RSMR Invest magazine - issue 4 by rsmr

Invest ISSUE NO. 4 â&#x20AC;˘ SPRING 2019

Are we heading for a choppy crossing during 2019?

Volatility

Opportunity

Infrastructure

Organisation

Is holding your nerve with a multi-asset approach the only way to smooth the ride for investors?

Is there a competitive advantage in embracing imagination rather than predicatability and certainlty?

How investing in companies with quality intrastructure assets and growth opportunities can reap dividends.

We take a look at how re-evaluating an investment strategy can improve levels trust from clients.

Our best ideas for your clients

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being key for the investor and adviser alike. Important Notice This is intended for investment professionals and should not be relied upon by private investors or any other persons. Past performance is not a guide to future performance. The value of investments and any income from them can fall as well as rise, is not guaranteed and your clients may get back less that they invest. RSMR Portfolio Services Limited is a limited company registered in England and Wales under Company number 07137872. Registered office at Number 20, Ryefield Business Park, Belton Road, Silsden BD20 0EE. RSMR Portfolio Services Limited is authorised and regulated by the Financial Conduct Authority under number 788854. ÂŠ RSMR 2018. RSMR is a registered Trademark.

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Contents

Spring 2019

06 J.P.MORGAN: Navigating the Later Cycle 08 BAILLIE GIFFORD: Extreme Returns 10 SHCRODERS: Global Market Perspective – Q1 2019

WHAT ARE YOU DOING ON BREXIT EVE? WELCOME to our first edition of Invest for 2019. As we go to print we are busy finalising details of our 3rd ‘RSMR in the City’ Investment Conference being held in the magnificent Merchant Taylors’ Hall on Threadneedle Street in the heart of the City on Thursday 28th March. We start with lunch from 12 noon with sessions throughout the afternoon where you will hear the views and comments from 20 leading global asset managers.

11 M&G: Mind the Gap: The chronic shortfall in the world’s infrastructure spending 12 INVESCO: Modern Risk Management 14 COLUMBIA THREADNEEDLE: Asset Allocation Update 16 GOLDMAN SACHS ASSET MANAGEMENT: A Better Deal 18 FRANKLIN TEMPLETON: Responsible Investing

CENTRE PAGES:

Dominic O’Connell from BBC’s Today programme is again on hand to moderate the sessions and we do all this just 24 hours before the UK is due to exist the EU. Should be an interesting time! It’s free for advisers and paraplanners and with four hours quality CPD is a must attend event – go to www.RAwards.co.uk to register.

26 ARTEMIS: Value, Growth or Both?

I hope to see you there. n

28 LEGG MASON GLOBAL ASSET MANAGEMENT: The case for listed infrastructure

Geoff Mills, RSMR

30 FIDELITY: A troubled marriage to tech

JANUS HENDERSON Fundamentals Are Healthy, But Keeping the Faith Might be Testing in 2019

34 T ROWE PRICE: Three Resolutions for a Happy and Healthy Portfolio

OUR OPINION 25 Ken Rayner: Global Round-up 32 Jon Lycett on why you should get your CIP in order

CONTACT DETAILS: Rayner Spencer Mills Research Limited Number 20, Ryefield Business Park, Silsden BD20 0EE. Tel: 01535 656555 or

Invest magazine is published by Rayner Spencer Mills Research Limited (RSMR). The views expressed do not necessarily reflect the views of RSMR or any other party affiliated to RSMR, and no liability can be assumed for the accuracy or completeness of the content, nor should any of the content be used as the basis of any advice offered.

Email: enquiries@rsmgroup.co.uk

Content is offered on an information only basis and intended only for professional financial advisers and should not be relied upon by private investors or any other persons.

All editorial and advertising enquiries should be directed to sarah.mcculloch@rsmgroup.co.uk

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ALTERNATIVES MULTI-ASSET QUANTITATIVE ACTIVE EQUITIES FIXED INCOME REAL ESTATE PRIVATE MARKETS

More investment strategies. One objective. Yours. We’re connecting one of the broadest ranges of capabilities with deeper insights and diverse perspectives. It’s a more progressive way of investing. Discover how we’re making extraordinary investment connections at aberdeenstandard.co.uk/connections Capital at risk

Aberdeen Standard Investments is a brand of the investment businesses of Aberdeen Asset Management and Standard Life Investments. Aberdeen Asset Managers Limited is registered in Scotland (SC108419) at 10 Queen’s Terrace, Aberdeen, Scotland, AB10 1XL, Standard Life Investments Limited is registered in Scotland (SC123321) at 1 George Street, Edinburgh EH2 2LL, and both companies are authorised and regulated by the Financial Conduct Authority in the UK.

NAVIGATING THE LATER CYCLE

Karen Ward,Chief Market Strategist for EMEA at J.P. Morgan Asset Management This is a marketing communication and as such the views contained herein are not to be taken as advice or a recommendation to buy or sell any investment or interest thereto. It should be noted that the value of investments and the income from them may fluctuate in accordance with market conditions and investors may not get back the full amount invested. Past performance and yield are not a reliable indicator of current and future results. There is no guarantee that any forecast made will come to pass. J.P. Morgan Asset Management is the brand name for the asset management business of JPMorgan Chase & Co. and its affiliates worldwide. Our EMEA Privacy Policy is available at www. jpmorgan.com/emea-privacypolicy. This communication is issued in Europe (excluding UK) by JPMorgan Asset Management (Europe) S.à r.l.and in the UK by JPMorgan Asset Management (UK) Limited, which is authorised and regulated by the Financial Conduct Authority.

or investors, navigating a market cycle is a bit like flying a plane. The part you really need to get right is the take-off and landing. At this stage in the cycle, with growth slowing and market volatility on the rise, investors need to keep a close eye on the controls and not be distracted by turbulence as we pass down through the clouds.

Equities Stock markets face two headwinds this year: a convergence in GDP growth in the developed world to more lacklustre rates by recent standards, and a narrowing of earnings growth globally. UK investors will also need to contend with uncertainty over Brexit— with any positive outcome likely to result in a rise in sterling, which would hit repatriated earnings for large cap UK companies even if they look attractive from a dividend yield perspective. Valuations are no longer particularly lofty anywhere—at least on a forward price-toearnings basis—and they look compelling in emerging markets. But there will need to be a sufficient rise in risk appetite for investors to confidently return to emerging market equities.

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Currencies As US growth differentials fade, the dollar is likely to nudge lower on a broad basis against European and emerging market currencies by the end of 2019, unless the slowdown does turn into something more globally systemic. For UK investors, sterling’s move may be particularly stark if the eventual Brexit outcome is relatively soft. We expect sterling to appreciate significantly if the Brexit deal is approved by the UK Parliament and the Bank of England acknowledges that rates will have to rise more swiftly as a result. n

The recent correction has lowered valuations across the board Global forward price-to-earnings ratios x, multiple

Fixed income Investors looking to shelter from economic turbulence in bonds at this time in the market cycle will need to be careful about where in the fixed income universe they land. The quality of investment grade benchmarks has deteriorated considerably in the past decade, while investors should not underestimate the influence of quantitative tightening on both the volatility and the absolute level of yields in fixed income. The challenge for UK investors is perhaps most acute. A Brexit deal may be good news for the economy and coincide with a bounce

in growth in 2019. But this would likely spark a faster pace of interest rate normalisation, which would weigh on government bonds. As the US Federal Reserve has more room than other central banks to cut rates when the cycle ends, a global approach to fixed income could be key.

Spring 2019 www.rsmr.co.uk

Source: IBES, MSCI, Standard & Poor's, Thomson Reuters Datastream, J.P. Morgan Asset Management. Chart uses MSCI indices for all regions/countries, except for the US, which is the S&P 500. EM is emerging markets. Past performance is not a reliable indicator of current and future results. Data as of 27 November 2018.

Connectivity, automation, electrification It’s the way forward. Shouldn’t you be part of it?

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To find out more visit: bnymellonim.com/aoc-uk

Managed by:

The value of investments can fall. Investors may not get back the amount invested.

