Acting for clients as they would want to act for themselves
Summer issue 2019 Published quarterly
C O N F I DAN T Save | Plan | Invest
Delivering diversity
Passing it down
Healthier portfolios
In the Youth Zone
Why the City needs more women, p5
Svenja Keller on intergenerational planning, p12
Ideas from the cutting edge of medical care, p16
We meet entrepreneur and charity CEO Mark Davies, p20
Playing Asia Our emerging champions, p10
C O N TA C T S
Head Office
Locations
46 Grosvenor Street, Mayfair, London W1K 3HN
Chelsea James Dunn 45 Cadogan Street, London SW3 2Q J T: 020 7337 0590 E: chelsea@killik.com
Richmond Ian King 2 Paradise Road, Surrey TW9 1SE T: 020 8948 7337 E: richmond@killik.com
Chiswick George Harrison 23 Chiswick High Road, London W4 2ND T: 020 8090 3303 E: chiswick@killik.com
Wealth Planning Svenja Keller 46 Grosvenor Street, London W1K 3HN T: 020 7337 0724 E: svenja.keller@killik.com
Esher Paul Martin 9 Esher High Street, Surrey KT10 9RL T: 01372 464877 E: esher@killik.com
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Private Client Team Simon Marsh, Fred Robinson, Kristian Overend, Michael Pate, Michael Berry, Gary Meredith T: 020 7337 0400 Mayfair Team Julian Spencer, Jeremy Sheldon T: 020 7337 0714 Grosvenor Team Fabrizio Argiolas T: 020 7603 5203 Killik Asset Management Graham Neale T: 020 7337 0008 Family Office Jer O’Mahony T: 020 7337 0664
Killik & Co is a trading name of Killik & Co LLP, a limited liability partnership authorised and regulated by the Financial Conduct Authority and a member of the London Stock Exchange. Registered in England and Wales No OC325132. Registered office: 46 Grosvenor Street, London W1K 3HN. A list of partners is available on request. Telephone calls are recorded for regulatory purposes, your own protection and quality control. This communication has been approved by Killik & Co for distribution to retail clients. The value of investments and the income from them may vary and you could lose some or all of your investments. Past performance of investments is not a guide to future performance. The tax treatment of investments may change with future legislation. Prior to taking an investment decision based on the content of this publication, investors should seek advice from their Investment Manager on the suitability of such investment for their personal circumstances. Killik & Co accepts no liability for any loss or other consequence arising from the use of the material contained in this publication to make investment decisions, where advice has not first been sought from their Investment Manager. Killik & Co has no obligation to notify a reader or recipient of this publication in the event that any matter, opinion, projection, forecast or estimate contained herein changes or subsequently becomes inaccurate, or if research coverage on the subject company is withdrawn. Partners or employees of Killik & Co may have a position or holding in any of the investments covered in this publication. You may view our policy in respect of managing conflicts of interest on our website.
PERSONAL VIEW
FROM THE EDITOR
Empowering families Tim Bennett Head of Education “The responsible one”. That label has stuck with me for years, even as the eldest of three siblings who all get along and pull their family weight in their own ways. For some of my peers, who seemingly can’t rely on their adult siblings for much, it’s a role that weighs much more heavily. As for only children, I imagine the sense of responsibility is magnified further still. I mention this because I reached that stage in life ten years ago when loosely defined family roles are tested. After a decade-long decline, my father passed away last year, aged 83, whilst my mother has been through the huge associated emotional challenges that I am sure many readers will be able to empathise with. Whilst this might seem like a morbid way to open the Summer Issue of Confidant, my message is not. Recent experience has rammed home two things very strongly. The first is the value of co-operation across and within family generations. The second is the importance of getting organised well before, as my father-in-law once put it, “the roof falls in”. As a qualified chartered accountant, in a family where my father had looked after all things financial for decades, I initiated the difficult conversations and got involved, along with my siblings, in both my parents’ financial affairs and welfare
I would therefore urge anyone who may be thrust into this role, especially without my background, or the support from other family members and friends that I have enjoyed, to consider seeking external help as early as possible. Whilst no-one can take away the huge emotional stress of situations like this, there are ways to reduce, or even remove, the administrative nightmares that await the poorly organised and ill-informed. Here, I will highlight just four things I am glad we dealt with as a family early enough; ––
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Creating lasting powers of attorney (LPAs) for parents (and grandparents). These allow someone else to make decisions on their behalf, regarding their welfare and finances, when they no longer have the capacity to do so themselves. Be warned, they take a bit of time to get right and register properly, the contents can require some sensitive conversations and there are traps for the unwary when it comes to assigning responsibilities Sorting out wills and reviewing existing ones. Families need to be clear about who will carry out the administration of any estate (the
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Getting on top of family finances, including financial plans and budgets. Long-term care, for example, is very expensive. Reviewing portfolios and other assets relating to older family members, will flag up whether enough capital will be available to meet what could one day become a big “foreseeable call” as Paul Killik calls it. This process will also help to identify “surplus” assets that could be passed down tax-efficiently
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Talking. Family members from different generations need to start having open and honest conversations with each other about the future and their expectations
None of this is easy and nor is predicting everyone’s reactions when these issues are raised. However, the benefits of tackling them early can be enormous, a point that our Head of Wealth Planning, Svenja Keller, returns to on page 12. I hope you enjoy reading her article along with the rest of this issue. ●
C OMING UP
SECURITIES IN THIS ISSUE
Whither regulation? P4
Blackrock Frontiers fund p9,
Central Bank antics P6 Emerging funds P8 Bond index blues P15 Through the keyhole P18 News roundup P21
“executor”), who will look after any minor children (the “guardian”) and who will subsequently inherit what. Given that lives can change fast (if, for example, older couples separate), existing wills shouldn’t gather dust for too long
in good time. Nonetheless, the process was pretty daunting and still provides moments of unexpected stress.
Stewart Investors Asia Pacific Leaders fund p9, Fidelity China Special Situations p9, Nike p11, Airbus p11, Standard Chartered p11, Prudential p11, Nidec p11, Alibaba p11, Tencent p11, Caretech p17, CVS Group p17, Ergomed p17, YourGene p17, Diurnal p17, London Metric Property p21, Orsted p21, Greencoat UK Wind p21, Royal Dutch Shell p21, Visa p21, PayPal p21, L’Oreal p21 Summer 2019 — 3
VIEW FROM THE TOP
Resetting our regulatory compass Paul Killik Senior Partner Paul explains why he is worried about the direction of travel when it comes to UK financial markets regulation. Before I get to the heart of this quarter’s article, I would like to set the scene by making three important points. Firstly, I acknowledge that we are all fed up to the back teeth of what has become a tortuous Brexit process, so I approach the authoring of any article connected to it with some trepidation! Secondly, I fully recognise that the issue I raise below represents only one piece in a more complex jigsaw. Thirdly, I would like to emphasise that I am not trying to make a judgement call either way and fully respect both sides of the wider debate. With those caveats penned, I shall summarise my point of concern.
Principles or rules first? “I think there are at least two important questions to answer on EU and UK regulation in the context of a future post-Brexit. First, are the EU and UK approaches to regulation notably different, and what does this imply for the future? And second, what sort of equivalence arrangements should we want and expect? These are obviously big questions. So, what follows only scratches the surface in the interest of getting the debate to progress.
I am not alone in this and was pleased to hear an important speech given in late April by Andrew Bailey, the CEO of the Financial Conduct Authority and a current front-runner to succeed Mark Carney as Governor of the Bank of England. I feel that his authoritative views warranted a wider audience than they received at the time and I have therefore reproduced a short extract from his full speech, which I would urge you to read and consider. 4 — Summer 2019
But there are very sensible challenges to this view of an underlying difference of legal approach which assert that EU law for instance is more of a hybrid of the two traditions, a mix of reason and experience. And, clearly since the 1970s the UK approach has become more hybrid as the EU space has expanded. I will though make one practical observation, which may have considerable implications for future choices. If you look around the world, you find that wholesale financial markets are more commonly found in countries with common law systems. I don’t think this is an accident or random act. Wholesale markets work better in systems that base their rules and principles more on experience.
A Gordian legal knot In short, I have for some time been personally alarmed by the ongoing erosion (and the likely eventual loss) of our Common Law legal system. This can be largely attributed to the increasing effects of codification upon UK financial regulation. The United Kingdom and the Republic of Ireland are the only two current EU member states that operate under the Common Law system. Most of the rest favour civil law, as codified by Napoleon and subsequently distributed across Europe during the 19th century. My issue here is that I struggle with how the concept of ever-closer integration can be meaningfully pursued in the context of two distinctly different legal jurisdictions.
reasonableness and fairness through the use of discretion which respects the values and attitudes of the time. I am all too aware that views on what is fair and reasonable can differ.
