Invest ISSUE NO. 1 • APRIL 2018
Are you ready? Global Growth Can the so termed Goldilocks environment continue with synchronised recovery and limited market corrections?
Navigating a rising interest rate environment Should investors look to alternative options?
Equity Markets Where next for 2018? A look at which areas fund managers have on their horizon and why they are investing there.
Diversified sources of income What are the best options for investors looking for income in 2018?
Get to grips with the Hub
T
he RSMR Hub has had a promising launch as the new essential resource for all types of thought leadership, market commentary, fund updates and blog content.
Since mid-January, sixteen of the UK’s top fund management groups have been contributing written articles and video commentary to help our adviser community – we estimate our membership includes around 15,000 advisers – get to grips with the issues they and their clients need to be informed about. From Brexit to inflation, from Chinese manufacturing to cryptocurrency, a huge range
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of topics are covered in the Hub, which is updated daily. As well as articles and videos, the RSMR Hub is a platform for upcoming adviser-oriented events – is there a conference taking place in your area soon? Amongst all these new developments the Research Hub, now simply known as Research, remains in place. Despite the name change this is, as always, the place to go for factsheets, profiles, and more resources to back up the R Ratings – the universally recognised mark of quality for an investment fund, portfolio, investment trust or DFM. If you haven’t had the chance to check out
the Hub yet, you can access it at rsmr.co.uk. Your existing Research Hub login will work, but registration is free and easy for those without. From the front page, you can dive into Research, our new video portal RSMR TV, or Ideas, where the latest and featured articles can be found. If you’re pressed for time, you can check out the weekly summary of content, posted every Friday. As we near the end of the first quarter, we’re gearing up to analyse how we can deliver even more through the RSMR Hub, and push ahead with expansion and new features. Early feedback has been positive, but if there’s anything we should know, good or bad, please don’t hesitate to get in touch!
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AROUND THE WORLD IN 60 MINUTES 06 BNY Mellon:Unlocking the Power of Alternative Investments
10 Artemis: The Impacts of Tax Cuts for the US Markets 10 M&G: Outlook for Commercial Property
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Contents GLOBAL GROWTH
Spring 2018
16 INVESCO PERPETUAL: Navigating change 17 GOLDMAN SACHS: India: The World’s Growth Powerhouse
NAVIGATING A RISING INTEREST RATE ENVIRONMENT EQUITY MARKETS 25 FIDELITY: A New Dawn for Equity Markets 27 BAILLIE GIFFORD: Managing Growth in Asia
DIVERSIFIED SOURCES OF INCOME 31 BLACKROCK: Diversified Sources of Income in the UK Market 33 ABERDEEN STANDARD: Making the Most of Diversification
OUR OPINION 11 Make Sure Clients Use Their ISA Allowance 21 Stephen O’Mara on Electric Vehicles 25 Thoughts on Fixed Interest Markets by Ken Rayner 29 Patrick Morris Explains How RSMR Rates Funds
Welcome to Invest – the new quarterly magazine from RSMR which has been designed exclusively for investment-focussed advisers and planners operating in the UK personal finance sector. We’ve been providing independent investment research since 2004 and our ‘R’ ratings are recognised across the sector as a badge of quality and used by thousands of advisers when making fund selections for investors. Our research is totally impartial. And in typical Yorkshire style we don’t hand out stars, diamonds, crowns or other such gimmicks; our approach is binary, a badge that says a fund is rated or not!
CONTACT DETAILS:
Welcome
We know this approach is clearly understood by advisers and investors alike. With over 7,500 registered users of our Hub, influencing the decisions of over 15,000 advisers we command an enviable position in the marketplace. We share the same goals – finding the right investments for your clients.
Some articles will be produced at our request by
So why have we launched a magazine? Well, quite simply we want to broaden our distribution and the Invest magazine helps us deliver a co-ordinated approach by which we can grow adviser numbers and extend the reach of the content from our two flagship conferences. We recognise that fund factsheets, by their design, contain succinct opinions. Invest will allow us to provide more detailed and quality thought leadership articles, aiding your research with additional opinions and commentary.
thoughts and ideas on how to improve the magazine.
the fund groups to support a rated fund or where a particular theme or best practice idea is topical. This will all contribute to your CPD requirements. We appreciate you taking the time to leaf through this, our inaugural issue of Invest. The format is still a work in progress and we will always welcome your We hope you find it interesting and of use. As a start why not follow us on Twitter at @RSMRtweets and give us your views. Finally, please do login to the RSMR Hub where there are lots of additional information and ideas to help you in your business. Check it out at www.RSMR.co.uk We hope you enjoy the read. n
Silsden BD20 0EE.
The 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.
Tel: 01535 656555 or
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.
Rayner Spencer Mills Research Limited Number 20, Ryefield Business Park,
Email: enquiries@rsmgroup.co.uk All editorial or advertising enquiries should be directed to Paul Breton, Editor, RSMR Invest paul.breton@rsmgroup.co.uk
Content is published with all rights reserved and any reproduction of content, wholly or in part, must only be made with the written permission of the publishers. © RSMR 2018. RSMR is a registered Trademark.
www.rsmr.co.uk Spring 2018
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INCOME SPEAKS VOLUMES
Janus Henderson Core Multi-Asset Solutions Lower cost, risk targeted, income potential For most investors, generating an attractive level of income in today’s low interest rate environment isn’t easy. So take a look at the Janus Henderson Core Multi-Asset Solutions range. Alongside the potential for capital growth, these lower-cost portfolios aim to provide regular and attractive levels of income. Each fund has been assigned a risk profile by Distribution Technology (DT) so the funds are designed to match investors’ attitudes to risk. A multi-asset approach offers greater risk diversification than would be achieved by investing in funds restricted to specific asset classes, regions or countries. Combine this with the in-depth knowledge of Janus Henderson’s experienced Multi-Asset team, and you can see why our Core Solutions range speaks volumes. Janus Henderson Core range
% Yield†
Janus Henderson Core 3 Income Fund
3.5
Janus Henderson Core 4 Income Fund
3.9
Janus Henderson Core 5 Income Fund
4.1
Janus Henderson Core 6 Income & Growth Fund
4.0
Historical 12 month yields as at 31 December 2017. Based on ‘I Inc’ share class. Source: Janus Henderson Investors.
†
janushenderson.com/core Yields may vary and are not guaranteed. *Ongoing charges figure may vary over time.
For promotional purposes
For professional advisers only. Janus Henderson Core Multi-Asset Solutions should be bought in conjunction with an attitude to risk tool as part of the financial advice process, therefore, these funds are designed to be bought by advised clients only. 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 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 intended as a summary only and potential investors must read the prospectus, and where relevant, the key investor information document before investing. Issued in the UK by Janus Henderson Investors. Janus Henderson Investors is the name under which Janus Capital International Limited (reg no. 3594615), Henderson Global Investors Limited (reg. no. 906355), Henderson Investment Funds Limited (reg. no. 2678531), AlphaGen Capital Limited (reg. no. 962757), Henderson Equity Partners Limited (reg. no.2606646), (each incorporated and registered in England and Wales with registered office at 201 Bishopsgate, London EC2M 3AE) are authorised and regulated by the Financial Conduct Authority to provide investment products and services. © 2018, Janus Henderson Investors. The name Janus Henderson Investors includes HGI Group Limited, Henderson Global Investors (Brand Management) Sarl and Janus International Holding LLC. H034104/0218
SECTION HEAD
RSMR INTRODUCTION
INTRODUCTION By RSMR’s Ken Rayner
A
s we head further into 2018, the global economy remains seemingly strong.