Investment Managers are appointed by BNY Mellon Investment Management EMEA Limited (BNYMIM EMEA) or affiliated fund operating companies to undertake portfolio management activities in relation to contracts for products and services entered into by clients with BNYMIM EMEA or the BNY Mellon funds. For Professional Clients only. For a full list of risks applicable to this fund, please refer to the Prospectus or other offering documents. Before subscribing, investors should read the most recent Prospectus, financial reports and KIID for each fund in which they want to invest. Go to www.bnymellonim.com. This is a financial promotion and is not investment advice. Investments should not be regarded as short-term and should normally be held for at least five years. The Fund is a sub-fund of BNY Mellon Global Funds, plc, an open-ended investment company with variable capital (ICVC), with segregated liability between sub-funds. Incorporated with limited liability under the laws of Ireland and authorised by the Central Bank of Ireland as a UCITS Fund. The Management Company is BNY Mellon Global Management Limited (BNY MGM), approved and regulated by the Central Bank of Ireland. Registered address: 33 Sir John Rogerson’s Quay, Dublin 2, Ireland. BNY Mellon is the corporate brand of The Bank of New York Mellon Corporation and its subsidiaries. Mellon was formed on 31 January 2018, through the merger of The Boston Company and Standish into Mellon Capital. Effective 2 January 2019, the combined firm was renamed Mellon Investments Corporation. Issued in the UK and Europe by BNY Mellon Investment Management EMEA Limited, BNY Mellon Centre, 160 Queen Victoria Street, London EC4V 4LA. Registered in England No. 1118580. Authorised and regulated by the Financial Conduct Authority. AB00167-051, expires 31 March 2019. T7528 01/19.

EXTREME RETURNS Baillie Gifford Director, James Budden challenges perceived market wisdom through academic research.

t Baillie Gifford, we generally prefer our research to appear irrelevant. The further it is from being a direct debate about the merits of a company as an investment, the happier we tend to be. Much of the most valuable research is deeply indirect in its investment implications and surprising in its eventual impact. But occasionally direct assault has its virtues. This particularly applies to academic input. It can have the ability to stand outside the moment. It certainly has the ability to free itself from the preconceptions, selfinterest and necessary operating dogma of practitioners and industry insiders. The very absence of skin in the game can be a virtue. Radical reappraisal is possible. Sometimes external authority gives the necessary evidence and context to build on uncomfortable and unexpected rumblings of our own. Such has been our experience of working with Hendrik Bessembinder of Arizona State University. In early 2017 Professor Bessembinder released his initial drafts of a paper titled Do Stocks Outperform Treasury Bills? The title itself is heretical. It is a central assumption of Modern Portfolio Theory that because equities are riskier they must have higher rewards. But Bessembinder showed that “slightly more than four out of every seven common stocks have lifetime buy-and-hold returns, inclusive of reinvested dividends, of less than those on one-month treasuries.

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“When stated in terms of lifetime dollar wealth creation, the entire gain in the US stock market since 1926 is attributable to the bestperforming 4 per cent of listed companies.” If this is right then our task is transformed. Our job is solely and simply to find and invest in the stocks that are capable of producing the extraordinary returns of the four per cent. So what characteristics might the companies need to produce these returns? What attributes in turn do we need to hope to identify them? As Bessembinder writes, “The returns to active stock selection can be very large. If the investor is either fortunate or skilled enough…”. So the natural course of affairs was for us to build a relationship with the Professor so that we could learn how to become skilled (or lucky). In March of 2018, James Anderson and Tom Slater, joint managers of Scottish Mortgage Investment Trust, travelled to Tempe, Arizona to discuss these matters with Professor Bessembinder. The two main areas of research that they agreed to work with the Professor on at this early stage are focussed on expanding data to the rest of the world, and trying to find common factors behind both the four per cent of the companies that have created all the return and the even more remarkable 90 companies (out of over 24,000) that have contributed half the wealth created in US equities since 1926. It’s this question of how to identify the qualities that have made these companies so successful, that has begun to unearth potentially crucial insight. It looks as if there could indeed be common factors behind the brilliance. Although many stocks with the most stellar returns now appear ex-growth (Exxon Mobil) or once mortally

wounded but now surgically reassembled (General Motors), at the start of their lives they were all participants in markets that would become very large and they entered, if not first, then at early stages (this has been the case from Exxon Mobil to Google). As these names indicate, titanic founder-owners, or at least missionary leaders, are the enduring pattern. An assemblage of FTSE 100 style companies boasting chief executives with three-year tenure does not feature. Moreover, these companies have not been run with slide rules or their ancient and modern equivalents. They are companies that acknowledge doubt and embrace emerging opportunities.

The skills we need are centred on dreaming of a grand future, backing great people and coping with ups and downs.

Now in a sense much of this is predictable, even if it’s more acute and structural than James Anderson and Tom Slater surmised. What is more striking and even more exciting is the attributes that the Professor believes investors in their turn need to possess to identify the truly great potential companies. Just like the company founders themselves, he thinks the skills we need are centred on dreaming of a grand future, backing great people and coping with ups and downs. His explication seems to run very counter to the perceived market wisdom. It certainly

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casts doubt over the strong preferences of most investors for predictability and certainty. But still more, his perceptions indicate that our job is much more about the imagination of the future and the qualitative assessment of leadership skills than about the hard analytic numbers and confident financial mastery. So the hope – or inspiration – that Professor Bessembinder provides to us is that as our financial industry marches firmly and unanimously up one hill, we should be running determinedly in the opposite direction. If we are right, that is a compelling competitive advantage. But there’s one last essential to the Professor’s current thinking. Identifying the great investments isn’t enough. As Hendrik Bessembinder makes plain it is the longterm compounding of their share prices that matters. This seems to us to require an additional set of skills such as the creativity to imagine greatness discussed above. The compelling urge amongst ordinary humans for sure, but far more damagingly amongst that odd sub-breed that are fund managers, is to take profits and lock in performance. As the old saying goes: ‘It’s never wrong to take a profit’. We believe it is often not just wrong but the worst mistake that can be made. n

IMPORTANT INFORMATION For financial advisors only, not retail investors. As with any investment, your clients’ capital is at risk. This article does not constitute, and is not subject to the protections afforded to, independent research. Baillie Gifford and its staff may have dealt in the investments concerned. The views expressed are not statements of fact and should not be considered as advice or a recommendation to buy, sell or hold a particular investment. Baillie Gifford & Co and Baillie Gifford & Co Limited is authorised and regulated by the Financial Conduct Authority (FCA). The investments trusts managed by Baillie Gifford & Co Limited are listed UK companies and are not authorised and regulated by the Financial Conduct Authority.

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GLOBAL MARKET PERSPECTIVE – Q1 2019 IMPORTANT INFORMATION: Please remember that the value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested. This marketing material is for professional investors or advisers only. This site is not suitable for retail clients. Issued by Schroder Unit Trusts Limited, 1 London Wall Place, London EC2Y 5AU. Registered Number 4191730 England.

Our latest economic and asset allocation views include a review of a turbulent year for markets, a look ahead to key themes for 2019, and a note on investment implications as the US cycle approaches the slowdown phase.

ost investors will be glad to see the back of 2018 when both US equity and government bond markets generated returns that were lower than cash. Such an outcome has only been registered in two previous calendar years since 1900 and highlights the challenge for investors in the current environment. At the start of 2018, expectations were high as a result of the synchronised recovery in global activity in 2017. However, global growth disappointed and remained a concern as trade tensions escalated. At the same time, a stronger US dollar and the tightening of global liquidity held back the performance of risk assets. In terms of asset allocation, we have moved to a more neutral stance over the quarter by closing our overweight in equities and commodities in recognition of the less

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positive macro backdrop. On bonds, we remain underweight government bonds and credit given unattractive valuations. Looking ahead into 2019, there are some key themes for markets. Global liquidity is likely to slow further with the continuation of the Federal Reserve’s (Fed) quantitative tightening (QT) and the European Central Bank (ECB) ending its asset purchase programme. While the tightening of global liquidity and trade wars will not help, a pause in tightening by the Fed could bring relief to dollar borrowers and emerging markets. Populist pressures could also see governments turn to fiscal policy to generate growth. Meanwhile, this quarter, we also take a look at the investment implications of the US cycle particularly as we approach the slowdown phase, a more challenging and volatile phase of the cycle. n l The full Global Market Perspective is available at www.schroders.com/en/uk/ adviser

SECTION HEAD

MIND THE GAP:

As the backbone of the global economy, infrastructure plays a crucial role in development, and ultimately prosperity. Yet not enough is being invested in the assets that provide society’s essential services.