It is easy to draw a simple distinction and note that the UK’s legal approach is rooted in common law and developed more through case law, while the EU system has deeper roots in the continental legal tradition of codification and greater use of statute rather than regulatory rules. On this basis, the UK approach (I am deliberately ducking the English versus Scottish legal tradition here, simply noting that Scottish law is more of a hybrid of the two traditions) is based more on the experience of cases, evolving in response to changing conditions and conceptions of the public interest. It is thus more inductive rather than being deductive in the sense of drawing from a single vision of a legal system. But to be clear, I don’t see this observation as inconsistent with Parliamentary sovereignty – it’s about how that system is put into practice. And in the world of public or administrative law – of which our world is part – the task is to apply standards of
What does that mean for the future? Left to our own devices, I think the UK regulatory system would evolve somewhat differently. It would I think take on board practical experience more rapidly, and it would be based more on principles that emerge from experience in public policy and somewhat less on detailed rules that can tend to become overly set in stone.” Living with a hybrid It could be argued, as Andrew Bailey himself confesses in the extract above, that we have lived with something of a hybrid for centuries, when looking at the position of the Scottish legal system within the UK. Notwithstanding the sensitivity about Brexit, I nevertheless think his speech raises important questions for anyone concerned about the future direction of the UK’s financial system. I will leave you to draw your own conclusion on his remarks – should you wish to read the speech in full, it is available at www.fca.org.uk/news/speeches/ future-financial-conduct-regulation ●
O P I N I O N
Why fund management needs more women Matthew Lynn Columnist and Author Matthew sums up why he thinks it is time for money managers to make room for more of their female peers. Ask the average investor to name three famous UK fund managers and chances are their answers will include the likes of Terry Smith, the now retired Anthony Bolton and, for arguably all the wrong reasons, Neil Woodford. Aside from their choice of career, this trio all have something obvious in common – they are men. I would argue that this needs to change. Recent research suggests that a male-dominated asset management industry, that is under increasing pressure to justify its fees, needs to respond quickly to the fact that women may make better investors. Testosterone at the top Can you name a single leading female fund manager, let alone three? Quite. Much like the rest of the financial services industry, running money for other people has traditionally been dominated by men. This hasn’t changed very much, even as the rest of the world has moved on. According to the Department for Work and Pensions, 62% of the British workforce are female, as are 44% of accountants, 48% of GPs, and 24% of solicitors at Partner level. Yet, just 7% of UK-based funds are managed, or co-managed, by women. Even in the supposedly progressive United States, the equivalent figure is just 10% according to Morningstar. The conclusion? Buying and selling shares for a living remains largely an all-boys’ club in 2019. This has nothing to do with a lack of ability on the part of women and everything to do with a relative lack of opportunity within the industry. Turning to ability, Warwick Business School recently tracked 2,800 investors and then measured their returns by gender. The men they followed managed to outperform the FTSE 100 by 0.14%, a decent result given how hard it is to beat the market. However, the women in the same sample chalked up average returns 1.94% ahead of the benchmark. Meanwhile, another study by Hargreaves Lansdown found that women on their platform out-performed
men by an average of 0.81% annually over a three-year period. Were that pattern to be extrapolated over 30 years (never an entirely wise thing to do, but bear with me), the women would end up generating a 25% bigger pot. So, are women doing something different from, and better than, their male peers? As the body of evidence builds about their ability to invest successfully, it seems that they may be, on at least three scores. Investing, not gambling Firstly, in general it seems that women are more risk averse. Studies of the way men and women invest suggest the latter take far fewer gambles, much as they tend to do in other areas of their life (when driving, for example). Sometimes that might mean that they miss a genuinely hot opportunity, but it also reduces the risk of buying a pup. Whilst no-one gets rich by staying entirely safe when it comes to investing, an ability to see through hype and stick with a strategy is vital to long-term success. Letting things be Next, women appear to be less prone than men to tinker with something that works, which manifests as lower levels of portfolio “churn”. This, in turn, may reflect the fact that they tend to spend less time worrying about timing the market and are better able to do what the likes of Warren Buffett and Terry Smith advise, which is to buy investments and then hang onto them. It’s not as exciting as regularly trading a portfolio but, given the lower frictional costs involved, it tends to work out well over long periods. Some critics of Neil Woodford, for example, have pointed to the fact that he seemed to get frustrated (and perhaps even bored) running a relatively transparent and stable income mandate. His troubles duly began once he was tempted to start dabbling in illiquid parts of the equity market where he was not necessarily considered the expert and where his transactional costs were higher. Speaking of which…
Keeping costs down The third reason it seems that women may have an edge over men is that they tend to hold a heavier weighting in index-tracking products of one sort or another. Whilst female fund managers do allocate money to genuine active talent, especially where there is no obvious, or efficient, index available or a manager has a proven track record in a specialist part of the market, they are more inclined to invest passively as a default. It may simply be that women are more likely to accept their own (and their peers’) limitations and are more cautious about committing money when they don’t know enough about a particular area of the market. The bottom line Clearly there is a lot more work to be done here. However, a growing body of evidence suggests that within the realm of active fund management, as it comes under increasing levels of scrutiny and rising pressure from passive investing, it makes more sense than ever to seek out the best talent. And the evidence suggests that means recruiting and promoting more women. Meanwhile, we should all remember a few simple lessons from the way women appear to approach money management – stick to what you know (and make sure anyone managing your money for you does the same), don’t fiddle with a portfolio for the sake of it and, as far as possible, keep your costs low. ● Summer 2019 — 5
THE BIG PICTURE
Stoking the US stock market Patrick Gordon Head of Research
140 120
120 100
92
80
73 58
60 40
120
106
37
45
39
36
Cajoling the US consumer
24 20
Mar-91 to Mar-01
Nov-01 to Dec-07
Jul-80 to Jul-81
Nov-82 to Jul-90
Mar-75 to Jan-80
Nov-70 to Nov-73
Apr-58 to Apr-60
Feb-61 to Dec-69
Oct-49 to Jul-53
May-54 to Aug-57
Oct-45 to Nov-48
0
Jun-09 to Present*
12
*Ongoing as at June 2019 Source: National Bureau of Economic Research
However, a closer look beyond the headline data, reveals a period of growth that has been long, rather than strong – most notably, it has failed to reach the heights of most similar periods since the Second World War. High levels of unemployment, coupled with the need for banks to rebuild their balance sheets in the wake of the financial crisis, acted as a drag in the early stages of the recovery and it therefore took a long time before the US Federal Reserve (Fed) felt sufficiently ‘comfortable’ to start removing some of the monetary accommodation which has been a major feature of the current expansion. 6 — Summer 2019
Whilst Trump’s main focus may be his re-election prospects in 2020, with consumption representing around two-thirds of US GDP, the strength of the consumer is extremely important to the health of the US economy and therefore markets. Arguably, it is even more so in an environment in which a strong dollar and trade tensions can weigh on exports and economic uncertainty causes firms to delay capital investment decisions. That is why the US consumer’s propensity to spend undoubtedly warrants the attention of policymakers. In that context, whilst the lowest unemployment rate since the early 1960s (3.6% in May) and wage growth above the rate of inflation are positive for household finances and consumer sentiment, a falling stock market is not. The potential effect on confidence may, in turn, impact spending and ultimately the US economy (chart 2).
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Jun 19
Jun 17
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Jun 14
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0 Jun 11
0 Jun 12
Chart 1 – US economic expansions since World War II (months from trough to peak)
Nonetheless, the last 0.25 percentage point increase in December 2018 left investors unimpressed. Equity indices fell sharply and the Fed received criticism that it’s ‘autopilot’ approach to raising rates may have resulted in a hike too far at a time of political and economic uncertainty and with inflation still below target. US President Donald Trump has been amongst its most outspoken critics – in June he re-emphasised his displeasure with the tweet: “The Fed Interest Rate is way too high, added to ridiculous quantitative tightening! They don’t have a clue!”
S&P 500 Index Conference Board US Consumer Confidence 3500
Jun 10
The current US economic expansion is a decade old, which puts it on the cusp of becoming the longest since at least 1854. That is according to the body that determines the official start and end dates of US recessions, the National Bureau of Economic Research (NBER). See chart 1 below for the data since World War two.
Chart 2 – Conference Board US Consumer Confidence Index and S&P 500 Index
Jun 09
A never-ending story?
The Fed duly raised the Fed funds target interest rate in increments of 0.25 percentage points from a lower limit (“bound”) of zero (and an upper one of 0.25%), where it had been for the seven years up to December 2015, until it hit 2.25% (with an upper bound of 2.5%).
Jun 07
Steering a tricky rate path
Jun 08
With all eyes back on the Federal Reserve’s interest rate policy, Patrick weighs up recent key US data and offers a pointer to active investors.
Source: Bloomberg
Testing the “Powell put” For years now, investors have taken comfort from an expectation that the Fed will adopt an easier policy stance if economic data weaken and the markets sell off. Indeed, this effect has become known as the ‘Fed Put’, or more recently the ‘Powell Put’ after current Fed chairman Jerome Powell. The Fed’s efforts to calm markets by slowing the pace of its programme of balance sheet reduction and pausing rate hikes, following the equity market sell-off in the fourth quarter last year, were well received and helped markets recover strongly after Christmas. Furthermore, in May this year, following a worse than expected jobs number, expectations increased that the Fed would go even further and begin to cut interest rates. Equity indices pushed upwards once more in anticipation, egged on by an unexpected intervention from ECB President Mario Draghi who indicated recently that Eurozone rate cuts may be back on the table. The good news is that the Fed arguably has more scope than most other major central banks to cut rates to deal with a deterioration in the economic outlook.
THE BIG PICTURE
the outlook for global growth weighed on sentiment. The potential tightening of the regulatory oversight of some the world’s largest technology companies hasn’t been universally welcomed either. Data-chasing dangers
That’s thanks to the steps it has taken in recent years towards normalising monetary policy (chart 3). Recent rhetoric from members of the Federal Open Market Committee (FOMC) that sets interest rates, suggest that a cut in the Fed funds rate is being given serious consideration. James Bullard, president of the St Louis Fed and a voter on the FOMC indicated in June that lower interest rates “may be warranted soon”. Meanwhile, Fed chair Jerome Powell stated that the Fed would “act as appropriate to sustain the expansion”, a sentiment he reiterated following the June meeting, at which rates remained unchanged. As a result, at the time of writing, the markets are pricing in a very high probability of a rate cut at the July meeting. Chart 3 – Central bank interest rates (US, EZ, UK) Fed Funds Rate BoE Base Rate ECB Main Refinancing Rate 8 7 6 5 4 3 2 1
Dec 18
Dec 14
Dec 16
Dec 12
Dec 10
Dec 08
Dec 04
Dec 06
Dec 02
Dec 98
Dec 00
0
Source: Bloomberg
While markets have, in general, responded positively to the potential easing of the Fed’s policy stance, other developments have been less well-received. For example, the re-escalation of the US-China trade dispute in May, and concerns over the potential impact that this could have on
What this somewhat mixed data picture reveals is that, at any one time, a number of factors may influence markets in either direction. These include geopolitical events alongside news and data, both economic and corporate. As a result, market sentiment can turn quickly, creating periods of sometimes significant volatility. Correctly predicting how markets will respond in the short-term can therefore be extremely difficult. For example, what may seem like a strong economic data point, on the face of it, may be poorly received by markets if it fails to meet expectations, or leaves investors mulling the likelihood of a less friendly investment environment. The opposite can also hold true when it comes to weak data. Furthermore, other unrelated factors can emerge that outweigh the seeming importance of an individual data point at any one point in time. So, while we believe it is important to follow global macro and political events and be aware of their potential implications, we do not believe that longer-term investors should seek to time their entry or exit from the markets based purely on them. That is why we emphasise proper diversification and the overall asset allocation across a portfolio. For investors who are able to withstand bouts of short-term volatility, our view remains that it is time in, rather than attempts to time, the markets that will produce better returns over the longer term. Our thematic approach reflects this as we continue to seek out investment opportunities in areas that can benefit from permanent structural changes. These include the growth opportunity from the developing Asian economies (as Gordon explains on page 8) as well as those emerging from technological disruption, changes in demographics and the growing environmental challenge. To find out more about these key themes and our specific ideas about how you could benefit from them, please speak to your Investment Manager. ●
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.