If you joined us for our 2018 ‘RSMR in the City’ investment conference you will have heard presentations from the top 20 fund groups in the UK, first-hand. This magazine now allows you to take a leisurely tour of the global markets and asset classes highlighting potential opportunities for investors. A synchronised global economic recovery has created a ‘Goldilocks effect’ for investors during the last 12 months, whereby strong stock market performances supported by benign monetary policies and muted inflationary pressures, such as wage rises, have smoothed the path for a ‘neither too hot, nor cold’ environment which has provided investors with strong returns. The US bull market – where share prices rise – became the longest in history in March 2017. Long bull markets often cause concern but this followed the global financial crisis and academic research suggests such recoveries are more muted than usual economic expansions.
Another factor aiding investor confidence has been a lack of market volatility in most global markets – in the Autumn, the US stock market was the calmest since the 1960s. As always, challenges exist in the background in the form of inflation, Brexit uncertainties, central bank action, and a long list of elections around the world.
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Spring 2018 www.rsmr.co.uk
Global Growth – can the so termed Goldilocks environment continue with synchronised recovery and limited market corrections?
In the Autumn, the US stock market was the calmest since the 1960s
As it became clear that the US was not the only source of global growth, dollar strength started to fade, helping Latin America, and particularly Asia, where currencies were able to appreciate against the US dollar and ease economic policy to support expansion.
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In the following pages we cover the main themes of our conference, starting with ‘Around the World in 60 minutes’, then we look at the following key themes:
Navigating a rising interest rate environment – with an ever increasing range of alternative strategies being offered should investors look to non-traditional options?
Equity Markets – where next for 2018? – a look at which areas fund managers have on their horizon and why they are investing there. Diversified sources of Income
– what are the best options for investors looking for income in 2018? With investors worried about inflation and low interest rates, how can you make the most for your clients? We hope you find our new magazine helpful and you might also find our latest ‘Market Outlook – Living in a 3D World’ written by RSMR’s Graham O’Neill a valuable tool to have for your discussions with your clients. Copies are available to download on the RSMR Hub. We wish you all continued success in 2018. n
www.rsmr.co.uk Spring 2018
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AROUND THE WORLD IN 60 MINUTES
UNLOCKING THE POWER OF ALTERNATIVE INVESTMENTS Three years after the launch of the Newton MultiAsset Income Fund, manager Paul Flood explains why investors in search of a sustainable income can benefit by broadening their horizons.
We believe alternative assets – and in particular real assets such as renewables and infrastructure – can provide stable, long-term cash flows
T
he first weeks of 2018 have seen a flurry of debate over whether the decades-long bull market in bonds has finally ended. Arguments and counter-arguments have been heard from both sides.
Only time will tell who is right. However, the bear market talk has served to, once again, highlight the problems faced in today’s markets by investors requiring a sustainable income. Problems faced even while the bond bull market was still in full swing.
Financial repression We live in an environment where central bank financial policy continues to drive up the price of most conventional assets but suppress the yields on government bonds. Concerns over the unattractive yields across the bond markets go far beyond the UK. Last month, the average bond yield on 10-year Swiss bonds was around zero. For 10-year German and Japanese bonds, the yields available were a mere 0.6% and 0.1% respectively.¹
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It was against this backdrop that three years ago we launched the Newton MultiAsset Income Fund. And the need for investments that can provide a sustainable income remains as real today as it did at the Fund’s inception. The expectation for rising interest rates, coupled with low and negative bond yields, mean many parts of the bond market have been an unattractive investment for those looking for sustainable income streams over a longer time frame. In this difficult environment, multi-asset investing has become an increasingly important means of securing both a diversified income stream and an attractive level of return.
Flexibility to go anywhere Multi-asset investing means having the flexibility to find the most attractive investment opportunities, wherever they are found, across all asset classes and all geographies. The Multi-Asset Income Fund offers a diversified portfolio of Newton’s best ideas from across the broad universe of equities, fixed income and alternatives.
AROUND THE WORLD IN 60 MINUTES
Placing the Fund in the Investment Association (IA) Flexible Investment sector gives us the maximum discretion to invest anywhere we see an opportunity. However, we also believe that the essence of multi-asset investing is as much about what you do not invest in, as what you do. Our flexible investment approach has enabled us to look beyond the traditional asset classes of bonds and equities to also invest in alternative assets such as infrastructure, property and renewable energy, which, in our view, can offer a number of attractive characteristics for income seekers. Unconstrained by benchmarks, we have been able to nimbly adjust the Fund’s asset mix over the past three years to increase our chances of securing a sustainable income stream and an attractive total return. The changing nature of the Fund’s portfolio since launch gives a practical insight into our approach and thinking. From when we launched on 4 February 2015 until more recently, we had decreased our exposure to bonds, while adding exposure to alternative asset classes. The allocation to bonds has been reduced from a peak of around 25% in February 2016, to 19.61% in February 2018 (while duration, or the portfolio’s sensitivity to interest rates, actually fell by -5.9% over the same period). Meanwhile, the allocation to alternatives, such as renewables and infrastructure, has increased from around 19% at inception, to almost 25% at the beginning of February 2018².
In addition to better-known alternative assets, in the past three years we have also diversified exposure through modest investments in asset financing such as aviation finance. With careful scrutiny of the types of contracts to be entered into, aviation finance can offer significant income yield.
Adding alpha The performance of the Multi-Asset Income Fund’s alternatives allocation has been a key driver of its strong returns and steady income stream. Over the 12 months to the end of December 2017, the Multi-Asset Income Fund’s gross absolute return was 12.1%. The Fund’s performance history since inception in February 2015, shows that the Fund has produced an annualised net-of-fee return of 10.1%. Only the MSCI AC World equities index has a higher return, but with considerably more volatility which would be hard for many schemes to stomach, if they are to avoid ‘sequencing risk’. This would entail having to free up cash requirements to pay scheme members at the wrong time in the cycle, when asset prices might be depressed, and hence running the risk of locking in a capital loss. Importantly, for schemes and individuals looking for a steady and reliable income stream to meet future cash requirements, the Multi-Asset Income Fund has also produced an annualised yield of 4.0%³.
The power of diversity The need to generate a sustainable and more diversified income stream has been a core reason behind the decision to increase exposure to alternatives since inception. We believe alternative assets – and in particular real assets such as renewables and infrastructure – can provide stable, long-term cash flows and good visibility and predictability of income stream in the future with little sensitivity to the economic cycle. Many renewables, such as solar and wind farms, have over 50% of their revenues derived from government subsidies, thus offering the haven-like qualities of government bonds. However, they come with the added advantage of often providing significantly higher returns. Infrastructure assets are also pertinent for those investors, like pension schemes, that have long-term investment horizons. Most infrastructure projects are ‘long-life’ or ‘long-duration’ assets. Because they often require high capital expenditure, they need stable, predictable revenue streams to attract the capital. This means that the contracts that back them typically have reasonably predictable and stable income streams over the long term.
Looking forward There are challenges ahead. In the renewables sector, for example, government subsidies are being cut in key markets such as the UK. As fixed and inflation-linked subsidies are withdrawn in favour of competitive auctions or tenders, revenues will become more dependent on power prices, introducing potential volatility. It is important not to overstate the threat, however. Where reductions in subsidies are occurring, they are being carefully managed. In the UK, for example, projects already receiving subsidies will continue to collect them for the full life of the contract, generally 20 to 25 years. Electricity prices would not be expected to change dramatically over time, so even when subsidies are withdrawn, revenue streams are likely to still look relatively stable compared to those of other assets. However, more care will need to be taken analysing the trajectory of future revenue streams. The benefit of a multi-asset portfolio is that as the environment changes, so can our asset allocation.