For financial advisers only. Not for onward distribution. No other persons should rely on any information contained within. This financial promotion is issued by M&G Securities Limited which is authorised and regulated by the Financial Conduct Authority in the UK and provides ISAs and other investment products. The company’s registered office is Laurence Pountney Hill, London EC4R 0HH. Registered in England No. 90776.

n the developed world, spending on the care, maintenance and expansion required for the adequacy of our existing infrastructure has fallen woefully short of the mark, leaving our critical assets creaking and bursting at the seams. We can all relate to this in our daily lives. Infrastructure investment in the G6 members – US, Canada, UK, Germany, France and Japan – has been in a multidecade decline and the current 3.5% of GDP is the lowest level since 1948 (see Figure 1). Today’s 70-year low is half the level it was at its peak in the 1960s – which also highlights the ageing nature of these assets. With government finances under pressure and limited expertise in the public sector, the private sector will play a significant role in the restoration and upgrade of our critical infrastructure.

Investing the annual requirement of US$3.7 trillion to the year 2035 – a typical infrastructure investment cycle – would result in aggregate spending of around US$69.4 trillion. Owing to rapid urbanisation and fast-growing populations, emerging markets account for more than 60% of the demand. China alone makes up a third. From China and India to Latin America and Africa, building the infrastructure required to ensure higher living standards and support economic growth remains a work in progress.

The Infrastructure gap Global spending requirements for economic infrastructure, 2017 – 2035

Infrastructure spending in the developed world G6 Government Gross Investment as % of GDP Source:McKinsey, Bridging Infrastructure gaps: Has the world made progress? October 2017.

In the developed world, the US and Canada require the most investment, with 20% of the global target – double the amount required in Western Europe. The important role to be played by the private sector in addressing the infrastructure gap should create a meaningful tailwind for certain businesses. In particular, Source: BAML, The Long View, 16 September 2018. we believe that companies with existing physical infrastructure assets (which provide a strategic barrier to entry) and growth opportunities are best placed to earn Global spending on economic infrastructure, a financial return on the required capital investments. which covers transport, electricity, water and Crucially, we invest in companies based on the quality of telecoms, was US$2.5 trillion in 2015. This their assets and growth opportunities, not simply in order contrasts sharply with the required amount to follow an infrastructure ‘concept’. n of investment estimated at US$3.7 trillion l The value of investments and the income from them per year (see Figure 2). The resulting US$1.2 will fluctuate which will cause fund prices and income trillion shortfall needs to be addressed to paid to fall as well as rise and you may not get back the ensure that the world stays on its economic original amount you invested. growth path.

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Danielle Singer, Multi Asset portfolio manager, Henley Investment Centre, Invesco

MODERN RISK MANAGEMENT

n this post Global Financial Crisis world, investors have broadened their investment universe to find alternative sources of both return and risk mitigation. This has led to a modernisation of risk management that is more suitable to an investment approach that goes beyond a traditional stock and bond portfolio. This article will explore the role of quantitative analysis within the realm of discretionary portfolio management, where humans – rather than models – ultimately make capital allocation decisions, specifically within a multi asset investment framework.

Systematic? Discretionary? Or both? Multi asset investing broadly encompasses strategies whose investable universe spans more than one asset class which can be subcategorized on a number of descriptors, including whether they are systematic or discretionary. The common view is that discretionary, or qualitative, multi asset strategies may not apply the same rigor as their systematic peers

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because decision making is left to humans. However, we believe strategies that have elements of both qualitative and quantitative disciplines may be well suited to avoiding the biases of each – quantitative modelling can mitigate the portfolio managers’behavioural biases just as qualitative input can provide judgement that may mitigate model error.

Ex-ante risk analytics (parametric risk models) Ex-ante risk modelling is used to make assumptions about how the positions in a portfolio may be expected to act in the future, which allows the manager to assess the risk of each holding on its own (independent risk), as well as taking diversification into consideration (portfolio risk) by using the ex-ante correlations of the holdings. Using a statistical risk model can provide context and confidence that a portfolio’s investments, or ideas, are not all representing the same risk exposures and that by combining them into a single portfolio, one can reduce the overall expected risk. Additionally, using a risk model can provide some context around

risk budgeting â&#x20AC;&#x201C; how much risk is being attributed to each investment or grouping and what is the implied diversification benefit of a given combination of them (see figure 1)?

Figure1: Diversification Benefit

As with any models, there are limitations to the exante calculations being evaluated. Therefore, a qualitative assessment of the risk output should include a discussion on model risk. Three common assumptions that ex-ante models make include: Acceptance of a normal distribution of returns (or a bell curve). Independence and identical distribution (IID) of the variables being assessed (like a coin toss) Linearity, which limits the treatment of instruments with a non-linear payoff profile (such as options). While you cannot completely avoid any of these model risks or biases, there are measures that managers can take to try to complement risk model outputs to provide additional perspectives on risk exposures. In fact, it is essential to take further steps in order to overcome statistical model risk and shortcomings. Below are summaries of the many lenses that we utilise to view risk:

For illustrative purposes only

1. Addressing sample bias by incorporating rolling window look-back periods 2. Incorporating non-linearity and fat tails (including use of backtesting) 3. Modern (hypothetical) scenario analysis for multi asset to challenge historical relationships

INVESTMENT RISKS The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested.

4. Measuring diversification through factor work and principal component analysis

IMPORTANT INFORMATION

Conclusion

This article is for Professional Clients only and is not for consumer use.

The role of risk management and a risk manager is to provide portfolio managers with the ability to take risk in a manner that helps them achieve their mandate. In the case of a multi asset portfolio, this mandate is typically centered on steady capital appreciation through a diverse set of sources, leading to a lower volatility profile. To achieve results consistent with investorsâ&#x20AC;&#x2122; expectations for multi asset mandates, we believe that risk management needs to be an inherent and iterative part of a portfolio construction process. Risk managers should approach risk from many different lenses using the modern tools that are available, but be cognizant of the potential for model risk and, of course, that uncertainty will always exist. Complementing strong quantitative input with experience and time-tested qualitative judgement may yield the best results when investing across many markets and asset types, where assessing historical and expected relationships is essential. n

All information is as at 30.11.2018 and sourced from Invesco unless otherwise stated. Where individuals or the business have expressed opinions, they are based on current market conditions, they may differ from those of other investment professionals and are subject to change without notice. Issued by Invesco Fund Managers Limited, Perpetual Park, Perpetual Park Drive, Henley-on- Thames, Oxfords9 1HH, UK. Authorised and regulated by the Financial Conduct Authority.

www.rsmr.co.ukâ&#x20AC;&#x201A; Spring 2019

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ASSET ALLOCATION. REALITY BITES? Maya Bhandari Portfolio Manager, Multi-Asset, Columbia Threadneedle Investments

Reality Bites The collapse across asset markets at the end of last year was surprising in the context of decent above-trend economic growth across the major blocs, muted inflationary pressures and expanding corporate profits. Certainly, global equities suffered the sharpest (volatility-adjusted) annual loss since the global financial crisis struck over a decade ago, ending the year with the worst December on record. US Treasuries experienced only the fifth negative return in 30 years, and investment grade credit returns were the poorest since the late 1990s. Equity and fixed income markets were remarkably “joined up” in derating last year, as a rolling discount rate shock rippled through the financial system. Collectively, as at midJanuary, asset markets appear to be pricing in around a 50% chance of economic recession over the course of the next year or so. Theories abound as to what drove these ugly recession-like returns, given that the weight of both actual data and forecasts, including our own, pointed to low risks of economic contraction. (While the longer the US government shutdown continues, the greater the risks of weaker growth, this is seen to be a one-off shock rather than the trigger for major slowing.) These theories range from geopolitical risks (trade wars and Brexit) to maturing monetary policies, mounting risks of economies weakening as they approach the end of the cycle, and/or as tighter financial conditions beget sharper slowdowns than anticipated. Yet, to paraphrase Albert Einstein, theory can be (remarkably) distinct from reality. Let’s take a look at each in turn.