Summer 2019 — 7
FUNDS RESEARCH
Gaining from Asia’s acceleration Gordon Smith Senior Fund Analyst Gordon explains how investors can best achieve a broad exposure to the world’s long-term growth engine.
Chart 1 – Total Population by Region <20 years 40-64 years
20-39 years >65 years
Chart 2 – Number and share of the global middle class by region North America Central and South America Sub-Saharan Africa
5
Always connect
Emerging giants Despite occasional setbacks, the Emerging and Frontier economies within Asia continue to grow at a faster rate than their Developed market peers. China, for example, has already surpassed the United States as the world’s largest economy, when measured in purchasing power parity terms. Meanwhile, population sizes within the region now dwarf those of other regions around the world. At over 4.4bn, what we would define as Asia equates to over 12 times the population of the US. Importantly, the demographic profile is also more favourable from a growth perspective, compared to both America and Europe. Over 1.4bn of the economically crucial age bracket of 20-39 year olds reside in the region (Chart 1) and in many of its developing economies, this age cohort continues to grow proportionally with the wider population. The urbanisation rate is also expected to rise strongly over the coming decade and will remain an important factor in the growth of the region’s wealth. Asia today 8 — Summer 2019
4.42bn
6,000
4 Population (billions)
Just two statistics paint a picture of Asia’s potential. The first one is that 60% of the world’s population now lives there and the second is that the wealth of this demographic is growing at a faster rate than anywhere else on the planet. A further recent game-changer for the region is the fact that Asia-led diplomacy and networking are leading to its many and varied economies becoming ever more interconnected. Which leads me to a third statistic for any remaining doubters – trade between Asian countries is now greater than the region’s entire trade with the West. These huge structural trends combined are propelling Asia to an ever more important role in the global economy, which is why we believe that the region should be well-represented within client portfolios.
Europe Asia Pacific Middle East & North Africa
5,000
3
4,000
2,000 46%
1.19bn 1
0.63bn
0.74bn 1,000
0.36bn 0
65%
3,000
2
North Latin America America & Caribbean
Europe
Africa
Asia
Source: UN Department of Economic and Social Affairs: World Population Prospects: 2017 Revision
is already home to 12 of the world’s 23 megacities, defined as urban areas with populations in excess of 10m (of which the UK has just one, London). In China, urbanisation is expected to increase by an eye-popping 21% to hit 76% of the population by 2050 and in India by 18% to get to 50% by the same point. A recent study carried out by the Brookings Institute estimated that, due to the sheer size of their populations and correspondingly faster economic expansion rates, over 83% of middle-class consumption growth over the period to 2030 will come from Asia (Chart 2). It won’t therefore surprise you to read that 15 of the top 20 busiest international airline routes now link the region’s cities. As these economies continue to develop and drive a progressively larger share of total global economic growth, Asia’s influence is set to become ever more dominant. However, the inevitability of this long-term trend won’t stop the US trying to stem the tide in the short-term. The passing trade squall Headlines will, for now at least, continue to be dominated by the trade negotiations between the US and China, with the terms
0 2015
2020
2025
2030
Source: Brookings Institute: The Unprecedented Expansion of the Global Middle Class (Feb 2017) – Homi Kharas
of any deal likely to become an important tool in President Trump’s 2020 election campaign. It is fair to predict that any further escalation in retaliatory tariffs between the two countries, without the commensurate clarity on a compromise solution, will hurt investor sentiment, delay capital expenditure and have some negative impact on global economic growth in the short term. However, we believe that media obsession over this ongoing “trade war” and the rumbling trade negotiations that accompany it, hides many of the important longer-term structural trends already underway within Asia. Since the last major Asian crisis in 1997-98, for example, many of the area’s economies have evolved their financial positions to a point of having far less reliance on foreign US dollardenominated capital, coupled with significant reductions in the fiscal and trade deficits of the past. This is a function of the fact that the growth in trade between Asia’s various economies has increased at a rate far exceeding that of broader global trade with the region. Internal trade, as a percentage of total trade, is estimated to have nearly doubled from 29% in 2009 to 57% in 2016, lowering the importance of Western economies as economic partners.
Our view is that this increasing interconnectedness is likely to be a highly significant feature of the next phase of growth. We then see big scope for the region to be given another push from another source – the huge populations within Asia’s less well-developed countries. Examples include; Indonesia, Pakistan, Bangladesh, the Philippines, Vietnam and Thailand. Between them, these countries account for nearly 1 billion people. The Belt and Road Initiative (BRI) is a recent manifestation of their increasing connectivity – the first China-led BRI summit in May 2017 was attended by representatives of 68 countries, accounting for close to two thirds of the global population and half of its gross domestic product (GDP). Clicks over bricks We also believe that the future speed of development of the emerging economies will benefit from the fact that an increasingly broad spectrum of advances can be achieved using new technological developments, without the need for more costly bricks and mortar infrastructure. One of the most notable examples is the leapfrogging of traditional, cumbersome landline telecommunication by digital mobile telephony in China. This has seen teledensities (the number of phone connections for every one hundred individuals) grow from less than 10% to 80% within a 15-year period. The same scale of change took multiple decades to achieve in the US. Ways in for investors The three funds summarised opposite are all Asia-focused constituents of Killik & Co’s Emerging Markets Service. This fund-based managed service aims to provide access to markets that are generally exposed to the less developed, but faster growing, regions of the world. You should be aware that whilst the stock markets that meet our criteria should offer attractive long-term growth prospects, they may also exhibit higher than average levels of volatility. In many cases, they can also be difficult to access efficiently by individual investors. That is why our strategy seeks exposure to these markets via collective investment funds. Our aim is to benefit from the expertise of a select number of specialist Fund Managers who have the appropriate regional experience both in stock-picking and diversification which, in turn, will help us to reduce short-term volatility. ●
PERSONAL VIEW
FUNDS RESEARCH
Key fund data and charts Each quarter we look at the funds that we think should form the cornerstones of a portfolio, subject to your aims and objectives. Here are three core holdings that we feel offer a good way to access the emerging Asia story over the long-term. To discuss any of these in more detail please contact your Investment Manager. Income & Growth
Growth
BlackRock Frontiers
Stewart Investors Asia Pacific Leaders
Fund Type
Investment Trust
Fund Type
UK UCITS OEIC
Manager
S Vecht; E Fletcher
Manager
D Gait; S Reddy
Market Capitalisation
£330m
Fund Size
£7,024m
KID Ongoing Charges
1.40%
KIID Ongoing Charges
0.88%
Historic Yield
4.3%
Historic Yield
1.0%
Well over half of the population of Asia resides outside of the relatively developed economies of China, South Korea, Taiwan, and India. This Investment Trust, managed by a specialist team at Blackrock, enables investors to access companies within the less developed regions of Asia and other emerging markets. The fund therefore provides exposure to the large and growing young populations of countries such as Indonesia, Vietnam, and the Philippines. Risk Rating: 7
We think businesses providing goods and services to consumers in Asia will benefit hugely from the growing wealth of the region’s already large populations. This fund offers access to a broad basket of equities chosen from across the region. The focus on sustainable and predictable business models, run by management teams that have proven they can be strong long-term stewards of investor capital has resulted in a compelling return profile. Risk Rating: 5
NAV & Share Price Total Return (last five years, indexed)
Total Return (last five years, indexed)
175
175
150
150
125
125
100
100
75
2014
2015 2016 BRFI Net Asset Value
2017 2018 BRFI Share Price
2019
Growth Fidelity China Special Situations Fund Type
Investment Trust
Manager
D Nicholls
Market Capitalisation
£1,209m
KID Ongoing Charges
1.35%
Historic Yield
1.8%
The structural shifts occurring in China continue to lead to consumption outgrowing the overall economy alongside consumer trends that are the envy of almost all other global economies. This fund offers access to a number of attractive areas. The portfolio is focused on key parts of the consumer markets and its constituents include an array of domestic brands. A number of these companies are beneficiaries of the fastmoving technological shifts taking place within the country. Risk Rating: 7
NAV & Share Price Total Return (last five years, indexed)
75
2014
2015
2016
2017
2018
2019
Killik Explains
To watch Tim explain the key differences between open and closed ended funds, please go to killik.com/learn and click on the “funds” tab. To receive a copy of Tim’s guide, “How to invest in equities”, please contact an Investment Manager.
290 240 190 140 90
2014
2015 2016 FCSS-LON Net Asset Value
2017
2018 2019 FCSS-LON Share Price
All chart data source: Bloomberg. Chart data to 1st July 2019. For details of the Killik & Co risk rating system, please refer to page 7.
Summer 2019 — 9
EQUITY RESEARCH
Profiting from Asia’s consumer boom Mark Nelson Equity and debt analyst Mark highlights the companies that are well placed to benefit from the changes sweeping across a growing pool of Asian countries. For a full copy of the research notes from which these ideas are drawn, please contact your Investment Manager. Going for growth As Gordon highlights on page 8, some powerful macroeconomic and demographic trends have taken hold across much of Asia. These provide opportunities for a number of businesses within our equity research coverage, as summarised below. Since we believe that the source of a firm’s revenues is more important than its country of domicile, some of our stocks are listed outside Asia. However, each one stands to benefit from one or more transformative factors which include; the spending power of a growing middle class, rising urbanisation, the “late-mover” advantages that are driving high levels of e-commerce penetration and a growing technological savviness within an emerging millennial population. Nike – on track The world’s leading sporting goods company, with unrivalled brand and product expertise, expects Asia to be the most important region for sports growth over the next five to 10 years. Nike derives 30% of its revenue from Asia and Latin America (chart 1), of which 16% comes from Greater China. We believe that the firm is well placed to benefit from the rising middle class, and in particular the increasing wealth of Asian millennials, who take more exercise and spend a higher proportion of their disposable income than their parents. Government initiatives, in places such as China, have encouraged increased participation in sports, meanwhile 10 — Summer 2019
Chart 1 – Nike 9M 2019 Revenue Split North America Greater China
EMEA Asia Pac & Latam
14%
Asia Pac Middle East
Europe Latin America
7% 43%
16%
Chart 2 – share of new deliveries to 2037 North America Africa & CIS
6%
8%
42%
16% 27% Source: Company Data
Nike’s strong sport star and team endorsements should drive sales thanks to a growing interest in sports teams and athletes from leagues such as the English Premier League and the US NBA. Airbus – flying high The global leader in the design and manufacturing of aircraft has a duopoly with Boeing in the market for passenger flights. In 2017, just 30% of the emerging markets population took a flight, a number that Airbus expects to increase to 85% by 2037 thanks, in large part, to the growing number of middle-class passengers in these economies. The company has significant exposure to this trend, especially when it comes to the AsiaPacific region, from which it derived 37% of 2018 revenues. Looking ahead, revenue passenger kilometres – a key measure of traffic for airlines – are forecast to grow at a compound annual growth rate of 5.5% between 2017 and 2037 across Asia-Pacific. As a result, Airbus expects demand for 37,400 passenger and freight aircraft in the next 20 years, with this region accounting for 43% of those deliveries (chart 2).