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AROUND THE WORLD IN 60 MINUTES
We believe that adding alternative assets to the portfolio, and reacting to market changes to constantly adapt the mix, gives us the best chance of accessing attractive income-producing assets. The flexibility offered by a multi-asset portfolio gives us higher confidence in delivering what clients are looking for: reliable and sustainable income over the long term. By broadening our investment horizon, we believe we are potentially much better placed to weather the economic vagaries of a still uncertain world. n 1. Source: Bloomberg, 12 January 2018 2. Source: Newton, 2 February 2018. 3. Source: Newton, 31 December 2017.
PERFORMANCE SUMMARY 2013
2014
2015
2016
2017
–
–
–
17.49
11.49
IA Flexible Investment Sector
14.73
4.84
2.25
14.50
11.65
MSCI AC World TR GBP
15.55
15.21
21.34
13.84
13.84
Fund
Source: Lipper as at 31 December 2017. Fund Performance for the Sterling Income Shares calculated as total return, including reinvested income net of UK tax and charges, based on net asset value. All figures are in GBP terms. The impact of an initial charge (currently not applied) can be material on the performance of your investment. Further information is available upon request.
Past performance is not a guide to future performance. The value of investments can fall. Investors may not get back the amount invested. Income from investments may vary and is not guaranteed. There is no guarantee that the Fund will achieve its objective. The Fund may invest in investments that are not traded regularly and are therefore subject to greater fluctuations in price. The Fund takes its charges from the capital of the Fund. Investors should be aware that there is potential for capital erosion if insufficient capital growth is achieved by the Fund to cover the charges. Capital erosion may have the effect of reducing the level of income generated.
For Professional Clients only. This is a financial promotion and is not investment advice. Any views and opinions are those of the investment manager, unless otherwise noted. For further information visit the BNY Mellon Investment Management website. INV01154 Exp 23 May 2018.
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FOR PROFESSIONAL CLIENTS AND IN SWITZERLAND, QUALIFIED INVESTORS ONLY
Déjà vu all over again? Newton’s1 Global Real Return
February 2018
“ Even after the
recent sell-off, the S&P 500 is still up more than 12% over the past 12 months
”
Blessed with a synchronised upswing in the global economy, and despite the recent bout of volatility, investors’ appetite for risk appears largely undiminished. But for Aron Pataki a rising tide of warning signs is still too apparent to ignore. Things couldn’t possibly go wrong from here, could they? When it comes to missing the mark, few supranational organisations can have covered themselves in less glory than the IMF on the eve of the global financial crisis. In its April 2007 Global Financial Stability Report, the fund noted how “favourable global economic prospects, particularly strong momentum in the euro area and in emerging markets led by China and India, continue to serve as a strong foundation for global financial stability”. Cue, shortly thereafter, a stock market meltdown, government bailouts, the era of “too big to fail”, and the worst fallback in global economic growth since the 1930s. Fast forward 10 years and investors might be forgiven for thinking of Yogi Berra’s famous dictum that it’s déjà vu all over again. The IMF once more went on record to tout the strength of the global economy, most recently by upgrading its forecasts for 2017, 2018 and 2019. Speaking in Davos in January, Christine Lagarde, the IMF’s managing director, put it thus: “All signs point to a further strengthening [in global growth] both this year and next. This is very welcome news.” Boosted by this kind of risk-on sentiment, and despite a recent spate of volatility, stock markets continue to reward investors. In December 2017, for example, the MSCI World Index chalked up a record 14th consecutive month of positive total returns (in US-dollar terms). Even after the recent sell-off, the S&P 500 is still up more than 12% over the past 12 months (in US dollar terms to 12 February).2
1 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. 2 Source: Bloomberg as at 12 February 2018.
AROUND THE WORLD IN 60 MINUTES
THE IMPLICATIONS OF TAX CUTS FOR THE US MARKET Following a long wait since the start of the new administration in the US, Stephanie Sutton takes a look at the likely positive rewards now that new legislation is taking hold.
The corporate tax cut and the investment incentives included in the new legislation are designed to boost the US economy.
F
inally here. Early last year, just after the election of Donald Trump, we were asking ourselves if his promises of fiscal stimulus would extend the business cycle that had been underway for the previous seven years. While we were doubtful about the worth of the measures in the first place, there was a frustrating lack of progress for most of last year – to the point that we doubted much would get done at all. However, confounding the naysayers, the bill was eventually passed in late December 2017, boosting stocks and areas of the market that were seen to be beneficiaries of a lower tax rate. Meanwhile, on the economic front, data released since last summer confirms that the US is in good shape. At this point we expect positive growth to continue through 2019.
How will the savings be spent by companies? The corporate tax cut and the investment incentives included in the new legislation are designed to boost the US economy. Undoubtedly the impact will be bigger for companies that are higher tax payers. The question is how the additional cash that will be released will be deployed by
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companies. We expect to see a pick-up in capital expenditure (capex). This has been confirmed by recent surveys (see chart below) as companies indicate that capex and reinvestment and cutting debt are top of their spending priorities.
What do you plan to do with funds made available from tax cuts and repatriated funds? Reinvest/capex
23%
Pay down debt
17%
Pay more dividends
12%
Hold cash
10%
Increase employee compensation
10%
Increase buybacks
7%
Mergers and acquisitions
7%
Nothing, don’t expect better cash flows
7%
Increase pension funding Return $ to customers through rate cuts Cut prices to stimulate sales
4% 2% 1%
Source: Evercore ISI Company Survey, January 2018
The tax reform will not just benefit companies; personal taxes are also being reduced. This should also have a positive impact on consumer spending, carrying on the improving trend that we have seen recently.
RSMR COMMENT
ENSURE THAT CLIENTS USE THEIR ISA ALLOWANCES A boost to infrastructure… Separate to the current government’s agenda we are also seeing an uptick in infrastructure spending. This is the result of funding made by the previous administration as well as the decision of a number of states to raise gasoline taxes to pay for infrastructure projects. Because of the lag between planning and starting these projects, we are only now starting to reap the rewards of these decisions. While in recent years growth companies have led the stockmarket’s performance, we expect market leadership to be more balanced in 2018. Earnings growth will be boosted by the tax cuts and we anticipate that the market will perform in line with earnings. We will, however, be watching inflation closely to determine how long the current economic cycle lasts. n
THIS INFORMATION IS FOR PROFESSIONAL ADVISERS ONLY and should not be relied upon by retail investors.
It might sound a bit obvious, but with tighter restrictions on pensions’ contributions, it is all the more important that investors utilise their ISA allowances in every tax year. The current allowance (2017/18) is £20,000 per individual. Married couples can, therefore, invest up to £40,000. Any unused ISA allowances cannot be carried forward into future tax years and it makes sense to invest as early as possible in the tax year rather than piling in at the last minute. According to HMRC, as at the end of the last tax year, there was £585 billion invested in ISAs and, believe it or not, £270 billion of this was held in cash ISAs which have an average yield of just over 1%. There is clearly plenty of scope for investment advice in this area with retirement planning potentially being a significant consideration. You don’t have to invest in emerging markets or dive into the Bitcoin frenzy to get a better return than what cash funds or bank accounts are paying. With inflation now in excess of 3%, cash accounts are generating negative real returns (i.e. interest paid minus inflation works out at around -2.0% per annum). In other words, the purchasing power of the cash held in such vehicles is in decline. Savers, many in retirement, seeing the value of their savings being eroded on an ongoing basis. There are many investment fund solutions which can be utilised to meet an investor’s aims and objectives, subject of course to the client’s circumstances and tailored advice. n
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. Issued by Artemis Fund Managers Ltd which is authorised and regulated by the Financial Conduct Authority.
