate bond borrowings, leading to a record level of debt outstanding of around $13 trillion at the end of 2018. To put that into perspective, the total balance sheet of the US Federal Reserve is around $4 trillion. This increase in leverage has led to a deterioration in the average credit rating, such that the share of bonds rated ‘BBB’ (the lowest category within “investment grade”) has risen from around 20% ten years ago to above 50% now.

Meanwhile, the sub-investment grade part of the market has also experienced strong growth, as evidenced by the more than five-fold increase in the total market value of the Bloomberg Barclays Pan-European High Yield Bond Index over the last decade.

This rapid rise has been fuelled by an increase in issuance from both lower quality, more-highly leveraged companies and “fallen angels” (companies that have lost their investment-grade status). High profile downgrades have hit the likes of Tesco and Telecom Italia, triggering the reclassification of tens of billions worth of bonds as high-yield. Furthermore, in recent years there has been a well reported decrease in bondholder rights, as evidenced by the declining number and quality of protective covenants.

Gloom but not doom The general deterioration in the quality of investment-grade bonds, combined with the rapid rise in sub-investment grade parts of the market and the declining quality of bond covenants, points to the risk that a future downturn could trigger higher defaults and lower recovery rates than in previous credit cycles. This unfavourable backdrop, combined with a historically low yield environment, will likely weigh on the future performance of the asset class.

However, all is far from lost for bond investors. Bulls will point to the fact that, although bond yields may be lower these days and some risks have increased, the main characteristics of the asset class have not changed. Corporate bonds continue to provide a reliable income in excess of that available from bank deposits and retain a low level of correlation with equities, an important consideration when it comes to portfolio diversification. Furthermore, higher quality examples will always offer greater security of income and capital protection than equities. That’s why even a gloomy investor, surveying the global economy, shouldn’t put investment grade corporate bonds at the top their worry list. ● Spring 2019 — 15

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

Seeking yield Peter Bate Portfolio Manager Peter outlines how income investors, who are willing to accept a higher level of risk, could diversify their income stream via a Special Situations portfolio.

Income payers – our ideas

Fund investors looking for income in the current climate face two challenges. The first is finding a decent, inflation-beating yield in a world of ultra-low interest rates.

The second is working out how it has been created and understanding any attendant risks (a point made by Patrick on page 6). For example, some readers may have noted the recent media commentary on a high profile flagship Equity Income Fund, in which only 26 of the 90 companies (29%) actually pay a dividend. Given that dividend-paying stocks make up about 59% of the £4.7bn of assets in the fund, this places investors in the hands of a surprisingly small number of very big payers, such as Imperial Brands, Barratt Developments and Taylor Wimpey. So, this quarter, I’d like to highlight how we can help our investors to generate a diversified income stream.

DWF – a recent IPO in the legal services sector and, with a £380m market capitalisation, the largest law firm to list (by some margin) at the London Stock Exchange. Although we have been investing in legal services related businesses for some years, this could be the first time some of the larger investors have approached the sector. The group is a truly international business and we see a number of drivers to revenue and profit growth. We think that on 11x prospective earnings, with a 6% yield at the time of writing, it offers deep value.

It’s not all about growth Our Special Situations service, with its minimum portfolio of 15 stocks, sourced from a preferred list of about 80 companies, is often viewed as being purely suited to a capital growth mandate.

However, we enjoy the flexibility that comes from offering a discretionary service, rather than a unitised vehicle.

This means that we can build bespoke portfolios that suit a client, whether their individual preference is to avoid certain sectors, or perhaps hope to be rewarded for taking on additional volatility. What some investors may be less aware of is the fact that we can also offer an income skew within an overall exposure to UK smallto-mid cap stocks, subject to carrying out the appropriate suitability checks and assessing any tax issues that may arise.

16 — Spring 2019

Here is a snapshot on some of the stocks that we believe could sit within this type of portfolio. For more information on any of these, please contact an Investment Manager.

Duke Royalty – lending money against mines, pharmaceuticals and even music rights may be a well-established concept, however the Duke Royalty team has taken it one step further and lends based on more varied revenue streams. The non-dilutive covenant-lite nature of the funding Duke provides has proved particularly attractive to owner-managed businesses. As the group builds up its portfolio of royalty streams, we believe that the added diversification should lower the firm’s overall risk profile.

As the yield subsequently compresses, we would hope investors can expect a capital growth boost too.