19% Source: Company Data
Standard Chartered – cashing in This global bank boasts a unique emerging markets network that sees it derive more than 80% of its profits from Asia, Africa and the Middle East (chart 3). That enables Standard Chartered to participate in trade flows not only between emerging and developed markets, but increasingly between emerging market countries themselves. As a result, it can serve Asian multinationals looking to expand out of their home market, given its ability to offer banking services to subsidiaries based all around the world. Chart 3 – Standard Chartered operating income split Europe & Americas Africa & Middle East
18%
27%
Greater China & North Asia ASEAN & South Asia
12%
43%
Source: Company Data
Furthermore, the bank is well placed to gain from China’s Belt and Road Initiative. This trillion US dollar infrastructure project is designed to link trade routes across Asia, Europe and
Furthermore, the gap between the population’s healthcare needs and state provision remains substantial across Asia, a fact that is driving significant demand for health insurance. A similar shortfall exists when it comes to pension provision across many Asian markets. We believe that Prudential is well- positioned to take advantage of these trends – it is one of the market leaders in the region with significant scale advantage over rivals, a diverse set of operations and a difficult- to-replicate distribution structure. Nidec – motoring ahead Nidec is the world’s leading manufacturer of motors, with products that are used across a range of appliances, including washing machines, air conditioning units and refrigerators. Motor systems account for 47% of global electricity consumption, with total energy use in industrial motors forecast to double by 2040. Half of this increase will come from China and India alone. Meanwhile, air conditioning, which has seen rapid growth in some regions, has achieved just 8% penetration in the tropics. This is one of the hottest parts of the world and an area that encompasses almost all Southeast Asia and roughly half of India. The IEA expects the global stock of air conditioners in buildings to grow to 5.6bn
Chart 5 – Chinese internet usage by provider Alibaba
Tencent
US EU Brazil
Other
100%
Chart 4 – global air conditioner stock (million units)
Prudential – assuring progress
80%
China Japan & Korea Mexico India Indonesia Middle East Rest of World
35%
40%
46%
48%
53%
56%
60%
5000
8%
21%
79%
12%
24%
65%
54% 54%
52%
4000
20%
38% 52%
57%
6000
48%
32% 30% 23%
Logistics
Mobile Payments
O2O Commerce
B2C Commerce
Online Gaming
Online Music
Source: PwC CN
2050
2042
2046
2034
2038
2030
2022
2026
2014
2018
2010
2002
2006
0
Online Video
1000
Social Media Advertising
0%
2000
Digital Advertising
3000
1990
A global life insurer and asset manager, Prudential derived 38% of its revenues from Asia in 2018. Insurance penetration in many Asian countries remains very low but we expect this to change as an emerging middle class grows, thanks to the strong correlation between rising income and the proportion of it that is spent on insurance.
amongst the highest in the world. Alibaba and Tencent are also expanding their influence into the rest of Asia.
13%
1994
The group is well-respected for its digital banking initiatives and is involved in multiple fintech projects, both in Asia and Africa. It is also working with several blockchain partners.
by 2050, up from 1.6bn today (chart 4), driven by urbanisation and the rising middle class in emerging economies such as Indonesia and India. Nidec is well positioned to benefit from this trend, with over a 60% share of the market for DC air conditioner fan motors.
1998
Africa in what has been described as a “21st century Silk Road”. Standard Chartered has operations in 45 of the 71 countries that are taking part.
EQUITY RESEARCH
Source: IEA
As China’s leading internet company, Tencent offers a wide range of online products that include messaging, news, payments and cloud computing. QuestMobile estimates that over half of China’s daily mobile internet usage takes place on one of the company’s apps.
The consumer appliance market, which includes washing machines and refrigerators, should also benefit from growing prosperity across Asia, putting Nidec in a strong position as a major player in motors and compressors.
Meanwhile, Alibaba is the market leader in e-commerce in China, with around a 58% market share in 2018. The company’s long-term growth will come from its ‘New Retail’ initiative to digitalise the over 80% of commerce that remains offline. It is also the dominant player in cloud computing in China, with a 51% stake in the country’s leading logistics provider and a 33% stake in the leading payments platform Alipay. ●
Alibaba and Tencent – digital doubles These two firms dominate the internet industry in China (chart 5) and have benefited from “late-mover” advantages in terms of the penetration of e-commerce and social media. A lack of physical infrastructure has contributed to strong growth in internet usage in the country, especially from mobile devices, and e-commerce adoption rates that are Key data Market cap (bn)
P/E ratio
Nike
106
29
Airbus
97
21
Standard Chartered
23
12
2.9
714
GBp
7
Prudential
45
11
3.0
1716
GBp
6
Name
Nidec
Yield (%)
Share price
Currency
1.1
84
USD
6
1.7
125
EUR
6
Risk rating
4.4(tn)
30
0.8
14725
YEN
7
Alibaba
441
25
0.0
169
USD
7
Tencent
3.4(tn)
31
0.3
353
HKD
7
As at 1st July 2019. For more information about the Killik & Co Risk Rating system, refer to page 7. Please speak to your Investment Manager for further information. Summer 2019 — 11
W E A LT H P L A N N I N G
Passing it on Svenja Keller Head of Wealth Planning This quarter, Svenja encourages more families to look long-range when it comes to helping future generations. What is intergenerational planning? Traditionally, planners have tended to look at the financial situation of individuals and couples but less so the whole family. Intergenerational planning addresses that gap. A combination of house price rises and older-style final salary pension schemes have created a lot of wealth at the top of many family trees. Some “baby boomers” are even still net savers because their pensions are so generous. The issue therefore isn’t so much whether their children, grandchildren, or great grandchildren will inherit – they will – but rather how to optimise the timing, select the right method by which assets are passed on and minimise the tax consequences. This matters because whenever assets get passed from one generation to the next, there is usually an inheritance tax implication and there is still a widespread perception that assets should go directly to children, rather than grandchildren. That is natural enough in the sense that parents want to see their children set up securely. However, from a pure tax perspective, it is more efficient to skip a generation because otherwise 40% inheritance tax might apply at every step. If grandparents pass assets to their children, there is a 40% exposure, which then resurfaces when those children do the same thing.
12 — Summer 2019
However, there is much more to intergenerational planning than just tax. We need to prepare parents to start thinking and strategizing about identifying and passing down surplus assets earlier to help children, grandchildren and even great grandchildren. There is work to do in both directions – potential beneficiaries also need to be aware of their choices and responsibilities too. For example, if grandparents decide to give their grandchildren a leg-up, by paying school fees, not only are they being tax-efficient, they are also helping their own children indirectly, who would otherwise be footing the bill. A key consideration here should be the financial position of the relevant children – many inherit when they are in their 40s or 50s when they may already be well off. If their parents pass wealth straight to them, they are bequeathing a tax planning challenge too. Then there is the “how?” – assets can be transferred via several different routes to younger family members, depending on the level of asset protection that an older generation may want to lock in. The most important thing is that people start to think and plan early enough so that their wealth doesn’t end up going to the government through sheer inaction (unless that’s what they want of course!). What can go wrong? Families can be complicated these days, as more and more people separate and sometimes remarry, often bringing
children with them. As a result, someone’s wealth could end up in completely the wrong place if they are not careful. People don’t always realise, for example, that if they remarry, some of their assets could pass to their new spouses’ children and even their partners in addition to their own “blood” children. I have seen divorce cases where parents have been distraught to see part of their wealth taken by the spouse of one of their children, who is simultaneously being horrible to them. Another beartrap can be created as children grow up – they will inherit from the age of 18 unless alternative arrangements are put in place. Some people might be fine with the idea of handing a large estate to a teenager, but many won’t be. Then there is the headache of who is left in charge of executing someone’s wishes, either when they no longer have the mental capacity to manage their own affairs, or on death. Finding the right person – someone they not only trust but who is also administratively competent and emotionally capable of dealing with an estate at what might be a very stressful time – isn’t always straightforward. Sadly, money issues can tear otherwise stable families apart – it’s an area where a professional can add a lot of value as they can approach everything from a neutral legal standpoint without the burdens of family politics and emotions. Isn’t this just relevant to the wealthy? That’s a common misconception. True, with the first £325,000 of an estate tax-free under the inheritance tax rules, many couples can protect £650,000 easily. On top of that, there is the residence nil rate band (RNRB), which will shelter up to another £175,000 per person once it comes fully into effect in 2020/21. That will bring the value of an estate that should fall outside of inheritance tax for, say, a married couple, up to £1m. With house prices being as high as they are
PERSONAL VIEW
a large inheritance might do to the motivation of potential beneficiaries. If a young 20-year-old gets a large sum for example, will that stop them from wanting to be successful? Large trust funds are great in one sense, but they can also breed the wrong attitude.
(particularly in London), more and more families will need this increased ceiling.
Sometimes it can help to get a professional adviser into the room to guide all these emotionally charged conversations. Research suggests that the more people communicate, the more tax they save. Otherwise, parents sometimes go off and make arrangements that their children don’t even know about and that are not optimal for the whole family. To borrow a strapline, it is “good to talk”.
However, a planner can still help at, or below, this level as there are complicated rules attached to the RNRB. For example, the property in question has to pass to what the rules call direct descendants and things get trickier where people want to downsize or sell their home to fund care. Also, this new band gets tapered away once the total estate tops £2m.
I think there are two reasons why more of us don’t. First off, most people don’t want to think about, let alone discuss, their own demise. And second, many children won’t raise the subject for fear that they will look greedy or uncaring. That’s why it is often easier if they start the dialogue off with “my advisor has suggested that we need to have this conversation.”
In broader terms, people often also need help with wills, regardless of wealth. For example, they might think that on death, everything they own will automatically pass to a spouse. But without a will and where the deceased leaves children behind, that’s only partially true as then they are only entitled to chattels plus the first £250,000 of an estate. Things can get messy where that £250,000 is locked into, say, a family home and the various beneficiaries start to fight about whether it should be sold. Meanwhile unmarried partners could inherit nothing without a will.