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AROUND THE WORLD IN 60 MINUTES
OUTLOOK FOR UK COMMERCIAL PROPERTY
Justin Upton Justin is the deputy fund manager of the M&G Property Portfolio and a chartered surveyor with over 16 years of experience in property. He joined M&G Real Estate in January 2010 as the deputy fund manager of the M&G Pooled Pensions Property Fund. Previously Justin was a Director at Mayfair Capital. Prior to this, he was the Assistant Fund Manager of the £1.6bn Henderson UK Retail Warehouse Fund and the Henderson Caspar Securitized Fund. He holds a degree from the University of Birmingham in social and economic history and a Masters from City University in propertylaw and valuation
A
fter a surprisingly strong year for UK commercial property, expectations across market participants are for a more subdued midsingle digit total return in 2018. Commercial property recovered quickly from the jolt to performance after the EU referendum. The question now is: where are we in the cycle? In our view, the pricing of UK commercial property is near to fair value on an absolute basis. However, relative to other incomegenerating asset classes, notably bonds, the yields on commercial property remain attractive. Currently, the spread between the initial yield on the IPD UK All Property Index and the redemption yield on 10-year UK government bonds remains well above the long-run average. Should the frequency and size of interest rate rises from the Bank of England be greater than the market expects, we believe this differential could narrow.
Central London offices have seen rents come under pressure as financial firms evaluate their space requirements
Encouragingly, responsible lending has continued since the last crash and debt has remained relatively restricted. Equity, rather than debt, has been a driving force in this cycle; this places property on a surer footing in the event of unfavourable market developments. Looking at fundamentals, rents across retail and offices continue to be positive, despite ongoing concerns regarding Brexit.
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However, performance has been patchy. Central London offices have seen rents come under pressure as financial firms evaluate their space requirements and look to dispose of excess space. This negative pressure on rents is manifesting itself in valuation falls on assets with short-term leases, refurbishment projects and vacant schemes, where the market pricing for risk is not matching the price at which vendors seek to sell. We feel this subsector remains most vulnerable to capital falls in the near term. Across the wider market, while prime property has recovered from the downturn in 2016, prices for secondary assets have been slow to stabilise as the risk premium has increased.
Spring 2018 www.rsmr.co.uk
We expect negative to anaemic rental growth over the next two years, consistent with the deteriorating growth prospects for the UK economy. Over the course of the past 18 months, our strategy has been focusing on two key areas. Firstly, we have sought to tilt the portfolio away from good secondary towards prime assets, strengthening our tenant base, which underpins the M&G Property Portfolio’s income. (See Figure 1* for the IPD Rental Information Service (IRIS) report on the quality of the fund’s income.) Secondly, the property sales have been selected to ensure the portfolio exposures are aligned to the M&G Real Estate House Forecasts, putting the fund in the position to optimise performance potential in the years ahead. n
AROUND THE WORLD IN 60 MINUTES
Figure 1: Income quality: tenant mix
Source: IPD Rental Information Service (IRIS) report, December 2017 vs Quarterly Version of IPD Monthly Index
M&G Property Portfolio: Performance in sterling
Source: Morningstar, Inc., Investment Association database 31 January 2018, Sterling I share class, net income reinvested, price to price
Past performance is not a guide to future performance. *Figure 1 shows two charts generated by IRIS assessing the income quality on the fund. The analysis considers the various factors in the pie chart compared with the benchmark, from which a score is generated as depicted on the line chart. As the report shows, the fund’s income quality has improved since the suspension period in June 2016, as a result of the sales that have taken place. The M&G Property Portfolio invests mainly in one type of asset. It is therefore more vulnerable to market changes for that specific type of asset. This type of fund can carry a higher risk and can experience bigger price gains and falls when compared to a fund which invests in more types of assets. If significant numbers of investors withdraw their investments from the fund at the same time, the manager may be forced to dispose of property
investments. This may result in a less than favourable price being obtained in the market. Where market conditions make it hard to sell the fund’s investments at a fair price to meet customers’ sale requests, we may temporarily suspend dealing in the fund’s shares. The value of investments will fluctuate, which will cause fund prices to fall as well as rise and you may not get back the original amount you invested. 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.
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ENGINEERED TO GO THE DISTANCE Aviva Investors Multi-Asset Funds • Dynamic: targets optimal asset allocation • Precise: underpinned by robust risk management • Efficient: maps across a broad risk spectrum • Powerful: robust track record Aviva Investors Multi-Asset Funds (MAF) annualised performance 1 year
3 year
5 year
MAF I
2.53%
3.33%
4.26%
MAF II
5.94%
5.97%
7.07%
MAF III
7.83%
8.08%
9.17%
MAF IV
9.36%
9.21%
10.47%
MAF V
12.19%
11.32%
10.66%
Past performance is not a guide to future performance. Source: Lipper, a Thomson Reuters Company, as at 31 December 2017. R3 share class, annualised performance, bid to bid basis, net income reinvested, net of ongoing charges and fees.
Discover a range of funds engineered to align with your clients’ chosen risk and reward profiles, actively managed to target long-term capital growth. Capital is at risk. The funds invest in derivatives which can be volatile. Investors may not get back the original amount invested. avivainvestors.com/MAF
Risk-rated by:
Sustainable Income | Capital Growth | Beating Inflation | Meeting Liabilities
For today’s investor
For professional clients and advisers only. Not to be distributed to or relied on by retail clients. Ratings are no guarantee of future performance and can change. The Aviva Investors Multi-asset Fund range comprises the Aviva Investors Multi-asset Fund I (“MAF I”), the Aviva Investors Multi-asset Fund II (“MAF II”), the Aviva Investors Multi-asset Fund III (“MAF III”), the Aviva Investors Multi-asset Fund IV (“MAF IV”) and the Aviva Investors Multi-asset Fund V (“MAF V”) (together the “Funds”). The Funds are sub-funds of the Aviva Investors Portfolio Funds ICVC. For further information please read the latest Key Investor Information Document and Supplementary Information Document. Copies of these documents and the Prospectus are available in English free of charge on request or on our website. Issued by Aviva Investors UK Fund Services Limited, the Authorised Fund Manager. Registered in England 1973412. Authorised and regulated by the Financial Conduct Authority. Firm Reference 119310. Registered address: St Helen’s, 1 Undershaft, London EC3P 3DQ. An Aviva company. www.avivainvestors.com RA18/0014/01062018
Consistency. The solution for uncertainty.
THREADNEEDLE DYNAMIC REAL RETURN FUND Designed to deliver equity-like returns with two-thirds of the volatility by investing in a mix of asset classes and actively adapting the portfolio to changing market conditions. The Fund adopts a consistent, straightforward, long-only and unlevered approach to target return investing and has achieved a strong track record.