Walker Greenbank – this upmarket furnishings business has been operating against a tough trading backdrop. Even so, the group has made significant progress recently with its highly profitable design licencing model. Although recent downgrades to earnings expectations have naturally reduced dividend cover, cost cuts and working capital improvements suggest to us that the dividend can be maintained.

GVC – as the largest online gaming business in the world, GVC has faced headwinds on multiple regulatory fronts lately. The recent sale of a large proportion of the shares held by the CEO will also worry some investors. Nonetheless, we believe that the group continues to benefit from its significant scale and restructuring potential, following the Ladbrokes takeover. It also has exposure to the emerging, and potentially lucrative, market for US gaming thanks to a joint venture with MGM. Elegant Hotels – this chain operator is based in the Caribbean and does the bulk of its business in Barbados. The group has suffered, as fragile consumer confidence and a weak pound have hit UK visitor numbers. Meanwhile, US numbers have also been squeezed at the margin, thanks to the impact of competitor offerings from the likes of Airbnb. However, we like the valuation, which we believe more than discounts these issues. We also see scope for significant gains from property development.

Hollywood Bowl – by running the largest chain of alleys in the UK, Hollywood Bowl offers an inexpensive and popular leisure activity that can deliver significant premiumisation and segmentation gains, as well as the potential for the roll out of multiple formats. The firm should also be able to capitalise on a slow commercial property market to secure attractive rents.

PERSONAL VIEW

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

Safecharge – this electronic payment processing business is operationally geared (high fixed costs as a proportion of total costs) and cash generative. Whilst we are normally wary of technology businesses with high dividend yields, we view Safecharge as more of a platform provider and therefore a more solid bet.

With a strong balance sheet, the only big threat, in our view, to the dividend would be a large acquisition that required significant integration investment.

XPS Pensions – as a supplier of actuarial and investment consulting services, this company has earnings streams that are driven by regulation and an annual reporting timetable. Since genuinely acyclical companies like this are very rare, they deserve to be highly rated. Yet, we feel that this is not reflected in the current share price, which is still being held back by issues relating to the integration of a large acquisition made last year.

Strix – this firm is the largest designer and maker of electronic kettle controllers in the world, and by some margin. The safety critical, low-cost component has been mass produced, applying huge economies of scale, by Strix over decades, making it hard for competitors to enter the market.

The shares have always offered a healthy yield, by virtue of the firm’s high cash generation and its capital-light nature.

Norcros – as a UK-focused play, with a focus on bathroom fixtures and fittings, Norcros has understandably faced a challenging trading environment recently. Management have nonetheless coped incredibly well, deploying the balance sheet to good effect in making complimentary acquisitions. Having traded around dividend yield/PE multiple parity last year, the shares have since re-rated but remain good value in our opinion.

Caretech – a provider of care services to children and adults with a range of needs, Caretech has substantially increased in scale following the recent takeover of its closest listed peer, Cambian. We believe that the guidance around resulting synergies given at the time of the merger was incredibly cautious. In particular, we hope to see the benefit of much better staff churn metrics at Caretech filtering through to Cambian, which in turn will drive better care quality scores.

multiple funds rather than just one, with some decent resultant cost savings.

The second is increased demand from investors for alternative investment funds, a trend Sanne is well positioned to service.

In addition to having a high organic growth rate for a business of its size, we expect future expansion to be bolstered via acquisitions.

Adept Technology – the provider of communications and managed services business model hinges on the fact large technology suppliers want a consolidated supply base, whilst small business users face a daunting choice of technology options and ownership models. Adept is a capital-light and cash generative business that has undertaken a roll up strategy within the sector. We would expect to see more acquisitions going forward.

Sanne – the shares of this provider of outsourced fund administration services are driven by twin tailwinds. The first is increasing regulation, which is driving a desire to outsource. This means administration fees are shared across

Cineworld – the recent takeover of Regal means that the bulk of revenue and profit for this cinema group are now derived from the US. Whilst debt levels are high following this deal, strong cash generation should pay this down rapidly. We see upside to market forecasts from higher than expected synergies in the US and a solid 2019 film slate, particularly in the second half of the year.