Geopolitical risk Geopolitical risks are pulling in different directions, with trade wars waning somewhat, but Brexit still a focal concern. Trade disputes act as a tax on productivity, with major prospective disruption of often highly integrated supply chains. Our key

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judgment here remains a likely de-escalation in what is, by all counts, a zero-sum game. As such, we expect some rerating of Asian and Japanese stocks in particular, which carry hefty embedded premia. Japanese equities, for example, are trading on a forward P/E that is in the lowest first percentile of the past 15 years, consistent with economic recession that not even the most cautious observers anticipate. Brexit, by contrast, is probably the most important driver of total returns over the next six months from a sterling investor’s perspective. We believe there is a 60% chance of an orderly exit, with the remaining 40% split between an Article 50 extension and a no-deal scenario. Perversely, a no-deal crash out delivers outsized gains to unhedged exposures from a sterling base, with a less disruptive outcome delivering a drag of comparable magnitude.

Monetary policy The direction of monetary policy, meanwhile, matters enormously for valuations across the piste – it is also a central factor for recession risk, discussed below. The recent shift in Fed-speak, including from the most hawkish members, has deintensified fears of a meaningfully tighter Fed from here. Indeed, markets now price in about half a hike over the year, from three hikes as recently as November. Labour markets are tight but so are financial conditions, and insofar as markets have done some of the Fed’s work, a more cautious policy stance may be deemed more appropriate. On balance, our judgment is that gradual tightening persists, continuing to add pressure to fixed income markets. A lot of the travelling here has already taken place – even quantitative tightening (QT) is arguably three quarters done (12-month rolling central bank purchases peaked in early 2017 and in as much as an end to QT is zero purchases, we are 75% of the way there). That said, an abrupt steepening of the Phillips curve is a risk we are monitoring closely.

SECTION HEAD Recession risk Finally, recession risk, which informs earnings, policy and interest cover. We don’t believe economic cycles die of old age; rather they tend to be caused by a tightening in policy needed to keep inflation or leverage in check, neither of which are a burning worry at present. Although this view is broadly shared by the Fed, it is not without challenge. For example, the fiscal steroids that were applied to an alreadyhot US economy in 2018 may encourage the Fed to tighten more than this policy framework suggests. On a different tack, economists such as Brad DeLong and Claudio Borio make persuasive arguments for why financial market weakness can drive business cycle weakness in a self-fulfilling prophecy. However, insofar as reality bites, 60% of major US equity market

corrections since the secnd world war have given false signals of US recession. Our expectations, and those of the consensus, converge around slower but above-trend economic growth in most regions, supporting mid-single digit earnings growth.

Positioning

IMPORTANT INFORMATION:

Reflecting our key judgments discussed above, recession hedges appear to be somewhat overvalued. Since our last update, multi-asset portfolios have nibbled further into Asian equity markets – both in Japan and Asian emerging markets – to capture the more attractive risk premia on offer. We have also continued to build sterling exposure across sterling-based funds to further desensitise client portfolios to Brexit-induced swings in value. n l columbiathreadneedle.co.uk

Asset allocation snapshot Dislike Asset Allocation

Neutral

Goovernment Cash I/L Credit

Favour Equity Property Commodity

Equity Region

UK EM US

Pac ex-Jpn EU ex-UK

Real Estate Global Equity Materials Utilities Sector Telco

Financials Industrials Consumer Cyclicals Energy Staples

Health Technology

Bond – FX Hedged

Germany US UK

Nordic Ausytralia EM Local

Japan

Corporate IG EMD Corporate HY

Credit

Strongly favour

Commodity

Precious Metals Grains

Livestock Softs

Base Metals Energy

USD

GBP JPY AUD

Euro Nordics

Source: Columbia Threadneedle Investments, as at 22 January 2019.

Japan

For investment professionals only, not to be relied upon by private investors. Past performance is not a guide to future performance. The value of investments and any income is not guaranteed and can go down as well as up and may be affected by exchange rate fluctuations. This means that an investor may not get back the amount invested. Your capital is at risk. This material is for information only and does not constitute an offer or solicitation of an order to buy or sell any securities or other financial instruments, or to provide investment advice or services. The mention of any specific shares or bonds should not be taken as a recommendation to deal. The analysis included in this document has been produced by Columbia Threadneedle Investments for its own investment management activities, may have been acted upon prior to publication and is made available here incidentally. Any opinions expressed are made as at the date of publication but are subject to change without notice and should not be seen as investment advice. Information obtained from external sources is believed to be reliable but its accuracy or completeness cannot be guaranteed. This material includes forward-looking statements, including projections of future economic and financial conditions. None of Columbia Threadneedle Investments, its directors, officers or employees make any representation, warranty, guarantee or other assurance that any of these forward looking statements will prove to be accurate. Issued by Threadneedle Asset Management Limited (TAML). Registered in England and Wales, Registered No. 573204, Cannon Place, 78 Cannon Street, London EC4N 6AG, United Kingdom. Authorised and regulated in the UK by the Financial Conduct Authority. Columbia Threadneedle Investments is the global brand name of the Columbia and Threadneedle group of companies. columbiathreadneedle.com

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A BETTER DEAL Goldman Sach's Asset Management Andrew Wilson describes his reasons for a positive outlook for 2019.

t Goldman Sachs Asset Management, we believe 2019 offers a better deal for investors for three key reasons:

l Continued expansion in global growth and corporate profits.

We believe US growth will moderate in 2019 while the slowdown outside of the US is now behind us. Many Emerging Markets economies remain in the early stages of recovery with room to run. In our view, the continued global expansion will underpin corporate earnings growth and support risk asset performance.

l A low bar for positive surprises. Conditions heading into 2018 were hard to beat, resulting in a situation where most surprises were negative. That is not the case going into 2019. Macro expectations and asset prices have adjusted sharply lower, lowering the bar for positive surprises that could lift asset prices. l Attractive valuations. In our view, the significant shift in valuations in 2018 is overdone relative to both macro and corporate fundamentals. Investor concerns around the long cycle, trade tensions and populist politics will likely carry through to 2019, but we believe it is too soon to position for the end of the cycle and markets have already gone too far in pricing these risks.

Where are the investment opportunities? We prefer equity over credit, and credit over rates, and regionally, EM to DM. These preferences are based on attractive valuations relative to macro and corporate fundamentals. l Equities are our preferred asset class. We think the 2019 risk-reward for

equities is improved relative to 2018 after the de-rating in valuation multiples observed this year. Selectivity is increasingly important amid higher volatility, elevated political and trade risks, as well as slowing revenue growth and margin pressures.

Recent underperformance has created attractive valuations in corporate credit. Continued economic

and corporate earnings growth may help to keep downgrade and default activity in check, while also affording over-levered issuers time to potentially improve credit quality. We favor exposure to issuers with strong or improving balance sheets, high interest coverage ratios and pricing power (given rising input and wage costs).

We expect renewed outperformance of EM assets relative to DM. EM asset devaluationsâ&#x20AC;&#x201D;particularly

in currencies and equitiesâ&#x20AC;&#x201D;have surpassed what is implied by underlying fundamentals. In 2019, we expect EM asset performance to be unleashed by improving growth and upside policy surprises.

The views expressed herein are as December 2018 and subject to change in the future. Individual portfolio management teams for GSAM may have views and opinions and/or make investment decisions that, in certain instances, may not always be consistent with the views and opinions expressed herein. United Kingdom and European Economic Area (EEA): In the United Kingdom, this material is a financial promotion and has been approved by Goldman Sachs Asset Management International, which is authorized and regulated in the United Kingdom by the Financial Conduct Authority. Although certain information has been obtained from sources believed to be reliable, we do not guarantee its accuracy, completeness or fairness. We have relied upon and assumed without independent verification, the accuracy and completeness of all information available from public sources. Past performance does not guarantee future results, which may vary. The value of investments and the income derived from investments will fluctuate and can go down as well as up. A loss of principal may occur.