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columbiathreadneedle.co.uk/DRR Important Information. For Professional and/or Qualified Investors only (not to be used with or passed on to retail clients). Ratings as at 30 November 2017. Volatility of equities measured as MSCI ACWI Index. 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. Threadneedle Opportunity Investment Funds (TOIF) is an open-ended investment company structured as an umbrella company, incorporated in England and Wales, authorised and regulated in the UK by the Financial Conduct Authority (FCA) as a Non-UCITS scheme. 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. Subscriptions to a Fund may only be made on the basis of the current Prospectus and the Key Investor Information Document, as well as the latest annual or interim reports and the applicable terms & conditions. Please refer to the ‘Risk Factors’ section of the Prospectus for all risks applicable to investing in any fund and specifically this fund. The above documents are available in English only and can be obtained free of charge on request from Columbia Threadneedle Investments’ Client Services department PO Box 10033, Chelmsford, Essex CM99 2AL. Issued by Threadneedle Investment Services Limited. Registered in England and Wales, Registered No. 3701768, 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. 01.18 | J27286_MASTER_A4 | 1976117
GLOBAL GROWTH
NAVIGATING CHANGE
Georgina Taylor, Research Director at Invesco Perpetual, explains how tightening monetary policy may affect markets in the coming months.
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ntil recently, improved global growth data has combined with low inflation and that has helped central banks maintain an incredibly loose view on monetary policy – the so-called ‘goldilocks’ environment. However, hints of inflation in the US and therefore the possibility of more aggressive rate hikes from the US Federal Reserve were enough to trigger a return of volatility in global equity markets at the beginning of February. This has led investors to increasingly question whether the current trends in financial markets are at a tipping point and if correlations between asset classes are about to change. Policy has been a key support for financial assets in recent years. However, ultra-loose monetary policy had to come to an end and two years ago the US Federal Reserve started the slow and steady path to higher interest rates. Given the starting point for interest rates, rate rises were initially absorbed by financial markets, but this year something changed – the potential for higher inflation. This is crucial because a rise in inflation could suggest that Central Banks have not tightened policy quickly enough. A change in economic backdrop could lead to a quick and painful shift towards tighter monetary policy, removing the policy backstop which has been a support for financial markets since the financial crisis. The reason this is important for equity markets is because both interest rates and growth expectations drive equity market valuations. Growth expectations are used to assess the path of earnings in the future and the discount rate is used to discount those earnings back to today. But it is the level, not necessarily the change, in bond yields that is also important for multi asset investing. If bond yields are rising from very low levels, but are offset by higher growth expectations, then equity markets can shrug them off – better growth
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expectations will dominate. But if bond yields rise without a corresponding improvement in growth expectations, then the higher discount rate could choke off future growth and equity markets look worse value. This is the dilemma investors face today. Higher bond yields without an improvement in growth expectations could lead to a positive correlation between bonds and equities – where both bonds and equity markets decline. Whether the goldilocks environment described at the beginning is sustainable or not, and because many factors can influence the relationship between asset classes, increased flexibility within a multi asset approach can be a useful way to navigate these changing dynamics across financial markets. Stepping away from asset class constraints and adopting an unconstrained approach to sourcing investment ideas, is one way to try and achieve a return and risk dynamic which is sustainable throughout the economic cycle. n 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. Important information . This document is for Professional Clients only and is not for consumer use. 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. This document is marketing material and is not intended as a recommendation to invest in any particular asset class, security or strategy. Regulatory requirements that require impartiality of investment/investment strategy recommendations are therefore not applicable nor are any prohibitions to trade before publication. The information provided is for illustrative purposes only, it should not be relied upon as recommendations to buy or sell securities. Invesco Perpetual is a business name of Invesco Asset Managers Limited, Perpetual Park, Perpetual Park Drive, Henley-on-Thamesthe 1mn new workers that come into the economy each month.
Bridging the gap between research and portfolios THE INVESTMENT SOLUTIONS FOR A MIX OF INVESTOR NEEDS The new RSMR portfolio service has been created to deliver improved investor outcomes, simplify the advice process and enhance the overall client experience.
To find out more contact us now:
01535 656 555
enquiries@rsmgroup.co.uk www.rsmr.co.uk If you want to avoid additional administrative work, or avoid portfolio drift through not being able to perform fund switches or rebalancing swiftly, then you may wish to consider our range of discretionary portfolios. Here, these tasks will take place automatically, although you will still have the opportunity to utilise the platform of your choice.
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. Š RSMR 2018. RSMR is a registered Trademark.
GLOBAL GROWTH
INDIA: THE WORLD’S GROWTH POWERHOUSE
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t Goldman Sachs Asset Management, our excitement in the Emerging Markets (EM) investment opportunity has been invigorated, in particular by India, as we observe three key drivers that leave the country poised to potentially double in GDP by 2027 and become the world’s third largest economy.
Strong domestically-driven growth profile FOR FINANCIAL INTERMEDIARY USE ONLY. NOT FOR USE AND/ OR DISTRIBUTION TO THE GENERAL PUBLIC. Past performance does not guarantee future results, which may vary. Past correlations are not indicative of future correlations, which may vary. Confidentiality No part of this material may, without GSAM’s prior written consent, be (i) copied, photocopied or duplicated in any form, by any means, or (ii) distributed to any person that is not an employee, officer, director, or authorized agent of the recipient. © 2018 Goldman Sachs. All rights reserved.
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India today is where China was in 2000, with nearly identical share of the total global output and similar GDP per capita – the latter is expected to double by 2027. India’s demographic profile – with 65% of its 1.2bn population under the age of 35 – is unparalleled, and the Indian consumer is at an inflection point with the bottom 50% of the population by income consuming less than 10% of the total pie. India will need to create at least 15mm jobs per year to keep up with these demographic trends.
Reform-minded government Prime Minister Narendra Modi’s government is working with the private sector to build the physical and digital infrastructure to better transport goods, information and
India’s 1.2bn people, while smoothing friction points to allow for greater ease of living and doing business. We are encouraged by the vision and execution of the administration as “good politics means good business” – a phrase reiterated by many private and public sector officials. India now stands to reap the gains of structural reforms from Good and Services Tax (GST) to demonetisation (India’s government removed the 500 and 1000 rupee bank notes from legal currency in November 2016) that had previously taken a toll on growth as they forced the economy to modernise and formalise.
Profitable and diverse corporate universe India’s market structure is particularly compelling due to the number and diversity of publicly-listed companies that offer access to India’s growing consumer population, while having a much smaller share of state-owned enterprises than China, for example. We prefer small and midcaps, many which exist outside of the benchmark index, particularly in sectors where India is trying to solve domestic challenges like employing, educating, and caring for the 1mn new workers that come into the economy each month. n
Economic growth
Workforce
Reforms
India’s per capita income is expected to grow 2x by 2027, from $1,868 currently to $4,135.
150mm Indians are coming into the workforce in the next 10 years and India already represents 18% of the global workforce.
India jumped 42 spots in the World Bank’s Ease of Doing Business Index since Modi’s election, but its rank at #100 leaves room for improvement.
Formalisation
Urbanisation
Industrialisation
As GST helped formalise the economy, India saw a 50% increase in the # of enterprises registered for tax last year.
2 of 3 Indians live in rural areas where monthly per capita spending is $16/month vs. $29 for India at large (China is 4x greater).
Despite employing half of India’s population, the agriculture sector only produces 17% of India’s GDP.
Spring 2018 www.rsmr.co.uk
We manage things simply and well. Why is this so hard to find?