Eco Animal Health – a veterinary pharmaceuticals business whose key product, Aivlosin, is used in the treatment of a range of respiratory and gut disorders in pigs and poultry. Having spent a long time investing in this product, the group is now reaping the rewards whilst it simultaneously commits to the next generation of product lines. ●

Key data Market cap (£’m)

P/E ratio

Yield (%)

Share price

Currency

Risk rating

364

11

6.0

121

GBp

8

Duke Royalty

86

17

6.5

43

GBp

9

Walker Greenbank

44

6

7.3

60

GBp

9

3197

9

5.8

556

GBp

8

64

7

5.6

71

GBp

9

Hollywood Bowl

315

16

5.0

213

GBp

8

Safecharge

453

19

4.8

295

GBp

8

XPS pensions

278

13

4.9

132

GBp

8

Strix

304

11

4.8

159

GBp

8

Norcros

152

6

4.2

190

GBp

9

Caretech

369

9

3.3

335

GBp

8

75

10

3.0

316

GBp

8

Name DWF

GVC Elegant Hotels

Adept technology Sanne Cineworld Eco Animal Health

744

19

2.6

538

GBp

8

3964

12

3.9

293

GBp

8

299

21

2.3

430

GBp

9

As at 1st April 2019.

For more information about the Killik & Co Risk Rating system, please refer to page 7.

Please speak to your Investment Manager for further information.

Spring 2019 — 17

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

Boosting young brains Jamie Beaton CEO at Crimson Education Following another successful Killik & Co event for a group of ambitious 14-17 years olds at our Mayfair office, Jamie explains how he helps parents to develop tomorrow’s talent.

keeps both students and their parents fully up to date on progress and results. All told, a full program typically takes around two to three years to complete and we get people joining us from about the age of 14.

How did you get involved with Crimson?

How do you find the right staff?

I grew up and was educated in New Zealand. There, it was clear to me from quite a young age that very few students were looking at overseas university options, just as I am sure most UK students were not looking much beyond their own shores at what might be on offer in, say, the US. One day I heard that a student four years ahead of me had gained a place to study at Yale – I made it my mission over the next few years to work out how I could get into a top overseas university. I pitched for places as far afield as the Middle East, Singapore, the US, the UK and Australia. Without much in the way of formal, structured support, I felt as though I was throwing darts blindfolded.

However, as a string of positive responses came back, I suddenly started getting interest from fellow students, asking how they could follow my lead. That’s when I saw the commercial opportunity. In 2013 I created Crimson Education, with the explicit goal of helping local students to bridge the gap between their domestic education and university application system and the equivalent global ones.

For the last six years I have been the CEO of a company that now employs 220 full time staff and has 2,400 mentors on its platform.

What sort of people seek your support?

We tend to be approached by ambitious families that are looking to enhance the educational and career prospects of their children. Many want us to deliver a truly personalised learning experience and the reassurance that their kids will end up in an institution that really suits, and will fully develop, them. As a result, 18 — Spring 2019

our students tend to be ambitious, welleducated and highly motivated. That said, we can cater for all levels of academic ability, provided we manage expectations around the difficulty of getting into some of the most competitive global universities.

What are the key ingredients of a Crimson programme?

Let’s take the UK as an example. One of our challenges is to help students through the Universities and Colleges Admissions Service (UCAS). A typical candidate will apply to five different places with the help of one of our expert Application Consultants. So, we might have a potential Oxbridge undergraduate who has no idea how to choose between Oxford and Cambridge, let alone which individual college to apply to. This choice matters because the chance of getting a place can vary by college and subject. We’ll help them with their personal application and any extra study they may need to undertake to pass the relevant admissions exams.

However, we don’t stop at just the academic side – we’ll also try to enhance their skills and knowledge with extra curricula activity recommendations, leadership projects and summer programs. A typical Crimson support team can therefore end up comprising five to eight different mentors.

Our students then have access to a huge online learning platform full of helpful resources, including video clips from current and past undergraduates. We also run a comprehensive reporting system that

We stand, or fall, by the quality of our mentors. I started our network through my contacts at Harvard, who helped me source some of the smartest academics who wanted to work with us. Now our team comes from many of the world’s best universities – for the UK and the US for example, think Oxford, Cambridge, Yale, Princetown, Stanford and MIT. Usually they will have gone through our program and already have, in many cases, tutoring or coaching experience, coupled with very high exam scores in the relevant tests. We put all of our mentors through a thorough CV and background screen, plus they also receive lots of training from us.

Once they have joined Crimson, our learning platform then operates a reputational points system – after every interaction students rate their tutors and give us very detailed feedback. It’s fair to say that we are aiming to retain exceptional individuals.