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Why is stopping superbugs a job for an asset manager? Because antibiotic resistance is a global human health threat. Because we engage with companies to curb the use of these drugs in healthy farm animals. Because engagement helped encourage a leading fast-food chain to announce plans to phase it out. Because that way, we’ll help medicines stay effective. Because responsibility influences outcomes – for investors and for everyone. Read how we take responsibility every day at avivainvestors.com/engage

For today’s investor

For professional clients and advisers only. Issued by Aviva Investors Global Services Limited. Registered in England No. 1151805. Registered Office: St Helen’s, 1 Undershaft, London EC3P 3DQ. Authorised and regulated by the Financial Conduct Authority. Firm Reference No. 119178.

RA19/0028/09012020

FUNDAMENTALS ARE HEALTHY BUT KEEPING THE FAITH MAY BE TESTING IN 2019 Paul O’Connor, head of the Janus Henderson UKbased Multi-Asset team, discusses how a multi-asset approach could help to smooth the ride for investors. What are the key themes likely to shape markets in 2019? At face value, the global economic outlook for 2019 and beyond still looks fairly marketfriendly. Consensus forecasts continue to project an unusually long economic expansion, with few signs of imminent recession, offering continued fundamental support to mature bull markets in risk assets. However, given the unprecedented nature of some key aspects of the current macro environment, and the fact that both policy and political uncertainty look set to be unusually high in 2019, faith in the constructive long-cycle scenario is likely to be frequently tested during the year.

On the monetary policy front, concerns are likely to focus on whether the US Federal Reserve (Fed) can engineer a ‘soft landing’ and how financial markets will adjust to the ending of the decade-long era of global quantitative easing (QE). Away from central banks, the other big policy question overshadowing 2019 is whether global trade tensions will ease before economic confidence is damaged or some sort of financial accident is triggered in the emerging markets. On top of this, the year is likely to be punctuated by a number of political flare-ups, with developments in Italy and the UK looking most likely to generate headlines in the early months of the year.

Rolling annual central bank asset purchases ($ billions)

Source: Bloomberg, TS Lombard, as at July 2018 Note: Projections after June 2018. US Federal Reserve (Fed), European Central Bank (ECB), Bank of Japan (BoJ), Bank of England (BoE)

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Where do you see the most important opportunities and risks within your asset class? We see equities offering the highest expected returns in 2019, although they will probably give quite a bumpy ride. 2018’s washout in high yield stocks has created some attractive entry points, particularly in the UK. One of the big calls for the year will be whether 2018’s US outperformance in the equity and currency markets can continue. Many of the fundamental drivers of these trends are now well priced-in and the best phase of US outperformance is now behind us. Gauging when to rebuild exposure to emerging markets will be another key decision in 2019. Value is emerging here but a sustained upswing will probably require significant good news from US-China trade talks or the belief that US interest rate expectations are peaking.

How have your experiences in 2018 shifted your approach or outlook for 2019? We saw 2018 as being a key transition year for financial markets. The big theme here was the ending of QE and an unusually benign era in financial markets and the return to a more complicated and uncertain market environment. We expect that the uncertainty witnessed in 2018 may continue into 2019. If this is the case, lower and more

variable returns and greater volatility than experienced during the QE era is likely. While buy-and-hold investing worked well when markets were clearly trending higher, the choppier conditions that we expect for 2019 will demand a greater emphasis on volatility management and asset allocation. In this sort of environment, well diversified, actively managed multi-asset funds should have plenty to offer investors. fundamental drivers of these trends are now well pricedin and the best phase of US outperformance is now behind us. Gauging when to rebuild exposure to emerging markets will be another key decision in 2019. Value is emerging here but a sustained upswing will probably require significant good news from US-China trade talks or the belief that US interest rate expectations are peaking. n l These are the manager’s views at the time of writing and may differ from those of other Janus Henderson portfolio managers. The information should not be construed as investment advice. No forecasts can be guaranteed.

IMPORTANT INFORMATION: This document is intended solely for the use of professionals, defined as Eligible Counterparties or Professional Clients, and is not for general public distribution. Past performance is not a guide to future performance. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested. Tax assumptions and reliefs depend upon an investor’s particular circumstances and may change if those circumstances or the law change. If you invest through a third party provider you are advised to consult them directly as charges, performance and terms and conditions may differ materially. Nothing in this document is intended to or should be construed as advice. This document is not a recommendation to sell or purchase any investment. It does not form part of any contract for the sale or purchase of any investment.Any investment application will be made solely on the basis of the information contained in the Prospectus (including all relevant covering documents), which will contain investment restrictions. This document is intended as a summary only and potential investors must read the prospectus, and where relevant, the key investor information document before investing. We may record telephone calls for our mutual protection, to improve customer service and for regulatory record keeping purposes. Issued by Janus Henderson Investors. Janus Henderson Investors is the name under which investment products and services are provided by Henderson Investment Funds Limited (reg. no. 2678531) (registered in England and Wales at 201 Bishopsgate, London EC2M 3AE and regulated by the Financial Conduct Authority) Janus Henderson is a trademark of Janus Henderson Group plc or one of its subsidiaries. © Janus Henderson Group plc

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RESPONSIBLE INVESTMENT

Julie Moret, Head of ESG, Franklin Templeton

esponsible Investment is now part of the investment mainstream. No longer a niche consideration, it represents a structural shift in the industry that is here to stay. It continues to generate growing levels of interest and awareness, as the volume of press comment, social media posts, surveys and new fund launches continue to attest to.

What Is Responsible Investment? According to the PRI Association¹, responsible investment describes a process where environmental, social and corporate governance issues are incorporated into investment decisions. We think ESG considerations, such as those listed below, play an important role from an active management perspective, giving a sense of how companies are managing what are often longer-term strategic risks that can reshape competitive advantage and, ultimately, long-term value creation for shareholders. That’s why ESG analysis is key to our investment approach at Franklin Templeton.

ESG Considerations Environmental

Social

Governance

• Environmental remediation • Ecosystem change • Pollution • Unsustainable practices • Resource depletion • Energy resources • Climate change risks/ opportunities • Carbon emissions, measurement & reporting

• Data security & governance • Social cohesion & stability • Child or slave labour • Employment levels • Health & safety practices • Inequality • Product safety • Diversity • Infrastructure

• Shareowner rights • Say on pay • Tax • Institutional strength • Bribery & corruption • Rule of law • Separation of Chairman/CEO roles • Accounting practices, transparency

Diverse ESG Approaches There are several different approaches to responsible investing, the most commonly recognised are described below. Values-driven investment solutions can exclude certain investments to comply with ethical or religious values Thematic investment solutions focus on companies that address social, environmental or climate change challenges with their products and services ESG-tilted or best in class investment solutions select companies with leading ESG

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practices, or companies with a trajectory of improving ESG standards Impact-focused solutions aim to invest with the explicit intention of generating positive and measurable social and economic outcomes

Current ESG Themes Plastics: An Emerging ESG Risk A growing theme is the impact of so-called “convenience culture” pollution. The world’s oceans contain 150 million tonnes of plastic, with 8 million being added annually.² At this rate it is projected that by

2050 there will be more plastic by weight than fish in our oceans.

Responsible Investing at Franklin Templeton

Meanwhile, we have begun to see a shift in consumer behaviour and regulatory pressure on curbing single-use plastics. With only 9% of plastics globally recycled, this is an area governments are keen to address.

We think the consideration of ESG factors can lead to better outcomes for our clients.

The European Union (EU) has set targets that by 2025 90% of plastic is to be recycled. This shift will require companies to think about circular economy solutions. The economics of plastic use is also changing. The manufacture of plastics is extremely energy-intensive. Oil and gas comprise two-thirds of input costs when producing plastics, so effective carbon pricing could dramatically increase cost pressures. Regulation and Shareholder Rights We have seen some divergence between regulators in Europe and the United States on ESG topics. While Europe is aiming to hardwire sustainability into its capital markets, there has been a growing corporate voice of dissent in the United States against investor influence on sustainability factors like climate change. It seems clear to us that despite increased lobbying from corporates, investors will continue to put pressure on companies to address material ESG factors and exercise their rights to file proposals on behalf of clients where necessary. We believe active managers have a role to play in encouraging corporate disclosure of decision-useful ESG information which will further the industry’s development of ESG practice. Our investment process continues to evolve to reflect the integration of our ESG analysis. That, in turn, informs our engagement with companies as active stewards of our clients’ money.