Justin Urquhart Stewart Head of Corporate Development Seven Investment Management
Seven of us started the business sixteen years ago because we couldn’t find a suitable place to invest our own family savings. Today, we’re careful on cost and big on service. It’s radical common sense really. For more radical common sense go to www.7im.co.uk The value of investments can go down as well as up and clients may get back less than they invested originally.
Seven Investment Management LLP is authorised and regulated by the Financial Conduct Authority. Member of the London Stock Exchange. Registered office: 55 Bishopsgate, London EC2N 3AS. Registered in England and Wales number OC378740.
Every day, the number of fish in a pond doubles. If it takes 24 days to fill the entire pond with fish, how long does it take to fill half the pond?
Most people get the answer wrong and say 12 days. Using instinct instead of analysis, your unconscious mind can get things confused. We believe that understanding your own mind can help you make better investment decisions. And if you’re still stumped, the answer is 23.
Know your own mind. Take the investIQ test. schroders.com/investIQ
Please remember that capital is at risk. Marketing material issued in February 2018 by Schroder Investment Management Limited, 31 Gresham Street, London EC2V 7QA. Registered No: 1893220 England. Authorised and regulated by the Financial Conduct Authority UK12531.
RSMR COMMENT
INVESTMENT THEMES: ELECTRIC VEHICLES RSMR Investment Research Manager, Stephen O’Mara takes a look at the current reality for the market everyone is talking about.
The headlines are that they will have far reaching developments for society.
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n our many meetings with fund managers (well over 500 per annum), we often come across a number of recurring themes and not just from managers who typify their process as being thematic. In many instances, evolving developments in particular markets are recognised as being significant parts of an investment thesis for a particular stock or sector by investors who would not describe themselves as being particularly thematic. The past thirty years or so has been a phenomenal period of technical change and one of the next big products currently being developed are electric vehicles. The headlines are that they will have far reaching developments for society and related industries but, as ever, there may be roadblocks that will dictate the pace of what many see as an inevitable change (from fossil fuel powered combustion engine vehicles to EVs).
Spring 2018 www.rsmr.co.uk
Mathieu Rachmaninoff, an experienced member of Newton’s global sector analysts’ team who also has significant industry experience, having previously worked for Renault-Nissan (designing products and managing projects), sees the case for EVs, in the abstract as being clear-cut. First, fewer moving parts (70-80 as opposed to over 1,000 in an internal combustion engine). Second, they are potentially safer (no heavy engine block lowers the risk of driver injury – frontal impacts make up 75% of road accidents – and the hefty battery packs have been shown to reduce the damage from side impacts). Third, the offer a fun driving experience – potentially sports car performance at affordable prices. In addition, regulations on emissions are only going to get tighter and the noise around vehicle bans in big cities continues to mount and it is already affecting the market share of diesel cars in Europe.
RSMR COMMENT All of this has implications for major car manufacturers and they have begun to respond. Is Tesla the future or could it be eclipsed? Rachmaninoff observes that in response to its 2015 diesel emissions scandal, VW committed €10 billion to developing a future built around EV. It now aims to have 30 new pure EVs by 2025 and other manufacturers are keen to take a similar road. US manufacturer GM has got off to a flying start with EVs. Its GM Bolt has a range of 238 miles for a single charge and has been described as a game changer in mass market EVs. Infrastructure, is another area where Rachmaninoff believes manufacturers and regulators are preparing the ground for an EV future. It could provide a headwind. Electric charging points are needed and a one-size-fits-all approach is necessary. Another potential headwind is that government subsidies are still needed. In countries such as Denmark and Hong Kong, where subsidies have been reduced, sales of EVs have dropped dramatically. Coming at the theme from another angle, Stephen Anness of Invesco Perpetual has done some analysis on the impact of EVs on oil demand and this clearly will feed through to views on oil companies, for example. He thinks that investors under appreciate the dynamics of global oil demand. Out of the total demand for oil, passenger cars account for only around 20% of demand. If you add back heavy duty trucks and other transports (e.g. ships and planes), transport accounts for around 50% of demand but power to weight requirements, at present, suggest these cannot be electrified. The other key element for Anness is a stock versus flow argument, when it comes to the global car fleet. The global
fleet consists of around 1 billion cars and virtually none of these are electric. Every year, around 100 million new cars are sold and 30 million are scrapped, leading to an increase of 70 million vehicles each year. Unless all cars sold are EVs very quickly, the combustion engine fleet will continue to grow (at least in the medium term) even if sales of EVs increase rapidly. Anness also points towards the battery supply chain, which is critical but little discussed as being a constraint to rapid EV development. Modern battery technology requires a number of rare materials, for example lithium and cobalt, which are essential agreements. More than half of the world’s supply of the latter comes from the Democratic Republic of Congo. The supply chain, he argues, is not robust. He is also sceptical about how quickly the infrastructure can be put in place. Leaving aside the above, another theme which will impact on all of this is the rise of emerging economies and the billions of people living there who aspire to the lifestyles of the developed world. Ten years ago in the commodities boom this was a common theme and many pointed out the increased need for energy as economies matured. With or without EVs, that dynamic has not changed. On the back of the EV theme, Newton’s analysts have recommended a semiconductor manufacturer, a battery manufacturer and a chemicals company producing lithium. Invesco Perpetual’s equity growth funds have, for the most part and where appropriate, meaningful exposures to energy related equities. The EV theme and research surrounding the development and EVs and its likely impact on the oil price have helped framed these investment decisions. n
www.rsmr.co.uk Spring 2018
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WHERE OPPORTUNITIES EMERGE WE ARE THERE
Which is why our extensive team can find first-class opportunities. Whatever your emerging market portfolio challenge, we can offer an expert solution. jpmorgan.co.uk/em
The value of investments and any income from them may go down as well as up and investors may not get back the full amount invested. LV-JPM50929 | 03/17 0903c02a8209f537
EQUITY MARKETS IMPORTANT INFORMATION This article 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, so you may not get back what you 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. The Fidelity Global Special Situations Fund uses financial derivative instruments for investment purposes, which may expose it to a higher degree of risk and can cause investments to experience larger than average price fluctuations. Changes in currency exchange rates may affect the value of an investment in overseas markets. Investments in small and emerging markets can also be more volatile than other more developed markets. This article must not be reproduced or circulated without prior permission. Fidelity International refers to the group of companies which form the global investment management organisation that provides information on products and services in designated jurisdictions outside of North America. This communication is not directed at, and must not be acted upon by persons inside the United States and is otherwise only directed at persons residing in jurisdictions where the relevant funds are authorised for distribution or where no such authorisation is required. Unless otherwise stated all products and services are provided by Fidelity International, and all views expressed are those of Fidelity International. Fidelity, Fidelity International, the Fidelity International logo and F symbol are registered trademarks of FIL Limited. UKM/0218/21594/SSO/ na
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A NEW DAWN FOR EQUITY MARKETS
Fidelity Global Specialist Fund Manager, Jeremy Podger, takes a look at what the new growth enviroment might mean in the coming year.
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fter years of stagnant earnings growth (in US dollar terms), the rate of global earnings growth in 2017 was broadly similar to the rise in markets. Given this, we could say that we appear to have moved from a “revaluation” phase to a new “earnings driven” phase of market growth. At the end of last year, the consensus view was looking for US earnings to grow by over 10% in 2018. However, the passage of the tax reform bill, which was not in these estimates at the time, could propel US earnings growth into the teens (in % terms) this year. There may be scope to surprise positively outside the US as well. So this should be supportive of markets this year, although one should note that growth in 2018 (and then 2019) is unlikely to be up to last year’s strong showing. Against that is the expectation of a tightening of liquidity conditions with further rate rises in the US and some “tapering” of quantitative easing in Europe. Meanwhile, economic indicators are generally very positive (though admittedly one could worry they cannot get much better).