We also have a full-time team of strategists, with typically 10-15 years of experience, who help on the admissions side. They need to be deeply familiar with the domestic applications process in their home country but also very comfortable supporting students from all over the world from one of our many global offices. We employ former admissions officers, from places such as Harvard, who can train our team on what is happening on the ground and any key changes they need to be aware of.

Then we have a parent coordination team, who look after reporting and some of the pastoral issues that can crop up – in effect they are a bridge between our mentors, students and parents.

What skills do young people need to succeed in 2019?

We tend to mentor quite a few students who will end up in fields such as finance, technology or consulting. However, regardless of their background and career ambitions, I strongly believe that all young people must grasp that disruptive technology (such as AI) is changing the face of the workplace. Firms from pure new Fintechs through to established law firms are focusing on how they will automate repetitive manual tasks. To thrive against this backdrop requires the ability to think freely and creatively throughout a career. If I could pick three key essential skills, they would be; Quantitative reasoning: an ability to work with data, even if it isn’t a core skill in a particular role, is crucial – most jobs will increasingly require at least a basic ability to analyse and interpret data Communication: strong interpersonal skills, and the ability to persuade others, have always been vital, whether they are applied directly in a sales context, or indirectly in terms of relationship management Integrity: long-term success is built on a sound set of character traits which include honesty and trustworthiness.

How important is pure academic ability?

At no other time in history has academic strength been more important than right now, particularly when it comes to the acquisition of skills in key areas such as quantitative reasoning. In my experience this goes hand in hand with a great work ethic. The high school kids that I saw go the furthest were the ones who were smart, but also worked harder than the rest.

I also believe that a place at a top University can unlock some of the biggest career doors. When I look at, say, Google’s London-based AI team, every single person (including an ex-Crimson student) has a PhD from a great university. Meanwhile, the students that are breaking into the firms like Facebook, Goldman Sachs, Bloomberg, top tier industrial firms, political institutions, or the best notfor-profit organisations, all boast strong academics. Sure, some people succeed on their commercial wits alone, but we don’t hear so much about the many who don’t.

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

One thing is for sure – the odds improve with a strong academic background. When I look at our alumni, I would say that the way they conducted themselves at school between the ages of 14 and 18 heavily influenced their futures.

Are there any downsides to aiming for the top academic places?

In some cases, yes. Whilst we are all about enhancing potential, that translates as helping students find the best universities for them. Some of our intake go onto architecture programmes, others head into the creative arts and a few don’t even go into university straightaway.

Whilst we are known best for our contacts at the top institutions, we also offer help with the admissions process at a wide range of others. For example, we currently coach students who want to study at Williams, a small arts college in the US with a very different feel to many of the larger universities. Ultimately, we have to do what is right for the student – we don’t want people to base their entire identity around getting into a particular college or landing a place somewhere where they will be unhappy.

Inevitably, that means we sometimes spend time on what we call “parent to student alignment”. Quite a bit of the tension and stress we see in young people arises from the expectations of their parents. This can work both ways – we may be dealing with overly ambitious parents, or highly motivated students who feel unsupported. In these situations, it’s vital that we align everyone behind our plan, which is why we put a lot of effort into reporting and stakeholder updates.

What do you say to someone at the end of a Crimson program?

Our key message is that getting into college or university is just the beginning. Once someone gets the place they really want, the clock resets. Now they have the chance to explore new academic avenues and build on the character traits that have got them this far through new friendships and networks.

We also stress the importance of pursuing the things that they are passionate about, rather than falling into whatever is in vogue, or following a path they think is prestigious but they won’t enjoy.

Throughout their lives, people need to really focus on what they love doing and at university they can really boost their chances. Whilst I accept that young people can go through school and not develop any real academic passions, when it comes to higher education they’ve got the opportunity to take some big steps on their journey towards a purposeful career.

To stimulate them early on, we try to give our students exposure to new areas they may never have previously considered.

Otherwise I tend to find young people are just passively passionate about the last thing they’ve experienced – show them a hospital and they want to become a doctor; take them to a law firm and suddenly they are all wannabe lawyers; show them how them a rocket lab works, and they want to become an astronaut, and so on. Young people need to be properly immersed in as many options as possible until they find something they can really get behind.

A key part of this is avoiding the parent trap – doing something because Dad or Mum did it and want to see them follow suit. That can lead to huge conflict and resentment and it’s why we spend time coaching students in how to achieve happiness and mental wellbeing, even if it entails some tricky family conversations.