The pity is that we are often involved as planners far too late – perhaps when someone already has a severe illness or is losing mental capacity. That can narrow our options when it comes to advice.
When should families address these issues? The earlier the better and if different family members can agree with each other, better still. It’s important to discuss delicate but important issues, such as how much money older generations might need, what their aspirations are for their “surplus” wealth and how far down the chain they are prepared to pass assets. Equally, younger family members need to think about whether they really need to inherit large sums and whether grandchildren might make better beneficiaries. As part of this, parents and grandparents must think about what
What are the best ways to save inheritance tax?
W E A LT H P L A N N I N G
funds. Sometimes we find that they would prefer to retain some access in case they need to pay for long-term care, for example ●●
An alternative is to make gifts into trust. The choice of vehicle will be driven by how much subsequent access is allowed to the assets and the level of control someone wants to retain over them. Gifts into trust are more complicated and expensive to set up than outright ones, but they do alleviate many of these control and asset protection concerns
●●
Next on the list comes business relief for private company investments or AIM shares. Since these are risky and often illiquid, they come with some attractive inheritance tax concessions, subject to all the conditions being met
●●
For wealthier families we then come to bespoke tax structures, such as companies or partnerships. These vehicles need to be built with care and with help from a good tax adviser, plus a solicitor. Put together well, they can offer a lot of flexibility
●●
Finally, there is the life cover option. This doesn’t solve any inheritance tax planning issues per se, but it does provide a family with a way to fund the tax bill, albeit at a price in terms of the premium
There are several and for me there is a clear pecking order. Whilst there is a lot more to know about these individually, in summary; ●●
The easiest way to do inheritance tax planning is to spend money on assets that have no monetary value, such as holidays and other life experiences
●●
The next option is to make outright gifts. There is, for example, a £3,000 annual exemption. People can also gift their surplus income every year if it’s done regularly. Outright gifts are probably the simplest option. However, the donor gives up control and access, which also makes it risky if the money is then spent by a wayward child, grandchild or their spouses. If that is a danger, there are various asset protection solutions available. In addition, outright gifts are final in the sense that the donor loses all subsequent access to the relevant
Deciding between these options comes down to a trade-off between cost and complexity, versus tax efficiency. Too many people who come to us have been advised to set up structures they don’t understand, or that simply don’t work. There are other traps for the unwary too – for example, trusts impose responsibilities on trustees and these need to be explained and understood. It’s important therefore that they talk to someone they can rely on to advise them and who can continue to provide support on an ongoing basis. Summer 2019 — 13
W E A LT H P L A N N I N G
Which documents should families put in place? Everybody should have a will to make sure that their assets end up in the right place. Just the process of drafting it can help to focus their mind on what will happen in the future. Individuals should also set up lasting powers of attorney (LPAs). There are two types, covering finances and health. In a way, these are more urgent than sorting out a will because they will activate before someone dies. Our increasing longevity means that more people are suffering from conditions such as Alzheimer’s and dementia. Meanwhile, anyone can get unlucky and be involved in an accident out of the blue. If they can’t make legal decisions and there is no document that says they have appointed someone who can, the courts have to get involved which can make things long-winded and difficult. Now a word of caution to the DIY fans out there – these are legal documents and as such, one mistake can render them invalid. What’s more someone may create a situation they never intended. For example, LPAs can be set up so that one person can make all the decisions, or so that the responsibility is shared. But what if an appointed
representative subsequently moves abroad, or dies? Or what if joint attorneys can’t agree on a key decision? A regular review with an adviser can sidestep these pitfalls. Remember that these are documents that only activate when needed and that’s usually at the point it is too late to do anything about a mistake. Another common pitfall is not getting these documents set up and registered correctly, which can invalidate them. Finally, it is good practice to review LPAs (and the older style Enduring Powers of Attorney which preceded LPAs) on a regular basis; many older documents do not contain clauses that allow someone to delegate responsibility for portfolio management to a third party. The other key document that more of us should have in place is a financial plan. In some cases, where a family is large and complex, this sits alongside a full-blown charter that sets out individual objectives, responsibilities, agreed obligations and time scales within the family. However, a much simpler document can help keep individuals and their families on track to meet their goals and also on top of the related paperwork and processes.
Intergenerational Wealth Transfer Survey Here are some highlights from a OnePoll survey carried out in April 2019 of 2,000 respondents; 1,000 adults aged 18-34 and another 1,000 aged 65+ who have children and grandchildren. Please contact one of our Killik & Co Planners to find out more. Who do you intend to leave your estate to? Children 59% Grandchildren 29% Other 7% No-one 5% When will you transfer most of your wealth? As part of my estate During my lifetime I have not decided Not saying
72% 8% 18% 2%
Do you expect to receive an inheritance from your parents or grandparents? Yes 46% No 26% I don’t know 23% Not applicable 5% Have you spoken to your parents or grandchildren about this? Yes 21% No 79%
Have you spoken to your children or grandchildren about your plans?
What do you expect to use the money for?
Yes 41% No 59%
Property 44% Clear debts 12% Starting a family 17% Education 7% Something else 20%
14 — Summer 2019
Who should attend an intergenerational planning meeting? First and foremost, a Planner – they will act as co-ordinator for the other specialists that are needed – wills and LPAs, for example, are dealt with by tax and trusts experts. Then there is the investment management side, which is a different pool of knowledge. Sometimes people bring their own accountants or solicitors into the conversation, which is fine provided all the specialists talk to each other. As a Planner, I can’t put anything in place unless I have understood someone’s intentions from their will and how assets are being passed on. An Investment Manager, on the other hand, won’t know how to manage someone’s lifetime savings without a firm handle on their plans around future gifts, including timescales and objectives. The aim here is to move the conversation away from individuals in isolation and onto children, grandchildren and even great grandchildren. After all, why plan for each generation in isolation when we could be maximising a family’s overall wealth by helping up to four at the same time? ●
Killik Explains Wills To watch Tim’s short video explaining all the basic features of this key document and pointing out some of the pitfalls, please go to killik.com/learn and click on the tax effective saving tab to find “Why you need a will”. For a copy of our guide on how to save and invest for your family, which includes an overview of inheritance tax and trusts, please speak to an investment manager or wealth planner.
PERSONAL VIEW
BONDS RESEARCH
Bond ETF buyers beware Mateusz Malek Head of Bonds Research
20%
A simple search for all sterling denominated corporate bonds listed on Bloomberg brings out more than 3,500 issues with a total amount outstanding of nearly £900bn. However, this number can be quickly whittled down because many of these bonds may be too small, or illiquid, to be investible, whilst others may not trade at all (for example, certain private placements). Then there are those that carry no credit rating or are rated below investment grade. The SLXX ETF, conveniently narrows down that vast universe to around 400 of the most liquid, investment-grade (IG) corporate bonds issued by approximately 120 different companies. However, anyone who thinks that by buying an ETF tracking the performance of sterling denominated corporate bonds they are getting exposure to the UK’s domestic economy, needs to be careful. UK tracking errors Although the SLXX ETF can only hold sterling bonds, the companies issuing them don’t have to be based in, or even have any business in, the UK. In fact, of the ten
13.8% 13.0% 10.4%
10% 4.8%
5%
6.5%
20+ Years
15-20 Years
7-10 Years
10-15 Years
5-7 Years
1-2 Years
Source: iShares
2-3 Years
0.1% 0.1% Cash
0%
0-1 Years
Just as the equity market has its favourite indices, such as the FTSE 100 or S&P 500, so bond markets also have theirs, even if the names may not be as familiar or concise. Some of the more popular include the Bloomberg Barclays Sterling Corporate Bond and the Markit iBoxx GBP Liquid Corporates Large Cap Index. The latter matters because it is used as a benchmark for the popular iShares Core Sterling Corporate Bond Exchange Traded Fund (SLXX ETF). With around £1.6bn of assets under management, this tracker is one of the largest corporate bond ETFs in the UK. But what exactly does it represent?
18.3%
17.2% 15.8%
15%
Construction challenges
Delving into duration
Chart 1 – SLXX ETF Maturity Profile
3-5 Years
This quarter Mat takes a look at the bond market’s most popular passive products.
largest issuers held by the ETF, only five are UK based. The largest individual issuer is a French, state-owned utility company Electricite de France (EDF), which represents nearly 4% of the index. Overall, only around 40% of the ETF represents bonds issued by companies domiciled in the UK, with the remainder issued by businesses based in the US, the EU, Switzerland, Australia, Mexico (America Movil) and even Russia (Russian Railways). A glance at the sectoral exposure of the sterling IG bond market, reveals that the SLXX ETF is consistent with its international peers, which are the dollar and euro-denominated, investment-grade, corporate bonds trackers, LQDE and IEAH respectively. Not surprisingly, IG bond markets globally tend to be dominated by financials, with banking typically representing around 25-30% of the market, which is also the case with SLXX. The UK bond market, however, has a slightly higher exposure to the telecoms sector and a lower exposure to non-cyclical consumer companies than either the euro or dollar markets. In terms of credit quality, the UK market is in line with its peers, at least when it comes to IG bonds, with an approximate 50% exposure to the lowest rated “BBBs”, around 40% in “As” and around 10% in “AAs” and “AAAs”. Interestingly, SLXX holds one AAA-rated issuer, The Wellcome Trust, which currently puts it two-notches higher rated than even UK government gilts.