Trailing P/E ratios
Spring 2018 www.rsmr.co.uk
Overall at this stage my working assumption is that the current benign economic backdrop is most likely to lead to investors focusing more outside the US now that earnings growth has reappeared and valuations are relatively more favourable. Whilst the central case may be that the rest of the world now outpaces the US which is more expensive (even after tax reform), more mature in terms of the profit cycle and where companies have generally taken on more debt (unlike elsewhere in the world), if there is some kind of crisis, the US would be expected to exhibit more defensive qualities as it has done in the past. A sharp sell-off could be caused by any of a number of possible geopolitical events – one example might be an oil price related inflationary shock. It is also reasonable to expect the US market to correct if and when monetary conditions are significantly tightened and earnings growth turns negative. This will happen at some point but appears less likely on a 12-month view. In conclusion, in my opinion, subject as ever to unforeseen events, equities remain well supported. The focus, in the year ahead, remains on finding the best stock opportunities for our investors globally. n
Allianz Continental European Fund: an established performer over the long run in Europe. The Allianz Continental Europe Fund brings investors a wealth of expertise as a key part of an ÂŁ18bn high-conviction franchise. Managed by Thorsten Winkelmann, Marcus Morris-Eyton, and their experienced team, the fund has built sustained success based upon a disciplined and purely bottom-up investment process. By consistently identifying those companies in Europe that deliver structural growth with competitive advantages over their peers, it has produced outstanding top quartile returns over 1 and 3 years1.
For more information please visit: www.allianzgi.co.uk Or call 020 3246 7123
Source: Morningstar, as at 31 December 2017 in the IA Europe ex UK sector. For professional investors only. Past performance is not a reliable indicator of future results. The value of an investment and the income from it may fall as well as rise and investors might not get back the full amount invested. Allianz Continental European Fund is a sub-fund of Allianz UK & European Investment Funds, an open-ended investment company with variable capital with limited liability organised under the laws of England and Wales. The value of the units/shares which belong to the Unit/Share Classes of the Sub-Fund that are denominated in the base currency may be subject to an increased volatility. The volatility of other Unit/Share Classes may be different and possibly higher. Investment funds may not be available for sale in all jurisdictions or to certain categories of investors. For a free copy of the sales prospectus, incorporation documents, daily fund prices, key investor information, latest annual and semi-annual financial reports, contact the issuer at the address indicated below or www.allianzgi-regulatory.eu. Please read these documents, which are solely binding, carefully before investing. This is a marketing communication issued by Allianz Global Investors GmbH, www.allianzgi.com, an investment company with limited liability, incorporated in Germany, with its registered office at Bockenheimer Landstrasse 42-44, 60323 Frankfurt/M, registered with the local court Frankfurt/M under HRB 9340, authorised by Bundesanstalt fĂźr Finanzdienstleistungsaufsicht (www.bafin.de). Allianz Global Investors GmbH has established a branch in the United Kingdom, Allianz Global Investors GmbH, UK branch, 199 Bishopsgate, London, EC2M 3TY, www.allianzglobalinvestors.co.uk, which is subject to limited regulation by the Financial Conduct Authority (www.fca.org.uk). Details about the extent of our regulation by the Financial Conduct Authority are available from us on request. This communication has not been prepared in accordance with legal requirements designed to ensure the impartiality of investment (strategy) recommendations and is not subject to any prohibition on dealing before publication of such recommendations. 18-1224
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EQUITY MARKETS
MANAGING GROWTH IN ASIA The rising wealth of the middle class in Asia is likely to be the big driver of global growth.
Technology at the forefront of growth in emerging markets will level the playing fields according to Baillie Gifford’s Ewan Markson Brown.
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acific Horizon Investment Trust (PHI) is an Asia ex Japan fund that invests in growth companies. Ewan Markson-Brown, the fund’s manager, believes that the rising wealth of the middle class in Asia is likely to be the big driver of global growth over the next 20 years, but that this is not yet fully appreciated by investment markets. Over the past 18 months PHI has benefited strongly as both the Asia ex Japan region and technology stocks, to which PHI has a significant exposure, have rallied. Markson-Brown has long been making the case that technology emanating from the US, China and more recently India, is accelerating the adoption of new types of hardware and systems, leading to increased digitalisation across the globe. This process is levelling the playing field and, given their lower starting points, emerging markets are tending to benefit disproportionately as they play catch up. Traditionally, emerging markets have been late adopters of new technology. However, Markson-Brown believes that there has been an increasing realisation that several emerging markets, notably China
and more recently India, are now at the forefront of technological change. He also thinks that the adoption of new technology is accelerating and that the focus by investors, the public and media on new technology is capturing investors’ imagination at a time when earnings growth in these areas is accelerating. Another consideration has been a marked improvement in sentiment towards China, “I believe that China is now in a cyclical upswing that could last between two and five years and that this changes the perception of implied returns”, Markson-Brown states. “If China’s currency is likely to be stable, or even appreciating, financial markets will be better able to value stocks. This is occurring at a time when the Chinese market is still very cheap compared to western markets, for high-growth companies. In fact, Asia’s much faster growth rates versus developed markets might suggest that its markets should trade at a premium.” Markson-Brown expects to see a trend in global capital moving away from the US dollar, towards emerging markets, especially Asia, and a reassessing of the growth in these domestic economies. He takes a growth approach in some of the world’s fastest growing economies. It seems to make perfect sense. n
Important Information. For Financial Advisers and Intermediaries only. Past performance is not a guide to future returns. The views expressed should not be taken as fact and no reliance should be placed upon these when making investment decisions. They should not be considered as advice or a recommendation to buy, sell or hold a particular investment. As with any investment, your clients’ capital is at risk. The information and opinions expressed within this article are subject to change without notice. This information has been issued and approved by Baillie Gifford & Co Limited and does not in any way constitute investment advice. All data is current and source Baillie Gifford unless otherwise stated.