At a certain point, all parents have to come to terms with the fact that the choices they once made may not be the right ones for their children today. It’s all part of the difficult, but important, process of letting go and allowing their children to thrive on their own terms.

If you would like to find out more about Crimson Education, please go to www.crimsoneducation.org or email Jamie at j.beaton@crimsoneducation.org ● Spring 2019 — 19

A DAY I N T H E L I F E

Lights, camera, stock market action!

Rachel Winter Senior Investment Manager This quarter, Rachel explains how she blends regular media appearances into a busy work schedule.

What does a typical day look like?

No two are ever identical, but there are three common strands to my day-to-day activities. First and foremost, I am part of a team that looks after a broad range of clients and their investment portfolios.

When you factor in face-to-face meetings, phone calls and emails, this takes up a large chunk of my time. Secondly, and related to this, I have to keep up with what is happening in financial markets across the world and ensure that I am well informed about individual stocks – when clients phone, they expect me to have a view. Therefore, another decent slice of my day is spent educating myself and making sure I am on top of market activity. I spend my remaining hours dealing with the media, providing comments to the press and carrying out the occasional television appearance. As many readers will know, I also anchor the weekly Market Update for Killik & Co. Which parts of your job do you enjoy the most?

I love meeting people from all walks of life, whether in the office, out at clients’ houses or inside a television studio, but I also really like learning about different companies and analysing portfolios.

I really enjoy the combination of relationship management and analytics – understanding what a client needs and then designing an investment solution, whether simple or complex, that works for them. Increasingly I work alongside Planners, who are very good at seeing the wider picture and the context in which investment decisions are being made.

What does your client base look like?

The huge diversity of it is what I find both challenging but also very stimulating.

Some of my clients are young junior ISA holders. Others are in their twenties and 20 — Winter 2019

perhaps saving for a first house. Then I have clients in their thirties and forties who are often starting to accumulate serious wealth as their careers bloom. Next come the folk in their fifties and sixties who may be looking towards retirement, having cleared a mortgage and seen their children through education. Finally, my retirees (or part-retirees) are typically focused on generating income and perhaps running down, or giving away, their asset base.

levels of risk, when the truth is they may be better suited to something more cautious.

As a rule of thumb, if a client’s portfolio positioning will keep them awake at night, it probably needs adjusting. Managing risk is as important, if not more so, as generating good performance, which is why I spend time talking to clients about portfolio construction, diversification across sectors, geographies and asset classes, within the context of risk management.

Since quite a few women request a female Investment Manager, I probably have a higher than average proportion of them as clients.

That’s the main reason I also worry about how some of the pure app-based investment solutions out there are being used. Without the right advice, people can easily panic-sell and end up in cash where they will be lucky to earn any return, let alone beat inflation. They also face the dilemma of judging when to get back into the market. Given that the best days often closely follow the worst in stock markets, the ability to dip in and out using fingertip technology creates a potential minefield for novice investors.

What are they talking to you about?

If I could pick out a common thread, it would be a varying degree of anxiety about their finances. When I first meet people, of any age, they often don’t feel confident that they’re managing their money properly, or efficiently. Some fret that they are not saving enough for later life, whilst others are focused on funding a home, or an education for children, grandchildren and even greatgrandchildren. Many are simply unsure of how to get started. So, I spend quite a bit of time helping people to understand markets and the various different investment options that are available to them. The aim in all cases is to take away some of the worry factor.

I also deal with clients who are clearer about what they need to do and are simply looking for solid advice around their investment portfolios and a sounding board for their strategy and ideas.

One common concern, across all ages, recently has been the return of volatility.

Fortunately, I am not seeing any evidence of wide-spread panic, or of people “running to cash”. During trickier stock market patches, I aim to reassure clients about the merits of investing for the long term. Volatility also gives me a good opportunity to revisit risk assessments – when markets are rising, people often say they want to take higher

What solutions do we currently offer?

People coming to me have the choice between advised or discretionary investment services. The right choice for them comes down to their preferences, not to mention time and interest when it comes to investing. In a nutshell, an advised service puts them in control of all investment decisions, whereas with a discretionary service we are the decision maker on their behalf.

In terms of fees, some clients will compare our advised service with execution-only platforms elsewhere. An advised service does cost a bit more but then clients are paying to have a professional on the end of a phone with whom they can discuss a vast range of issues, whether portfolio construction, trade execution, tax, or even estate management. I find that many clients still want the level of personal service that we can offer and access to the discussions that can be had within the advised service. Many of our competitors have moved away from advisory business because of the regulatory environment (for example, in terms of having robust systems that can keep track of diverse portfolios), but we value the depth of mutual knowledge and trust that comes with advised services, often across multiple generations. I talk to, and engage with, my advised clients on a regular basis and the resultant relationships we develop here are second to none.