One metric that makes the UK bond market stand out is the average life of its bonds. For years the sterling bond market has built a reputation as a home for longer-dated bonds. It even attracted a couple of centenary issues, with three such bonds currently held by SLXX ETF; the Oxford University 2.54% 2117, the Wellcome Trust 2.52% 2118 and the EDF 6% 2114. The inclusion of longer-dated bonds, however, results in a weighted average maturity for the SLXX ETF of nearly thirteen years, compared to less than six for the euro-denominated IEAH ETF. Longer average UK bond market lives also create a greater exposure to changes in yields. A weighted average yield of just 2.2% means that even a small move higher, thanks to a change in interest rate expectations or a shift in credit spreads, can wipe-out years of income from these bonds. Getting active Investors who feel uncomfortable investing in low-yielding bonds with such long average lives through ETFs, may prefer an active investment approach instead. And that’s not the only reason. There are many parts of the market that simply don’t qualify for inclusion in the SLXX. These include perpetual bonds, callable financials, non-financial hybrids, inflation-linked corporate bonds, convertibles and the smaller sized issues I mentioned earlier, some of which may offer investors an illiquidity premium. There are also some interesting sectors that are excluded from the benchmark index, for example housing associations. Finally, there are parts of the market that offer higher-yields and lower duration risk, including unrated bonds or those rated below investment-grade. In summary, therefore, while a broad bond index tracker may offer a simple-looking solution, it doesn’t necessarily offer the best one. ● Summer 2019 — 15
S P E C I A L S I T U AT I O N S
Healthy opportunities Peter Bate Portfolio Manager Peter explains why the Special Situations service continues to favour the healthcare sector. Healthcare stocks play an important role within the Killik Special Situations service for three key reasons. Firstly, the whole sector is underpinned by some powerful underlying demographic drivers as an ageing global population, particularly in developed markets, which sadly but inevitably creates greater numbers of consumers for healthcare products and services. Secondly, we like the sector’s defensive earnings profile – healthcare demand remains stable in good times, as well as bad, which means the success or failure of a product is more closely aligned with its performance and cost. That leads us to the third reason we are enthusiasts; the constant need for innovation to serve areas of, as yet, unmet need and develop efficacious, faster and cheaper therapies. For active investors like us, these factors create a fertile and rapidly evolving landscape within which we can try to identify winners. Looking in the right places Investing in small cap drug development businesses does, nonetheless, present its fair share of challenges. The biggest is a lack of diversification at the product level. The oil sector offers a good parallel here – if BP drills a dry well, the share price may dip a bit, yet if a small cap oil explorer does the same thing the share price can halve in the short-term. The same forces are at work for drug developers – if a key new product fails late in the drug trial process, the share price impact for smaller players can be significant. That’s the reason why we generally avoid these firms, preferring to focus our attention on diagnostics and devices companies instead. As such, you may 16 — Summer 2019
enjoy Tim Bennett’s interview with Creo Medical’s CEO, Craig Gulliford, on pages 18-20. To compliment that article, this quarter we have highlighted some of our other preferred plays in the sector. These are segmented into larger cap names, that offer a more mainstream appeal and a yield (Caretech and CVS Group), plus a few smaller, higher risk ideas (Ergomed, Yourgene and Diurnal). To discuss any of these in more detail, please contact your Investment Manager.
prospective earnings and offer a 3% dividend yield. Whilst this is a leveraged business, carrying around £300m of net debt as at the end of March 2019, the balance sheet is well supported by £775m of freehold property.
Caretech – taking care of growth Caretech is one of the largest UK providers of community-based and residential care for adults with a range of disabilities. The firm also offers specialist education, fostering and residential care services for children. Having completed the transformational acquisition of its closest listed peer, Cambian, in late 2018, we believe that Caretech’s superior regulatory scores and reduced staff turnover metrics can be replicated there in time. This should drive better outcomes for care users and support the outsourcing of more placements to the group. We also anticipate a reduction in the cost and disruption created by the materially higher staff turnover levels at Cambian. Furthermore, we believe that the merger synergy guidance offered by management is very conservative. At current levels the shares trade on less than 10 times
CVS Group – vet shop joys Shares in CVS Group, a veterinary clinics operator, have been volatile lately as a multi-year bull run, driven by acquisition-led growth, has come under pressure. This is thanks, in part, to increased competition for deals, which has pushed up acquisition multiples, coupled with the cost impact of increasing demands from vets (especially the younger and newly qualified ones) for flexible working and the ability to operate as locums. Whilst we were happy with the level at which we went into the shares, we still view them as cheap when compared to recent industry M&A transactions. The most recent of these was the takeover of Compassion First in the US, on an EBITDA multiple of 20 times. A number of other market transactions have taken place at around this valuation level. Indeed, against this backdrop, and like other peers, we would not be surprised to see CVS Group become the subject of a takeover bid, particularly if it continues to trade on its current rating.
PERSONAL VIEW
S P E C I A L S I T U AT I O N S
Ergomed – clinical results Ergomed is an outsourcing provider of clinical trials and pharmacovigilance services – it takes on the ongoing monitoring of drugs that are already on the market as well as the associated administration. The firm has recently seen a material rise in the share price following a strong earnings upgrade from its clinical research services (CRO) division. We believe that there is significant value in the group, which could be unlocked via a break-up. Comparable market transactions would value the pharmacovigilance business alone at around £150m, which would put it above the current enterprise value for the whole group of just £140m. Yourgene – newly modified Yourgene is a B2B provider of genetic tests, reagents and bioinformatics services to clinical labs. After a difficult patch, some longstanding intellectual property (IP) litigation has now been resolved and a weak balance sheet has been strengthened. The group has also appointed a highly commercial CEO who is engaging in a “buy and build” strategy within a very fragmented industry. We believe current market forecasts are undemanding and see a share price catalyst in the form of bolt on acquisitions, which should allow new products to be sold across the group’s existing client base of laboratories.
Diurnal – set to surge Diurnal is a drug developer focused on hormone disorders. Its key drug, Chronocort, aims to mimic the rate at which the hormone cortisol is produced naturally. Whilst, as noted earlier, we are generally not keen on investments in drug development companies thanks to the binary risk profile of clinical trials, Diurnal is a slightly unusual case. Following the failure of its European phase III trials for Chronocort, the share price crashed by nearly 90% from its pre-announcement level. The crux of our investment interest in this instance is that the data points selected as the trial “end points” were fundamentally wrong. During the trial, the company had collected other data which showed significant patient benefits, a fact that was accepted by the European regulator on 11th April, based on scientific advice that the existing data can be used to support a regulatory submission. We believe that the market has missed this key part of the investment case and has taken the view that if the drug was not approvable by the regulator in its current form, the group would not have received the advice it did. At 26p per share (the level of the recent £5m fundraise), the company has an
enterprise value (EV) of just £10m, which seems to ignore the likelihood that it has a viable drug that could be on the market in Europe in 2021. With this “orphan”, it will have regulatory exclusivity to go after a $300m annual market with no obvious competition. Looking at this another way, the EV of the company was around £100m immediately before the clinical trial failure – aside from a six-month delay until the market launch, we question what else has changed to warrant a much lower valuation. Indeed, we suspect that management is already engaging with potential US partners, where the same drug is at an earlier stage in the clinical trial process and would hope that any deal would be structured so that upfront payments will help allay funding concerns for the foreseeable future. Diurnal’s situation is not dissimilar to that of a firm called Shield Therapeutics – it faced an issue in the specific metrics used during clinical trials for a different indication (in this case a type of anaemia). As a result, there was a significant time lag between the company announcing that the regulator (in this case the FDA) were happy to accept another measure from the clinical trial, despite an initial drug trial failure, and the share price playing catch-up. ●
Key data Name
Market cap (£’m)
P/E ratio
Caretech
106
11
Share price
Currency
Risk rating
3.1
373
GBp
9
Yield (%)
CVS Group
514
16
0.7
723
GBp
9
Ergomed
134
25
N/A
287
GBp
9
Yourgene
79
N/A
N/A
13
GBp
9
Diurnal
26
N/A
N/A
31
GBp
9
As at 1st July 2019. For more information about the Killik & Co Risk Rating system, refer to page 7. Please speak to your Investment Manager for further information. Note: the Special Situations service is higher risk. Disclosure: Peter holds shares in Yourgene and Diurnal.
Summer 2019 — 17
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Transforming surgery Craig Gulliford CEO, Creo Medical Craig explains how Creo Medical’s cutting-edge technology is helping to revolutionise traditional operations. What is Creo Medical’s mission? We are a medical devices company focused on the emerging field of surgical endoscopy. Specifically, we enable clinical procedures to be performed minimally and non-invasively using the working channel of flexible colonoscopes or endoscopes. Our goal is simple – to improve patient outcomes by developing and commercialising a suite of electrosurgical medical devices, based on our ground-breaking CROMA Advanced Energy platform. This means we are moving the point of therapy for patients from the operating theatre, where they are likely to be under general anaesthetic, to an endoscopy room where a clinician can use conscious sedation or, in some cases, none. As a result, a patient can be out of hospital and back at home much faster and with fewer complications.
been a relative lack of innovation in the
What are your main product initiatives?
field of flexible endoscopy which remains
I’d like to highlight two here. Creo’s first product is called Speedboat – the world’s only bipolar, advanced energy, surgical blade. CE marked and FDA-cleared, it is already in clinical use along with our CROMA Advanced Energy platform. Speedboat is small enough to fit inside the working channel of a flexible endoscope and we’re getting great feedback from the doctors around the world who are using it, predominantly in the lower GI tract to remove pre-cancerous and early stage cancerous lesions from the bowel. Given the time it took to develop and bring to market, that is very gratifying.
predominantly a diagnostic, rather than therapeutic, practice. As the medical world looks to find more ways to apply minimally invasive techniques at an earlier stage in the progression of diseases, such as cancer, we are aiming to innovate in this specialist field. With our initial suite of tiny, advanced energy devices, we want to provide gastrointestinal (GI) solutions in the endoscopy market, enabling precise surgical procedures to be performed under sedation. What has been holding innovation back? I encounter no lack of ambition from the doctors who operate in this part of the medical world. However, in my view, there are two major hurdles that the industry needs to cross; technical and funding. Technically, there are two big challenges: ensuring that advanced energy can be delivered safely and effectively via a flexible endoscope and innovating with devices tiny enough to fit within the working channel of a flexible platform. From a funding perspective, there has been something of a gap – the big corporates that could be driving the necessary innovation are not willing to invest in it, or to shoulder the risk that would see it funded at a sufficiently early stage. That leaves the
So, it’s a win-win for patients
daunting task of overcoming the many
and doctors?
challenges associated with pioneering
Indeed. Over the last 20-30 years, surgeons have adopted more and more minimally invasive procedures, delivered via what most people broadly term “keyhole surgery”. However, the vast majority of these still require access to an operating theatre and involve incisions under general anaesthetic. Meanwhile, there has
surgical endoscopy to smaller companies.
18 — Summer 2019
However, the catch-22 is that these smaller companies need capital to get to the requisite level of clinical proof, yet without that they struggle to raise enough money. As a result, many great ideas get left on the whiteboard. This absence of seed capital creates opportunities for firms like Creo.