Each step of our investment process integrates in-depth ESG analysis. Our investment teams utilise a range of proprietary research and external data sources to arrive at investment insights. This is reinforced by dedicated ESG and risk management experts, bringing different perspectives, best practice and the latest thinking. By understanding relevant and material ESG factors, our investment teams can make better decisions. Engaging with companies, and continuous monitoring of their activities, are key tenets of our ESG approach, supported by actively voting all proxies in the best interest of our clients. We work closely with clients to understand exactly what they require. Drawing on our teams’ expertise, we continuously enhance our range of responsible investing solutions tailored to clients’ specific investment needs. Solutions range from values-driven, ESGtilted, thematic or impact-focused offerings, to custom ESG. They include impact funds and exchange-traded funds. n 1. Source: PRI – Principles for Responsible Investment, a leading, independent proponent of responsible investing. 2. Source: World Economic Forum. The New Plastics Economy: Rethinking the future of plastics, January 2016.

The comments, opinions and analyses expressed herein are for informational purposes only and should not be considered individual investment advice or recommendations to invest in any security or to adopt any investment strategy. Because market and economic conditions are subject to rapid change, comments, opinions and analyses are rendered as of the date of the posting and may change without notice. The material is not intended as a complete analysis of every material fact regarding any country, region, market, industry, investment or strategy. Data from third-party sources may have been used in the preparation of this material and Franklin Templeton Investments (“FTI”) has not independently verified, validated or audited such data. FTI accepts no liability whatsoever for any loss arising from use of this information and reliance upon the comments, opinions and analyses in the material is at the sole discretion of the user. Products, services and information may not be available in all jurisdictions and are offered by FTI affiliates and/or their distributors as local laws and regulations permit. WHAT ARE THE RISKS? All investments involve risks, including potential loss of principal. The value of investments can go down as well as up, and investors may not get back the full amount invested. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, industries, sectors, or general market conditions. Issued by Franklin Templeton Investment Management Limited (FTIML), Cannon Place, 78 Cannon Street, London EC4N 6HL. Authorised and regulated by the Financial Conduct Authority. © 2019 Franklin Templeton Investments. All rights reserved

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SECTION HEAD

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FOR PROFESSIONAL CLIENTS AND QUALIFIED INVESTORS ONLY

TAKE ADVANTAGE OF HUMAN AND MACHINE The BlackRock Advantage range of six new equity funds harness the power of human insight and machine intelligence. Building on over 30 years’ experience, we use advanced tools to unlock one of the world’s most valuable untapped resources: big data. Utilising innovative systems, proprietary models and advanced analytics we can quickly uncover emerging trends and patterns on a global scale. These can be used to inform investment oppor tunities within our range of funds. Take advantage of the power of human and machine.

Capital at risk: The value of investments and the income from them can fall as well as rise and are not guaranteed. You may not get back the amount originally invested.

Search ‘BlackRock Advantage’

SECTION HEAD

THE GLOBAL ECONOMY:

'IN THE CITY' WHAT’S GOING ON? CONFERENCE RSMR Director, Ken Rayner, takes a quick look at current worldwide activity.

Ken Rayner, Director at RSMR

nvestment calm evaporates as stock markets fall. Economists and fund managers have begun to believe that the benign investment climate, which followed the global financial crash a decade ago, is facing a number of headwinds.

This was reflected in the market falls in February 2018, setting the tone for the year, and was again evident in the final quarter. Even the powerful US stock market remained only marginally positive, in sterling terms, after the Federal Reserve increased interest rates, leading to political and investor disharmony in December. The negative year has not just been down to struggling equities. Research by global bank, Morgan Stanley, showed that up to mid-December 2018, 21 asset classes had negative returns during the year after a very positive 2017. The investment climate changed due to a cocktail of economic hazards, including global political uncertainty, escalating trade disputes, China’s economic slowdown and a strong US currency. Added to this have been moves by central banks to withdraw support introduced after the financial crash by raising interest rates and reducing bond purchase schemes. All this affected investor confidence and activity throughout 2018 and this is likely to continue for the time being as Brexit, international political uncertainty and trade disputes rumble on. n

Registration is now open – go to rawards.co.uk.

e hope you can join us for our 3rd ‘RSMR in the City’ Investment Conference being held in the magnificent Merchant Taylors’ Hall on Threadneedle Street in the heart of the City on Thursday 28th March. We start with lunch from 12 noon with sessions throughout the afternoon where you will hear the views and comments from 20 leading global asset managers. Dominic O’Connell from BBC’s Today programme is again on hand to moderate the sessions and we do all this just 24 hours before the UK is due to exist the EU. Should be an interesting time! It’s free for advisers and paraplanners and with 4 hours quality CPD is a must attend event. To register, please visit the event website – www.rawards.co.uk We look forward to seeing you there. n

VALUE, GROWTH OR BOTH? Simon Edelsten, from Artemis Investment Management describes the up-sides of the company's Global Select Fund.

here are many approaches to investing in equities. Some rely on technical factors such as momentum indicators and charts. Others are based on fundamental factors – cashflows, assets etc. The fundamental camp is often divided between ‘growth’ and ‘value’ approaches. ‘Growth’ investors believe the value of a share is based on its cash profits. The share price is therefore sensitive to how these profits grow and how heavily future cashflows should be discounted. ‘Value’ investors believe that a company has an ‘intrinsic value’ and that shares should be bought at a discount to that value.

Textbook approaches… There are many different and sometimes conflicting views of how to calculate this intrinsic value. In 1949, Benjamin Graham published The Intelligent Investor, one of the first textbooks on fundamental equity analysis. The book concentrates about two-thirds of its argument on investing in so-called ‘cigar butt’ companies – companies whose equities sell below the value of their hard assets. In 1950s America, there were still a small number of such ‘deep value’ stocks, but takeovers and asset-stripping soon eliminated these opportunities. The third section of The Intelligent Investor introduces the idea that the ‘intrinsic value’ of a company lies in its

future cashflows, especially when these are stable and predictable. Warren Buffett, who worked with Ben Graham in the 1950s, developed this ‘franchise value’ approach to investment. It emphasises the importance of barriers to entry - or ‘moats’ - in identifying companies with reliable cashflows. ‘Franchise value’ investing focuses on the current and future cashflows of a company and compares this with the equity’s current valuation. Some would say this is ‘growth at the right price’ investing. That can be distinguished from out-and-out ‘growth’ investing as there are many investment opportunities which do not have current cashflows – for instance drug discovery businesses and oil exploration companies.

Where are the opportunities now? The valuation model we use in the Artemis Global Select Fund has both a cashflow element and a value element – that is to say we hope to find investment opportunities coming out of both fundamental approaches. The Artemis Global Select Fund’s two step approach to valuation ensures that we cover all stock opportunities from ‘deep value’ through to ‘high growth’. Over the cycle, we observe how opportunities become more plentiful in one approach or the other - and the balance of our fund moves naturally from growth to value as the cycle matures. n

THIS INFORMATION IS FOR INVESTMENT PROFESSIONALS ONLY. IT IS NOT FOR USE WITH OR BY PRIVATE INVESTORS. Any research and analysis in this communication has been obtained by Artemis for its own use. Although this communication is based on sources of information that Artemis believes to be reliable, no guarantee is given as to its accuracy or completeness. Any forward-looking statements are based on Artemis’ current expectations and projections and are subject to change without notice.

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PREDICTABLE, STABLE GROWTH

– THE CASE FOR LISTED INFRASTRUCTURE Listed infrastructure is characterised by defensive growth and above average dividend yields. These traits can be amplified with an active approach that selects high quality companies, says Nick Langley of Legg Mason Global Asset Management.

irports, electricity networks, gas pipelines, rail and roads provide essential services whose demand is relatively predictable. Even in times of economic weakness, consumers continue to use water, electricity and gas. Fewer surprises means the market price of the companies that manage these services tend to experience less volatility than others.