Can’t people build portfolios by themselves?

Left alone, I find that people sometimes just pick a few stocks that they’ve heard of and may leave themselves very exposed as a result – it’s not uncommon to read about people investing all their pension assets in just one company and subsequently suffering huge losses if the share price collapses.

Here, we start with a client’s objectives and risk appetite and then structure a portfolio accordingly. The result may be a broad spread across many asset classes, or a pure equities skew where that seems appropriate. We also balance UK against international exposure – people often invest within their own shores and yet many of the best global companies are based overseas, often in the US. Also, although some of today’s most exciting companies are technology-focused, the UK stock market, as represented by the FTSE 100, only offers limited exposure to the sector. Buying an overseas stock is really not that different to buying a UK stock, and there is no need to invest solely in the UK. Investors should also not be put off by the fact that some overseas markets are hard to access directly – India or Vietnam for example. In these areas, we will look at the appropriate fund. Combined with our other services, it’s therefore very unusual for us not to be able to fully service a

A DAY I N T H E L I F E

client’s investment needs, as a one-stop shop, in a way that is hard for them to replicate as a lone-wolf.

How did you become the face of the Market Update?

I remember watching it years ago, before I joined the firm, and being impressed with how informative and concise it seemed. I never thought I would get the chance to present it myself. The opportunity came up when the regular presenter went away for a couple of weeks and offered me the slot. I enjoyed it so much that I begged not to hand it back!

The format is still a weekly, short video in which I summarise the main events that have shaped markets over the previous week and offer an insight (in so far as current regulations allow on a public platform) into how our key stocks have been affected. I collate the content myself and am always on the lookout for interesting insights to talk about.

Which of your media roles do you enjoy most?

They all bring different challenges and upsides. For example, I write for the Investors Chronicle portfolio clinic and am involved with their weekly podcast. I have also written for the Financial Times and been published on Reuters. These all demand carefully considered responses.

By contrast, I’ve also made quite a few appearances on CNBC and Bloomberg, as well as given commentary on live radio.

The challenge here, at what can be antisocial times, is responding to questions I may have had little warning about. It’s a very different type of engagement and one that keeps me on my toes.

What does a life well lived mean to you?

I think it’s important to enjoy work because it takes up such a large component of our time. My job provides focus and purpose, plus a chance to use and develop skills.

I feel quite lucky to do something that is interesting, challenging and varied.

However, I also make plenty of time for the things I love outside the office, which currently include skiing and cycling. A life well-lived is therefore about having a plan in place that will balance the two, allow me to achieve my goals and leave me with no long-term regrets.

Are you a saver or a spender?

A bit of both. I know that I need to be putting aside money for my eventual retirement, even if I don’t expect to fully stop working for decades. Set against that, my two immediate hobbies are not cheap! Personally, I find it easier to enjoy the present if I feel financially secure, so I try and achieve a balance between saving and spending.

That said, whilst I can advise my clients, I never impose my philosophy on them.

Understanding their interpretation of a life well-lived is vital in helping me to decide how we should be managing their money.

That’s why, as a firm, we have started to do a lot more cash flow forecasting as it allows us to model income and expenditure and give clients a clear picture of how long their money will last under certain scenarios and the related saving versus spending choices they face.

What advice would you give your peers?

Top of my list would be to get a financial plan together. Many people coast along and assume they will always have some way to generate an income later in life and therefore see no need to balance their finances now.

Some say, “I will never be able to afford a house, so I am not going to save for it” – some of these might be surprised by what can be achieved with a long-term savings plan.

Others are in the opposite position and have become financial slaves to the goal of home ownership, when it simply isn’t for everyone, emotionally or financially.

Perhaps the simplest piece of advice I can give nervous investors is to just start somewhere, rather than worrying and procrastinating. To help reduce the “fear factor” we try to educate and empower our clients by giving them all the investing basics. Our forthcoming app, Silo, should then help to make the process of getting started as easy as possible. ● Spring 2019 — 21

INVESTMENT MANAGER VIEW

Implanting profits Rachel Winter Senior Investment Manager As we live longer lives, our teeth are struggling to go the distance. That’s prompting healthcare-aware consumers to demand new ways to preserve, or replace, their originals. Here, Rachel takes a look at two firms that are benefiting from the growing demand for a long-lasting, perfect smile.