Another important innovation in our product development pipeline is a flexible device that allows surgeons access to apply small, controlled and targeted bursts of energy to soft tissue in organs that are accessible using ultrasound scopes (i.e. the pancreas, liver, kidneys, and possibly even the lung). The aim is to deliver cancer treatment under conscious sedation in the endoscopy suite, rather than in an operating room. This could make us part of a revolution in the treatment pathway for conditions such as pancreatic cancer. It’s exciting, important and challenging work. How long do these products take to develop? Solving the huge software and engineering challenges that came with our first product, and raising the necessary capital, took time – between 2011 and 2017 we were busy overcoming all the regulatory barriers. However, once products like ours have been cleared for use, a lot of the process and the background work can be carried forward from one device to the next. Whilst we can never cut corners in this field, being armed with prior knowledge and therefore
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hospital, depending on their recovery time and whether they needed a stoma bag for a period of time afterwards. So, during one morning, our technology saved the NHS around 12 hours of operating theatre time and somewhere between nine and 15 days of bed space.
not having to commit as much time and effort to basic decisions, such as the materials we will use and how we will supply the requisite energy, will make future development easier. How do cancer patients benefit? Take pancreatic cancer as an example. Known as a “silent killer”, it has the highest mortality rate, largely because the key symptoms don’t show up early in the progression of the disease and the range of therapies is limited. There is a well-established surgical solution called the Whipple procedure, but it is one of the most challenging and many patients are not suited to it because it can be highly disruptive. An alternative is targeted chemotherapy, radiotherapy, or both to deal with later stage tumours. Advances in diagnostic procedures using endoscopic ultrasound, on the other hand, allow physicians to see lesions much earlier in their progression. However, despite an earlier diagnosis, the current treatment range is still limited and typically involves chemotherapy, radiotherapy, open surgery or a combination. So, what are we doing differently? Imagine the tiny size of the needle used to take a biopsy (a small sample of tissue for further analysis) at the diagnostic stage – we’ve developed devices identical in size, shape and form to that needle with the ability to deliver a controlled burst of high powered microwave energy which gently ablates the tumour tissue, essentially killing the cancer. Even if this is not curative for all patients, with repeat treatments it may well extend the life of those who would otherwise have very few palliative options available to them. As day patients, people can be in and out within a couple of hours. Given that the procedure is one that they would be exposed to anyway in order to perform an initial biopsy, the only difference from using Creo’s technology is they might experience a few extra minutes of treatment time. With our approach, there is no invasive surgery and instruments are not deployed through the skin, reducing the risk of infection and scarring.
What could slow wider adoption?
What other conditions could this technology be suited to? Advanced diagnostic devices can be enhanced to address cancer tumours in the liver and the kidney too. Lung cancer is another complex area where the current diagnostics are not fantastic and could be improved. Meanwhile, other devices that we have in our pipeline will enable us to get to the root cause of bleeds within the GI tract – one of the most frequent triggers for emergency hospital admission in the UK and worldwide. Stomach ulcers are another common challenge – once treatment goes beyond tablets, patients are often looking at surgery. So, we are working on instruments that will allow physicians to deal with bleeding stomach ulcers, without having to resort to an operating theatre, at which point the problem has often progressed. The large number of ulcers that are dealt with surgically helps to explain the surprisingly high mortality rate for people who show up at hospitals with them. Do your tools save money? In June last year, a doctor in a UK hospital treated three patients on a list endoscopically utilising Creo’s Speedboat technology, who would otherwise have been referred for bowel surgery. The procedure time in each case was about 40 minutes and all of them returned home on the same day. Their alternative? Three hours of surgery followed by perhaps three to five days in
We need to build on our many local successes and persuade healthcare managers to see the potential benefit, across their entire operation, of taking people away from the operating theatre surgery lists and directing them through the endoscopy suite instead. It is still early stages for Creo’s commercialisation. Some of the resistance we have encountered is cost related – in the UK, for example, decision makers need to better understand the healthcare economic benefits of what we are offering across an entire NHS Trust. Frustratingly, we find sometimes that the data that would reveal the potential level of cost-saving our technology can achieve doesn’t appear to be widely available. However, we are working with the National Institute for Health Research (NIHR), who are tasked with driving innovation into NHS routine practice, to formalise this with the help of grants awarded by them to Creo. On the surgical side, any medical procedure carries risks: a surgeon may not use a tiny device such as Speedboat properly or hit issues whilst undertaking a procedure and cause a perforation. Set against that, what we are trying to do is remove the need in, say, lower GI procedures for a patient to have to potentially lose a large section of their colon, with the associated infection risks, longer recovery time and likelihood of external scarring. We have also established an education and mentor-led program to improve the way flexible endoscopists learn therapeutic practice. The general surgery profession has already transitioned away from the use of scalpel blades and open operations towards keyhole procedures and laparoscopic tools. Advancing the therapeutic skills of flexible endoscopists (a natural enough path) will involve some retraining to enable procedures to be completed without general anaesthetic. Summer 2019 — 19
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However, we are confident that once users see the outcomes that are possible, they will want to adopt our devices knowing that we are experts in training people efficiently and effectively in the safe use of our technology.
How big is your potential global opportunity? Colonoscopy studies suggest that around seven percent of routine bowel screenings will find a lesion that will be appropriate for treatment using our Speedboat device. In the US, where around 16 million routine examinations are undertaken annually, that’s over a million eligible procedures, and there are now similar screening programmes in place across most other western countries. In England, for example, the age for endoscopic bowel cancer screening is 55, although in 2018 ministers agreed that this should be reduced to 50. In Asian countries, such as Japan and China, recorded incidence rates are lower thanks, it seems, to a superior diet. That said, colorectal cancer rates are rising quite rapidly as food habits becomes more Westernised and lifestyles get more sedentary. Meanwhile, if you look at the way rates are changing for major diseases, such as pancreatic and liver cancer, it’s clear that demand for the kinds of product we are developing is only going to rise. That said, we can’t ever be complacent. With devices like these, there is always early-stage regulatory risk and the need to demonstrate that they can be applied safely to solve a specific problem. Meanwhile, commercially, we are a small company, at least in terms of our market share. That means we can’t afford any mistakes in a field where things do sometimes go wrong, whether they are caused by the wrong techniques, devices, users or patient selection. Hence our education program. 20 — Summer 2019
Who is on your team?
aerospace industry. Now, not only are they
We directly employ around 60 people, with more joining our R&D team. Since we went public, we’ve been able to deploy additional capital so that we now operate 4 fully resourced device development teams as part of an overall unit of about 35 engineers who look after the software and hardware requirements for the CROMA Advanced Energy platform. It’s challenging work, which is why 15% of our workforce are postgraduates, with about 10% qualified to PhD or Professor level. Their backgrounds are diverse too – we take people from a range of different industries, including technology, communications and telecoms.
putting coatings on machine parts, such
Then we have a commercial team of about eight people, which is growing as we build out a network of sales managers for our distribution channels around the world. Overall, I would say around 100 people are working for us, directly or indirectly. Where does your personal drive come from?
as fan blades for Rolls-Royce, they are also putting them on a tiny but key component of our devices. The only difference is our parts are around 10,000 times smaller! What are your passions outside work? My biggest hobbies, as a child growing up overseas, were surfing and windsurfing. Later, when I moved back to the UK, I swapped them for biking. I have also always loved travelling – I once took my children (then aged seven and nine) off for six months between jobs. On the way back I bumped into an old colleague at the Heathrow airport who asked me what I planned to do next. “I need to get fit now, because I’ve just spent months travelling around and not doing any exercise.” He just laughed at me. “So, what are you going to do? One of those ironman races?” Tragically, he died two weeks later from a heart attack – he
My passion for the job is routed in the fact that we can make a difference. Just a few years after I joined the firm, I was watching a case that involved our first product and concerned a man who had been through a colonoscopy two weeks earlier and been diagnosed with a lesion. He was told he may face urgent, invasive surgery. In the end, he was treated using our product and after a 20-minute procedure he went home. I love the way that innovation can really change lives like his and it’s great to work with a team who share that motivation.
was overweight and a type 2 diabetic.
I also love being in regular contact with a key opinion-leading group of doctors operating across Melbourne, Sydney, Japan, the US, the UK and mainland Europe – they are as inspired by the technology, and what it can do for patients, as we are.
that it is vital to balance work with family
Then there is the research element, which is fascinating. A couple of months ago I visited a metal improvements company in the Midlands – they are world leaders in putting coatings on to advanced metallic structures, with a specific focus on the
wacky ideas. Fast forward to today and
Right then and there I thought “Okay – in his memory, I’ll do an ironman race.” In the process I got fit and have decided to stay that way. I must be doing something right as I was delighted to receive a Bronze medal at the last World Aquabike championships. What is a life well-lived? It’s a cliché, but for me the key to living a good life is to do lots of things, but in moderation. I have learned over the years life but also to recognise that we all need to do things for just ourselves sometimes. I also think people shouldn’t underestimate what they can achieve – when we started Creo, we were just a bunch of guys in a garage with some who knows where we will be able to take Creo next? ● Creo Medical is a holding within the Killik & Co Special Situations Service.
Q U A R T E R LY S N A P S H O T
Making sense of markets Rachel Winter Associate Investment Director Our weekly Market Update presenter analyses the quarter’s key corporate news and assesses the takeaways for investors. Retail woes worsen The retail sector continues to struggle. This quarter brought the collapse of Debenhams and a major restructuring of Phillip Green’s once-dominant Arcadia group. Against that backdrop, we have a specific concern about the increasing prevalence of company voluntary agreements (CVAs), which are being used by retailers to force landlords to accept significant cuts in rent. This is bad news for retailfocused property, which is why real estate investment trusts (REITs) with high exposure to retail have fallen significantly. Whilst these REITs may look to be trading on large discounts, investors should remember that their property holdings are only revalued on an annual basis. If prices have fallen since the last formal valuation then the discount to historic underlying net asset value may look wider than it is in reality, making such REITs less of a bargain than they may seem. Hammerson has illustrated this recently as it tries to exit the retail sector – the firm recently announced that disposals made in 2018 took place at a 7% discount to 2017 book value. In our portfolios we are therefore avoiding retail property and focusing instead on logistics, with LondonMetric Property being our current preferred play. Dividend distress deepens Vodafone cut its dividend by 40% – another disappointing piece of news for UK income investors, for whom the last few years have been tough. FTSE 100 heavyweights including supermarkets, banks and miners have all reduced their dividends during the last decade. Vodafone’s latest move served as a reminder to review portfolios and think carefully about whether some of the higher dividend yields within them are sustainable (a point made by my colleague, Patrick Gordon, in the last issue of Confidant).