Are market participants prepared? Not surprisingly, the major listed infrastructure indices¹ tend to perform defensively against global equities. For toll roads, mobile phone towers, air and sea ports there may be greater fluctuation in revenues in line with economic cycles, but as monopoly providers they enjoy relative stability too. These assets can provide a source of defensive growth too. Another important difference is that with listed infrastructure, earnings, cash flows and dividends are primarily linked to the expansion of asset bases rather than to the broad economy. That expansion tends to come from structural factors rather than market forces – for example population growth or a move to a cleaner

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energy network. This means infrastructure stocks can continue to grow their earnings while companies in the broader market see earnings decline. Another positive of listed infrastructure is the tendency for more predictable income distributions. The stability of earnings derived is often the result of regulation and/ or long-term contracts that enforce viable and stable cash flows. Such income is also usually inflation linked. For regulated assets, the regulator determines the revenues that a company should earn on their assets and in doing so they typically take into account inflation. This provides a level of protection when buying a global portfolio of stocks, where individual stocks may come from countries with higher inflation than that of the domestic investor. The attractive yield potential of listed infrastructure is illustrated in the chart.

Selective about Infrastructure We believe in strict entry requirements for the companies in our portfolios. Companies should meet the hurdles of having predictable cash flows, inflation protection, owning longduration assets and having high barriers to entry and limited competition in their market.

Rare Income universe vs. traditional yield sources

In this way, we believe more defensive portfolios can be created than offered by the main indices and we believe portfolios can be created to primarily focus on predictable, above average dividend growth. As a measure of this, over the past 12 years², the S&P Global Infrastructure Index has captured, on a monthly basis, 71% of the market gains of the MSCI AC World Index (local) and 72% of market falls. While the income universe – a group of companies considered for the Legg Mason IF RARE Global Infrastructure Income fund has captured 52% of the market falls and 74% of the market gains.

Why now? Listed infrastructure came into its own in the final quarter of 2018 as investors rotated out of growth stocks in search of more defensive assets. The trade war between the US

and China is playing a key role, creating uncertainty and fuelling expectations of a slowdown. However, we do not believe the growth cycle is over yet. The trade war will dissipate somewhat, providing the impetus for one final move upwards with investors rotating back into growth names. But, we are very near that last hurrah for growth and the key to investing in infrastructure in 2019 will be in timing the switch from cyclical to defensive names. n

¹The DJ Brookfield World Infrastructure – TR, MSCI World Core Infrastructure – (net), FTSE Global Core Infrastructure, FTSE Global Core Infrastructure 50/50, FTSE Developed Core Infrastructure 50/50. ² 31 August 2006 to 31 December 2018. RARE Infrastructure Ltd was launched on 20 August 2006. ³Class X Distributing GBP (unhedged), as at 31 December 2018

IMPORTANT NOTICE This is a sub-fund ("fund")of Legg Mason Funds ICVC (“the Company”), an umbrella investment company with variable capital, authorised in the UK by the Financial Conduct Authority as an undertaking for collective investment in transferable securities (“UCITS”). Information has been prepared from sources believed reliable. It is not guaranteed in any way by any Legg Mason, Inc. company or affiliate (together "Legg Mason"). Before investing you should read the application form, Prospectus and KIID (and accompanying Supplementary Information Document). These and other relevant documents may be obtained free of charge in English from Legg Mason Investment Funds Limited, 201 Bishopsgate, London EC2M 3AB or from www.leggmason.co.uk. This financial promotion is issued by Legg Mason Investments (Europe) Limited, registered office 201 Bishopsgate, London, EC2M 3AB. Registered in England and Wales, Company No. 1732037. Authorised and regulated by the UK Financial Conduct Authority. This information is only for use by professional clients. It is not aimed at retail clients. Not for onward distribution. The fund invests in shares of companies, and the value of these shares can be negatively affected by changes in the company, its industry or the economy in which it operates. The fund invests in shares of infrastructure companies, and the value of these shares can be negatively affected by economic or regulatory occurrences affecting their industries. Investments in new infrastructure projects carry risks where they may not be completed within the budget, agreed timeframe or specifications. Operational and supply disruptions can also have a negative effect on the value of the company's shares. The distribution yield reflects the amounts that may be expected to be distributed over the next 12 months as a percentage of the Net Asset Value of the class as at the reported date. It is based on a snapshot of the portfolio on that day and does not include any subscription charges and investors may be subject to tax on distributions. Past performance is not a reliable indicator of future results.

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A TROUBLED MARRIAGE TO TECH Bill McQuaker, Portfolio Manager at Fidelity Multi Asset Open range talks about the fickle relationship between investors and the tech trade and whether it's over, or here to stay.

or over 25 years now, investors have been faced with the upsand-downs of the technology sector. 2018 was no exception and investors are now asking if this is the end of the tech trade. However, semiconductors have become such an integral part of our lives that it is clear the tech story is not going away. Investors are married to it, whether they like it or not. Today, workforce automation and artificial intelligence (AI) are automating brains as well as brawn, advancing at unprecedented speed and scale across many parts of the economy. Thus, we cannot assume that displaced workers can be easily redeployed to new functions, with profound implications for economic growth and the labour force.

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The importance of semiconductors is easy to overlook, as we see the end result of their use rather than the physical object. But they are key components in the electronic devices which form an integral part of our daily lives. Put most simply, it is the advancement in semiconductor technology that is responsible for all of us having a supercomputer in our pockets at all times.

Semiconductors are often referred to as the building blocks for growth in the 21st century, much like steel's role in the 20th century.

The “dot-com” boom and subsequent bust in the late 90s and early 2000s, best characterised by the now popular ‘irrational exuberance’ phrase coined by Federal Reserve Chairman Alan Greenspan, is the clearest example of the volatile relationship investors have had with tech stocks.

However, the tech story is broader than just the extreme valuations of anything with ‘.com’ in the name back in 2000, or the visions of Zuckerberg and Bezos today. Underpinning the story is the technology of semiconductors, and the direction of this technology is at least as important for the tech sector in the long-term as the latest trends in Instagram marketing.

Semiconductors are often referred to as the building blocks for growth in the 21st century, much like steel’s integral role in industrial production beginning in the late 19th and 20th century. But just as steel didn’t have solely commercial applications, and allowed for

the industrialisation of warfare, there is a disquieting side to semiconductors as well. While news headlines on the US/China trade wars often focus on US President Donald Trump’s tweets, rotting soybeans, and iPhones, we should not forget the newest semiconductor technologies will likely underpin a revolution in military affairs characterised by robotics and the internet-of-things. While battling China is increasingly synonymous with Donald Trump, the bipartisan nature of this dispute is evidenced by one of the Obama administration’s parting shots in January 2017. A report by the President’s Council of Advisors on Science and Technology argued for the continued US leadership in semiconductors for both economic and national security reasons, in the face of Chinese plans to expand their capacity, “motivated by economic and national-security goals.” Current Chinese semiconductor technology is not state of the art, but upscaling their productive capacity is a key component of their lofty China 2025 plan, which the US has taken issue with. All this speaks to the true nature of the trade dispute. At this juncture, investors are asking if this is the end of the tech trade. Given the long memory of investors scarred by the ‘dot-com’ bust, and the strong upward march of US tech stocks since mid-2017, it makes sense to ask that question, especially given the large weighting of technology stocks in major indices. But it is clear the tech story is not going away, and investors are married to it, whether they like it or not. n

IMPORTANT INFORMATION This information is for investment professionals only and should not be relied upon by private investors. The value of investments and the income from them can go down as well as up and clients may get back less than they invest. Past performance is not a reliable indicator of future returns. Investors should note that the views expressed may no longer be current and may have already been acted upon. These funds use financial derivative instruments for investment purposes, which may expose the funds to a higher degree of risk and can cause investments to experience larger than average price fluctuations. These funds invest in overseas markets and so the value of investments can be affected by changes in currency exchange rates. There is a risk that the issuers of bonds may not be able to repay the money they have borrowed or make interest payments. When interest rates rise, bonds may fall in value. Rising interest rates may. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. Issued by Financial Administration Services Limited, authorised and regulated by the Financial Conduct Authority. Fidelity, Fidelity International, the Fidelity International logo and F symbol are trademarks of FIL Limited.

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GIVE YOUR CIP A PROD! The primary benefit of a well-designed CIP is that it creates a consistent and repeatable approach.