Now though, dental implants are considered preferable in many cases.

Firstly, they interface with the bone of the jaw and can support an individual synthetic tooth that will not decay. They are also more aesthetically pleasing than dentures, with the added benefits of being permanent and easier to clean. That’s why demand is escalating, even though a full set can cost up to £50,000 in a developed economy. That’s good news for my first play on the dental theme – Straumann Holdings.

The Straumann solution

Longer lives, fewer teeth Bad teeth have been a British stereotype for decades. Film characters, such as Austin Powers, have made the wonky smile into a defining feature. There is even an episode of US cartoon the Simpsons that features a dentist terrifying his patients with the ‘Big Book of British Smiles’. So, in 2015, Harvard University and the University of London decided to put this old cliché to the test by joining forces to conduct the first ever systematic comparison of British and American teeth.

The result caused a few wry smiles – the study actually put the Brits ahead in terms of overall oral health. However, it also found that the average adult from both countries is missing seven teeth, while a later study by the American College of Prosthodontists claimed that 30% of Americans over the age of 65 no longer have any of their originals. On both sides of the pond, it seems that although overall dental hygiene has improved significantly over recent years, our growing longevity is putting our teeth at risk over the long-term. The challenge is what to do about it.

For many years, dentures were the only viable option for those with absent incisors.

22 — Spring 2019

A leading competitor in this market, Swiss firm Straumann produces a vast variety of different types of implant. Evidence of the popularity of its range came through in 2018, when the firm achieved organic growth of 19%, clocking up its best performance in ten years. It has an impressive global reach and currently derives one third of its revenue from emerging and frontier markets. Brazil counts for over 8% of that, helped by its exposure to the so-called ‘dental tourism’ industry. Increasing numbers of patients are travelling to the country to use the cheaper services available there rather than face a much larger bill at home.

This company is no one-solution wonder – its roots lie in more traditional orthodontic treatments, such as braces where its digital progress has been particularly impressive.

Last year Straumann invested in a company called Dental Monitoring, which produces remote monitoring systems that can be linked to smart phones. Rather than having to physically attend check-ups at regular intervals, orthodontic patients can upload pictures via the Dental Monitoring system and then some clever artificial intelligence (AI) software detects changes in tooth alignment. Once the relevant orthodontist has been notified, they can identify when a patient is ready to progress to the next step. Straumann believes that this potentially game-changing process could be further developed and applied to tooth decay and oral health.

Embracing technology Meanwhile, tooth alignment procedures are becoming more popular as more of us hanker after perfect rows of pearly whites (perhaps for those all-important selfie moments). Adult braces are therefore now more prevalent than ever before. “Clear aligners” have become particularly popular in recent years – these removable devices are less disruptive than traditional ‘train tracks’ and can also be fitted and monitored by regular dentists, as opposed to orthodontists. In a recent edition of the American ‘Journal of Clinical Orthodontics’, the editor penned a piece entitled ‘the end of braces’, in which he extolled their virtues.

Little wonder then that the market is currently expanding by over 15% per year.

The leading global brand in this space is called Invisalign and is owned by a US company called Align Technology. In the fourth quarter of 2018 the firm celebrated its first $2bn year of revenue, notching up clear aligner volume growth of 32% for the full year 2018, compared to 2017.

More impressive still is the revenue growth from its digital scanners business. In the past, patients wanting braces or aligners had a clay mould made of their teeth, which would then be sent to wherever the aligners were being produced. Today, this part of the process can be performed digitally, using a scanner. Last year, 88.7% of US Invisalign orders were submitted this way. In China, the proportion went from virtually zero to 45.9% in just a year.

Big strides in the use of digital technology have also worked wonders when it comes to marketing the product. Potential customers can ask for a scan which, combined with the relevant software, can show them how their teeth could look following treatment. This powerful tool is helping Align to build a sizeable social media following as, unlike prescription drugs, orthodontic treatments can be marketed directly to patients. Their dream is to make Invisalign a household name to the point where patients start actively requesting it. ●

PERSONAL VIEW

B R A N D U P D AT E

Building the House of Killik Sophie Ralls Brand Director Following another successful three-day residence in Mayfair just before the end of the tax year, Sophie explains how the House of Killik concept is evolving.

What is the thinking behind this initiative?