UK companies operate within a culture of paying high dividends, in contrast to the US where share buy-backs are more common. The advantage of the latter is that they can be cancelled in less profitable years. Many UK companies, by contrast, have fallen into the trap of committing to an on-going high level of dividend when they haven’t got the profit growth to sustain it. GSK and HSBC for example, offer yields of 5% and 6% respectively, yet both are achieving minimal levels of growth. In our view it is far better to settle for a lower yield from a firm with the potential to grow, rather than aiming for high dividends but at the risk of suffering a significant capital loss when those dividends need to be cut. Meanwhile, tobacco stocks fell following a Nielsen report highlighting that global tobacco sales dropped 11.2% in the four weeks to 18th May, notching up their 18th consecutive month of decline in the process. As a result of recent share price falls, British American Tobacco offers a dividend of nearly 7% and Imperial Brands an eye-popping 10%. Casting yet another grey cloud over the future of UK dividends, the Labour Party released a paper detailing its plans to nationalise the UK’s energy networks, should it get into government. Labour has previously suggested that its first port of call would be to nationalise the UK’s water utilities, and as a result we have long held a negative view of Pennon, United Utilities and Severn Trent. This latest paper means that National Grid and SSE are arguably also uninvestable until we know who will form the next government. Cleaner power starts to surge On a more positive note, in May the UK celebrated its first week of coal-free power since the First World War, highlighting the progress that has been made in our capacity to produce renewable energy, as investors and consumers alike demand cleaner power. For those seeking exposure to the renewables revolution, Danish wind farm developer Orsted and wind farm infrastructure fund Greencoat UK Wind continue to perform well.
Royal Dutch Shell also demonstrated its awareness of the importance of sustainability in April – it announced it would be stepping down from the American Fuel & Petrochemical Manufacturers (AFPM) in 2020, unimpressed with a lack of action on climate change. Shell has increased its focus on renewables, and on natural gas, which is less polluting than oil. Mobile payments build momentum A major profit warning from bank note printer De La Rue could be the death knell for cash. However, as we continue to transition towards a cashless society, opportunity abounds for online and mobile payment providers and we continue to invest in Visa and PayPal. Asia laps up luxury Whilst there are some decent pockets of opportunity within the UK market, given the number of potential blackspots (especially when it comes to income stocks) we continue to look for the best ways to tilt portfolios towards international investments. On that theme, the rumbling US/China trade war didn’t stop the Chinese economy from clocking up an impressive growth rate of 6.4% for the first quarter. Companies operating internationally continue to highlight Asia as the engine of global growth. Cosmetics group L’Oréal was a notable example back in April. The owner of high-end brands Lancôme and Yves Saint Laurent published expectation-busting year-on-year sales growth of 11.4%. Management cited strength in Asia and claimed that the luxury market in China is still growing at 40% per year. We continue to adjust our portfolios to capture this growth, both by investing directly into Asian companies and in Western companies with high levels of exposure to the region. ● Summer 2019 — 21
CHANGING YOUNG LIVES
“Somewhere to go, something to do and someone to talk to” Mark Davies Chairman of Hammersmith Youth Zone Serial entrepreneur Mark Davies explains how he has been inspired to lead a Youth Zone project that will help 4,000 disadvantaged children in West London. What is your role? I am chairing a project to build Hammersmith Youth Zone in White City, West London. This will comprise a stateof-the-art building, offering thousands of young people a huge range of activities, ranging from football and climbing to cookery and dance. It will follow in the footsteps of 11 existing Youth Zones and is due to open its doors in early 2021. The current Chair for London is somebody that I’ve known for over a decade – he asked me whether I wanted the challenge and I jumped at the chance to lead a project in West London, having supported one in Barking and Dagenham. Local initiatives like this one need to be able to tell a story that resonates with the community and much of my life has been spent in and around Hammersmith. I helped to set up a business that was based in the area from 2003 and since then, we have created a lot of jobs and I have invested in a lot of local ventures. So, I am hugely excited to be taking this on. What skills can you offer? The main thing I bring to a big project like this is the enthusiasm to get it done, combined with the business sense and credibility that I hope will encourage other people within the area to get involved. Succeeding with projects like this Youth Zone boils down, in large part, to cajoling the right people into delivering on time and to budget. Anyone who is planning to support us financially needs to know that charities like ours are not just doing something worthwhile but are also doing it efficiently and offering value for money. I am confident on both scores. 22 — Summer 2019
Why do we need Youth Zones? Here’s the short answer – a £1billion gap. That’s the amount of money that has been withdrawn from youth provision in this country since 2010. Even though 85% of young people’s time is spent outside school, 99% of government funding now goes into their formal education. The impact is obvious and, I am sad to say, largely negative. When young people, who are not fortunate enough to enjoy the sort of after-hours privileges I did, have nowhere to go or can’t see a way to be part of the community, they can quickly end up in some type of trouble. More policing – the topic that often makes the headlines – merely tackles the symptom but not the cause. We want to get to young people from disadvantaged backgrounds early, while they can still improve themselves and see a path to making the right choices. Left alone, with few outlets for their energy and creativity, they get frustrated and resentful. That’s why our Youth Zone strapline is, “Somewhere to go, something to do and someone to talk to”. Some will argue that this gap should only be filled by the State. However, we are not going to wait for the government to change tack when we know there are people within the community who can help now and will be inspired to do so. How will the Hammersmith project be funded? Through a mixture of public and private money. We will get around half the capital we need from the council and raise the remaining half ourselves, as well as covering ongoing running costs. Given that those are around £1.4million per year, I’m looking for around 40 businesses and generous individuals to commit to our first four years as Founder Patrons.
This project is, in many ways, the embodiment of the old cliché that “charity begins at home”. We are not some far-flung cause where you will never be quite sure of the impact of any cheque written – a Youth Zone is local, tangible and impactful and will make an immediate difference to the person who’s giving. After all, why rail against the rising crime rates and antisocial behaviour you see in your area when, through us, you can do something about it? Who are you aiming to help? Our promotional video (at onsideyouthzones.org) starts off with a young girl in her bedroom hearing an argument between her parents through the walls. She walks out of the house and is presented with two different paths to choose from – her “Sliding Doors” moment. Whilst it is very effective, what strikes me is that for many of the people we encounter, the concept of even having a separate bedroom that they can hear their parents arguing from, is alien. Plenty don’t have a bedroom of their own to escape to and many have parents who do not get along. For example, I’m a Governor at a school, where I recently attended a disciplinary exclusion meeting. The father of the child in question had recently gone to prison on a charge of grievous bodily harm against the mother. That’s the reality of some people’s lives. It makes me think, “If someone is growing up in a one bedroom flat, where do they go to get away and what’s the impact if they don’t have anywhere?”
PERSONAL VIEW
ranging from sports to cookery, there will be plenty to do and many ways in which our volunteers can help us.
The mental effect on young people of having no real way to escape, or to distance themselves from a rocky homelife, is clear. Who can blame them for going out onto the street and being “anti-social”? If the boot were on the other foot, how many of us could say we would behave differently? How many young people can you host? Each of the other Youth Zones has around 4,000 young people signed up, with the capacity to host 150 to 250 per night. We know of 7,000 children living in the borough of Hammersmith who are deemed to be living in relative poverty. We hope to have around 4,000 people on our roster and take around 300 per night. All of them will be aged 8-19, or up to 25 if they have disabilities. We will be sited within a couple of hundred yards of two tube stops; Wood Lane on the Hammersmith & City line and White City Station on the Central line. So, we are within a minute’s walk of stations that cover a very large area of London. In terms of the immediate vicinity, we’ll have the White City Estate to our west and the Grenfell Estate less than a mile away to our east. Traditionally, these are two groups that have never mixed as they are separated by the A40. We hope that our new centre could help to bridge the two communities. As part of that goal, I will hire a team of professionals who can work alongside local volunteers. We need representatives from the immediate estates to get involved so that we’re not seen as in any way intimidating. We also want support from local businesses and their employees. With at least 20 activities on offer every night,
There’s always a danger, when you build something really good, that those with the sharpest elbows get in first and shape it for themselves, whereas the whole point of this project is to attract youngsters who feel excluded from top-class facilities. The outreach work we will be doing with nine local schools will make it crystal clear that we are not running a cheap after-school facility for privileged kids. Our gym, for example, will be Virgin Active standard but will cost 50p per visit, rather than £50 or £60 per month. How will you measure success? Primarily through structured “before and after” behavioural assessments in partnership with the police. That is how we have identified drops in anti-social behaviour in the local area around other Youth Zones. We will also be tracking people as they come through and monitoring what they go on to do after they leave us. Whilst we are not a careers service, we will be helping people to focus on that key aspect of their lives. Perhaps the most obvious sign of success at our other Zones is the number of people who are now over the age limit but have returned as volunteers. Which of your many other roles do you enjoy most? They’re all rewarding in their different ways. As a school governor at a free school, I love learning from people who know a lot more than I do about a sector that I have a passion for. I sit on the strategy committee, the finance committee and the governors’ disciplinary committee. The latter reviews decisions made by the headmaster on exclusions. I find the challenge of really understanding what is driving a child’s behaviour fascinating and rewarding. I often play devil’s advocate, on behalf of the excluded child, by drilling down to properly establish that a school decision is right for them. Meanwhile, I had never picked up a bow and arrow before when I became the Chairman of Archery GB! I was called,
CHANGING YOUNG LIVES
totally out of the blue and told “they’re looking for non-executive directors and your profile fits. Would you be interested?” I have subsequently stepped down from that role, having enjoyed my spell doing it. Rowing, on the other hand, I know a lot more about because I have done it myself, so the Chairmanship of British Rowing was a more natural fit. I hardly need point out that it’s a very different sport to archery but both make a huge difference to large pools of people. Rowing is great for addressing two of our biggest challenges as a country – discipline and mental fitness. Whilst it is perceived as a middle-class pursuit, I would love to use the sport as a wider force for good. That’s why I have asked the gym designers at Hammersmith to include rowing machines. I would like to form a link with London Youth Rowing and also work with Fulham Reach Rowing Club, who already do outreach with local schools. What advice would you give an ambitious youngster? Believe in what’s possible and aim to achieve it. I dislike the cliche, “You can be anything that you want to be” because if I had decided that I wanted to be a rocket scientist, or an astronaut, then I would have been setting myself up to fail, even with my privileged background. I think that we often make that mistake with young people. I remember doing some work with Business in the Community and going around the schools in South London with a lady who just kept telling pupils, who were struggling with English as a second language, that they could be anything they wanted to be. I just thought, “You are not being helpful.” That said, a belief in their ability to make the possible happen is hugely important if young people want to uncover realistic opportunities and develop the confidence to try new things. If they leave us, truly believing that they can make a positive contribution to their community, we will have succeeded. ● To find out more about Hammersmith & Fulham Youth Zone – please contact Mark Davies on: mark.davies@onsideyouthzones.org Summer 2019 — 23
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