RSMR Business Development Manager, Jon Lycett, talks about how to get your ducks in a row when it comes to your proposition processes.

ong ago when I first joined the financial services industry, the acronym ‘CIP’ didn’t exist and nor did the process to which it refers. It’s probably unfair to use the oft quoted ‘pin sticking’ analogy, but there was certainly a culture where research was largely limited to a flick through the life and pensions supplement of a particular trade publication. Thankfully, most would agree that we’re in a much better place now. Post-RDR, the majority of firms have adopted some form of standardised process for matching clients with a suitable PRODuct or service – helped in large part by the increased use of back office systems, risk profiling software and platforms. But just as many firms were settling down into the broad use of a CIP, along came MiFiD II (which caused much consternation throughout 2018) and PROD. Worryingly, studies show that over half of UK advisers are unaware of the full implications of PROD. We will return to the impact of PROD in future articles but for now it does seem like a good time to set out some basic best practice principles on how to build and monitor a centralised investment proposition. The primary benefit of a well-designed CIP is that it creates a consistent and repeatable approach, which should produce better outcomes for investors. It should also enable a firm to operate more efficiently – with more time dedicated to offering clients

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the level of service that demonstrates value for money. It goes without saying that if the CIP is operated robustly and is well documented, then the regulatory risk to a business is significantly reduced. So where do you start? The first questions would usually relate to the philosophy that a firm uses and the tools that it uses. This should be documented to form the basis of a client service proposition. Common questions are; l Am I independent or restricted? l How do I consider risk and discuss capacity for loss? l What is my approach to asset allocation? l What type of clients do I deal with? And how do I segment them into defined categories? l How do I research and select solutions to match the requirements of each client segment? Having a structured advice process, containing several stages that are each underpinned by a robust methodology, will set your firm apart from the competition and help you to target the type of clients who see the value in the services that you offer.

Identifying needs & setting objectives This is the bread and butter for advisers. Increasingly, many are introducing lifestyle and life planning questionnaires into the process along with cash-flow modelling

DISCOVERY MEETING, RISK & CAPACITY FOR LOSS

ASSET ALLOCATION

FUND SELECTION & PORTFOLIO BUILDING

MONITORING & QUARTERLY REPORTING

ONGOING CLIENT SERVICE & REVIEW

ROBUST RESEARCH & ANALYSIS • DOCUMENTED METHODOLOGY • DUE DILLIGENCE • FULL AUDIT TRAIL

software tools seeking to respond to the increasing sophisticated client needs and to differentiate their service from the competition.

Attitude to risk Advisers use a variety of tools to determine a client’s attitude to risk and increasingly these involve more scientific approaches such as psychometric testing and questioning techniques, but there is no substitute for a good old fashioned discussion with your client where you can probe and challenge their attitude to risk and their understanding of the impact of market volatility in the market on their investments. This area is fundamental to establish client understanding, another part of TCF and needless to say this must all be recorded on the client file.

Asset allocation Many books have been written on the subject of asset allocation and the impact – both positive and negative – on long term investment performance. In setting asset allocation it is necessary to do this at a strategic level, based on the client’s appetite for risk over the longer term meeting the client’s expectations as determined by the risk profiling exercise. Some form of tactical overlay may then be considered to respond to shorter term shifts and trends in the market, but the strategic position should remain the starting point.

Fund selection/portfolio construction This is an equally important stage of your investment advice process and you should ensure you choose funds based on a combination of quantitative and qualitative factors. The quantitative measures centre on performance and risk with a number of measures used in each area to provide a comprehensive picture. The qualitative assessment of any fund is to assess how the fund will perform in the future. The purpose of this

part of the analysis is to ensure that the fund has robust fund management processes in place, and a strong fund management team and the qualitative screen allows a more detailed look at the how the fund actually operates. By combining both quantitative and a qualitative research you build up a thorough understanding of the fund, and how it works in different investment conditions and this can then be fed through into any selection for portfolio building

Monitor and review Not least to ensure you can justify the payment of ongoing remuneration you need to have a formal process for monitoring the underlying funds which form part of your recommendations made to clients and for reviewing performance and any required rebalancing.

Platforms Once your investment strategy and process has been agreed selecting a platform will be easier and some solutions will probably be capable of being eliminated because of the approach you want to take.

Conclusion By spending time reviewing your investment strategy you will provide focus in delivering a world class client service that will allow you to continue the journey towards delivering improved levels of advice and building trust with your clients. n

l This is the first of a series of articles considering the impact of MIFID and PROD rules on a firms investment proposition. Meanwhile if you need any help with your CIP please contact us at enquiries@rsmgroup.co.uk

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Nick Samouilhan , Solutions Strategist, EMEA

THREE RESOLUTIONS FOR A HAPPY AND HEALTHY PORTFOLIO

n January, many of us turn our thoughts to New Year’s resolutions. Running more; eating less meat; picking up a better hobby: all decisions grounded in an understanding that our entrenched behaviors have room for improvement and a hope that motivation – and a bit of hard work – will turn our aspirations into positive outcomes.

duration risk need to ask themselves whether it’s worth maintaining those positions. What is the fixed income part of the portfolio supposed to be doing? It can’t be to generate returns, as that’s what the equity allocation is supposed to do. What happens if risk assets sell off, and the fixed income allocation loses a substantial amount because it is loaded with risk-seeking – rather than risk-offsetting – positions.

This year, we decided to subject our investment processes to the same scrutiny as our eating and exercise habits.

So, for our New Year’s resolution number one: investors should be honest with themselves about what they’re trying to achieve in their fixed income allocation and adjust it accordingly.

As with most resolutions, our three 2019 investment resolutions begin with some reflection on what we have been doing so far, an acknowledgement that things may need to change, and a commitment to turning our aspirations into concrete actions. The first thing we need to accept is that investors have been lucky – and some of us maybe even a little naughty – in our fixed income allocations. Central bank actions since the Global Financial Crisis have pushed down interest rates across almost all fixed income markets. During this period, generally the greater the risk (whether in terms of duration or credit), the better the returns. But it’s time for change, because those great returns are now the equivalent of your tighter jeans. Interest rates and credit spreads are unlikely to continue to fall, so investors who have taken higher levels of credit and

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The second thing to consider is that, while we inhabit a far more globalised world than that of even a decade ago, we continue to invest as if each region in the world is an island. Should we overweight Japan and underweight the US this year, for instance? In the past, we could compare what the US market was pricing in about the US economy to what the Japanese market was pricing in about the Japanese economy, and then make a choice about Japan versus the US accordingly. Things have changed, however. Just as we should probably accept we can’t subsist on a diet of cheese and chocolate indefinitely, so too do we need to accept that in a world of global supply chains, geographically diverse corporate structures and international businesses, the benefits of a regional approach

to investing may have peaked. If a company is registered in New York, manufactures its wares in Brazil, assembles them in South Africa and then sells them to Chinese consumers, which region are you actually investing in? In today’s global economy, global investing simply makes more sense than regional investing. Though the shift will take time to reflect in investment processes, it is our second New Year’s resolution. Our final reflection concerns currency hedging. Because low and stable interest rates have framed the global investment environment in recent years, currencies have been ignored by investors, who could instead focus on the underlying equity or fixed income markets. But now, some central banks now hiking, others are pausing, and a handful are even cutting rates. In a world of diverging interest rates, our third resolution for investors is to start taking currency hedging seriously. (This one is particularly important for investors within the UK, where the currency is very reactive to the outcome of Brexit discussions.) Three New Year’s resolutions to consider in 2019. Hopefully – unlike our half-hearted commitments to running 10K races and cutting out bacon rolls – these ones lead to real change. At the very least, we hope they prompt some thinking about whether some common investment practices are sustainable or if 2019 is the year for a better approach. n

FOR USE BY PROFESSIONAL AND/OR QUALIFIED INVESTORS ONLY). Past performance is not a reliable indicator of future performance. The value of an investment and any income from it can go down as well as up. Investors may get back less than the amount invested. The material is not intended for use by persons in jurisdictions which prohibit or restrict the distribution of the material and in certain countries the material is provided upon specific request. Issued by T. Rowe Price International Ltd, 60 Queen Victoria Street, London EC4N 4TZ which is authorised and regulated by the UK Financial Conduct Authority. T. ROWE PRICE, INVEST WITH CONFIDENCE and the bighorn sheep design are trademarks or registered trademarks of T. Rowe Price Group, Inc. in the United States, European Union, and other countries. All other trademarks are the property of T. Rowe Price or their respective owners.

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