House of Killik was devised to excite and inspire people from all walks of life about the world of investing, and challenge the perception that our industry is remote and inaccessible to anyone who is not already well-versed in the ‘jargon’. It is a way to reconnect with those who feel underserved by the industry, or may have lost faith in the wake of the financial crisis a decade ago, while also speaking to those who have never encountered or considered investing before.

To do this, we created an inviting, inspiring, informal space that physically embodies who we are at Killik & Co, and subtly demonstrates how what we do helps people in their everyday lives. Rather than running conventional financial seminars, we had to design a wholly new format; hosting innovative events and informative debates with much-loved and like-minded consumer brands and businesses, who we felt our existing clients and target audience would relate to.

Where else has it been showcased?

We first tested the concept at our Mayfair branch, on Grosvenor Street in 2017; a grand building in the heart of London, which might feel to some an intimidating and inaccessible presence from the pavement. We welcomed people from all over London to enjoy a variety of informal events about business and investing; from conversations with fund managers to panels on starting a new business, or how we might travel in the future. The result far exceeded our expectations and was so well received that we quickly amplified the concept and ran it in Soho, as a seven-day residency in Bateman Street in 2018. This location was chosen specifically

to speak to an entirely new market – people who might not think of themselves as ‘savers’ let alone ‘investors’. We wanted to challenge their preconceptions and help them to reconsider their relationship with money and finance.

The natural progression was a permanent venue for House of Killik in Northcote Road, SW11. Last summer we created a hub for young professionals and families – a “home away from home” in the form of a physical, accessible space for local residents where they can explore ways to save, plan and invest in an inviting, unintimidating environment. Opened almost a year ago, Northcote Road is going from strength to strength.

Above all, we want to reconnect saving and investing with everyday life. Whether you are talking about the businesses we work for, the things we buy, or where we choose to travel, we are constantly making choices about how we spend our time and money. This has, in turn, informed the brands and businesses that we have been working with across the entire House of Killik series – from spinning studio Psycle to cycling brand Rapha; adventure-maker IGO to Virgin Holidays; non-alcoholic spirit distiller Seedlip to English winemaker Gusbourne; design studio Sebastian Cox to professional organiser Vicky Silverthorn and small business magazine, Courier.

How will you judge its success?

As a result, House of Killik in Mayfair was revived this Spring to celebrate the end of the tax year – another example of an industry-wide annual ritual that has yet to resonate and connect with people, beyond form filling and hitting the 5th April deadline for those already invested, and at all with those who aren’t. We ran a series of lifestyle and finance events, which linked back either to people’s passions – addressing the very reasons anyone saves and invests in the first place – or ways in which they could become more efficient and get the most out of their lives, time and money.

What sorts of events and speakers have you hosted?

Every event we host at House of Killik links back to our four core missions as a business; to offer investment advice and insight; to empower, by sharing our expertise and shining a light on the importance of advice; to educate and make investing accessible to all; to inspire people to discover their life well lived, and give them the tools that will help them to live it.

House of Killik is about redefining the meaning of wealth and bringing it back to its roots. It is also about challenging people’s negative perceptions of the financial industry, by changing the way it works and engages with its customers. To encourage people to save and invest for a longer, but increasingly uncertain, future, we want to make the process as attractive and exciting as when we engage with our favourite fashion brands, travel companies or hotel groups. If we can reconnect with savers by offering elegant, effortless and enjoyable solutions, then we will be doing our job.

What can clients look forward to in 2019/20?

House of Killik, Northcote Road will continue to run a series of informal events relevant to the needs and passions of the local community in Battersea. Meanwhile, the central Brand team will further explore and evolve the concept and look at new ways to bring it to life. To join this journey and be the first to find out about our latest initiatives, please sign up to our newsletter at www.killik.com/events. You may also like to try The Edit for our online series of inspiring articles, interviews and video content. ● Spring 2019 — 23

Good things come to those who wait Investing is a way to nurture your savings; giving them the best opportunity to go further. When practised over the long-term and combined with the tax-efficiency of a stocks and shares ISA, the benefits can be substantial.

So make the most of the time you have now, at the beginning of this new tax year, by investing today and embracing the power of slow.

Contact your adviser to find out more.

As is the very nature of investing, there are inherent risks and the value of your investments will both rise and fall over time.

Please do not assume that past performance will repeat itself and you must be comfortable in the knowledge that you may receive less than you originally invested. Killik & Co is authorised and regulated by the Financial Conduct Authority.