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SECTION HEAD
RSMR COMMENT
THOUGHTS ON FIXED INTEREST MARKETS By Ken Rayner
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overnment bond markets had performed surprisingly well in the period until the end of August 2017, but during September renewed efforts by the Trump administration to put in a programme of tax reform with cuts to corporate tax rates resulted in renewed optimism about a lift to the US growth rate. Furthermore, whilst the recent Fed meeting led to a pullback in expectations of rate rises two years down the line, market participants felt the probability of a further rate rise in December had increased affecting the short end of the curve. After the strong run in government bond markets year to date there was a back-up in yields globally of up to 25bp in some fixed interest markets in the 10 year area. Government bonds today appear priced for a continuation of a low inflation regime in perpetuity. While it can be argued that both equities and government bonds would both suffer if there was a significant pickup in short-term interest rates, government bonds appear more vulnerable than equities to modest levels of monetary tightening in the global economy. This is especially true if the tightening occurs through a continuation of the synchronised global recovery we are seeing today, rather than a significant pickup in inflationary pressures. In other words, if rates rise for positive reasons because economic growth and by extension company profitability is strong, government bonds at today’s prices could be vulnerable to a modest set back. The main argument for holding government bonds is that they have on most, but not all occasions, provided a strong hedge against equity market weakness in investor portfolios. A pickup in inflation, however, leading to the belief that monetary tightening would hit the economic cycle, would leave both asset classes vulnerable. Government bonds still offer investors a negative real yield in core markets, but whilst offering little value look unlikely to see a major selloff in the short term. At the time of writing, as we get close to the
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end of 2017 the difference between short dated and long dated US Treasury yields has narrowed at the fastest pace since 2008 as investors anticipate faster rate of policy tightening from the Federal reserve in 2018. It represents a pronounced flattening of the yield curve with investors receiving decreasing returns for holding longer dated bonds compared with shorter dated notes – often a harbinger of recession. This time however investors and analysts say the driving forces are different with inflation much more restricted in its influence even with the recent US tax reforms indicating further stimulus. At the same time there are significant buyers of long dated treasuries seeking the higher yield from quality assets needed by pension funds and foreign buyers in low interest rate environments. Moving to credit both investment grade and high yield debt are suited by a low growth extended economic cycle. Thus whilst spreads have tightened for yield hungry investors there is still a significant pickup available over government bonds. In investment grade in particular default rates are likely to remain very low and even in high yield the ability of companies to refinance remains strong, which will keep defaults below historical averages. High yield in particular would be vulnerable to any setback to global growth. In this market stock picking is vital, so investors should ensure funds selected have access to a strong corporate credit research team. Fixed interest continues to provide diversification in an investor portfolio, at a time when many asset classes have become increasingly correlated. It would be extremely risky to move to a portfolio holding just equities as unexpected events could happen and in an era of heightened geopolitical tensions exogenous shocks are always possible. As a result some fixed interest holdings should be maintained in a diversified and balanced portfolio with strategic bond funds continuing to offer investors a spread of fixed interest assets with the ability to react quickly to any changes in macro-economic conditions. n
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RSMR COMMENT
FINDING THAT INVESTMENT EDGE Our Investment Research Manager, Patrick Morris explains how RSMR rates funds.
There are numerous ways to slice and dice the sector
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common question we get asked in our business is how we rate an investment fund. This then leads to how do we decide that one manager or process is better than the next and where is the best place for an investor to park their money? In order for me to answer these questions it is important to give some perspective on the industry. The Investment Association (IA) is the trade body that represents UK investment managers. Given the huge variety of funds available in the UK, the IA provides a framework which categorises over 3,500 funds into over 35 sectors, with each sector having a clear definition setting out the criteria that funds must fulfil. Sectors are organised between income and growth producing assets further classified based on the asset type, region or specific objectives. Each sector is governed by both a sector committee and independent monitoring company to ensure they comply with their sector definition. The sector groupings (listed in Appendix I) provide a starting point for our analytical work. Each sector will vary by size including a combination of both active and passive funds. We use both quantitative and qualitative methods to understand and compare the funds comprising an individual sector. If we take the UK Equity Income sector for example, which currently comprises 87 funds, we will find that there are a number of approaches that managers take within this grouping. Some managers have highly diversified portfolios, others have more concentrated portfolios, some seek dividend income from small and mid-cap companies while others rely on larger multinationals
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such as Royal Dutch Shell, HSBC, BP, GSK and Vodafone which account for a high proportion of total dividends in the UK market. Some managers seek to invest in dividend growing companies while others will use derivative strategies to enhance their income generation. There are numerous ways to slice and dice the sector in addition to the traditional ‘growth’ and ‘value’ style orientations. This leads me back to the initial question of how do we decide one fund over the other?
SECTION HEAD
I recently read Superinvestors, by Matthew Partridge, which gives an informative account of some of the most well-known investors in finance over the past two hundred years. He selects twenty of the most successful investors over this period and rates them based on four simple metrics – performance, longevity, influence and ease of replication before assigning an overall rating to each investor. From traders to stock pickers to venture capitalists, the author selects a group of investors across a variety of specialisms. He compares the likes of Warren Buffett, Benjamin Graham and George Soros to some familiar names in the fund management industry today including Neil Woodford and Nick Train using his qualitative rating metrics. The original founders of global investment firms T.Rowe Price and Templeton Investments are included while the ‘father of index investing’ Jack Bogle also appears on the list. The author provides a biography of each investor before outlining their respective investment philosophies, examples of their successful (and not so successful) strategies and an assessment on how the reader can learn from each individual story. The author concludes that a variety of
RSMR COMMENT
approaches have been successfully employed over the past two centuries. The key message, however, is that each investor has created their own ‘investment edge’, each with their own unique preferences for the types of investments they invest in. At RSMR, we are similarly looking for managers and teams that have that ‘investment edge’ over their peers. This may come through specialist knowledge and experience, dedicated teams and resources, and differentiated styles and techniques. We build a collection of data on each fund over time and maintain ongoing dialogue with fund managers and teams to monitor any changes that take place. Therefore, we do not seek to determine that one manager or process is better than the next but rather to identify managers and teams that have crafted a process which can demonstrate consistency in line with their investment objectives. With a highly diversified universe of rated funds across the IA sectors, we are then confident that we can deliver a range of portfolios for investors according to their risk tolerance and preferences. n
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DIVERSIFYING SOURCES OF INCOME IN THE UK MARKET Adam Avigdori, Co-manager of the BlackRock UK Income Fund, gives his take on the domestic outlook for the year ahead.
A flexible approach is crucial to delivering strong investment performance through the cycle.
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he UK equity market continued to climb higher over the course of 2017, benefitting from the positive global economic backdrop leading to robust earnings growth.¹ However, as Brexit negotiations continue to stutter, investors remain cautious and this has been reflected in the substantial discount seen in the share price of UK domestic companies. While this caution is not unwarranted, the indiscriminate discount applied to UK domestic franchises is generating interesting opportunities to invest in some fantastic long-term, cash generative companies at attractive valuations. As a result, a flexible approach is crucial to delivering strong investment performance through the cycle.
Dividend growth set to continue but stock selection key It was a strong year for UK dividend payments in 2017 albeit boosted by sterling weakness and a revival in mining payouts having cut their dividends in 2016. Although the outlook for
earnings and cash flow growth continues to improve given the backdrop of synchronised global economic growth, dividend growth is likely to be more muted in 2018 if current exchange rates persist. In this environment we believe that stock selection will continue to be crucial; identifying those companies with strong cash generation that are well positioned to grow their dividends. Dividend growth is always important, particularly as inflation picks up, and we would encourage investors searching for yield to consider both the current yield on offer from an investment but also its ability to grow the payout. For example, we continue to like companies in the consumer staples sector whose cash generative business models have driven sustained and rapid dividend growth over many years in contrast to more cyclical, capital intensive sectors where payouts have proved more volatile.
Infrastructure and US shale driving attractive investment opportunities In terms of growing sectors, there continue to be opportunities in companies exposed to infrastructure and construction expenditure ¹Bloomberg, December 2017
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DIVERSIFIED SOURCES OF INCOME in developed markets. This is particularly the case in regions where activity levels remain subdued relative to longer-term averages and where initiatives are supported by the political environment. We also expect US shale to be an interesting and relevant theme as efficiency gains continue, lowering the marginal cost of drilling and yet supply chains are increasingly stretched offering opportunities to find companies with pricing power and volume growth.
The BlackRock UK Income Fund As part of our investment process, we regularly meet company management teams. In our recent conversations with CEOs and CFOs, they are typically upbeat reflecting the general acceleration in global growth which is driving strong earnings growth. However, there has also recently been growing reference to inflationary pressures. Anecdotally, we hear of double-digit wage increases for US truck drivers while the cost of certain chemicals has doubled over the last two years. These inflationary pressures are still isolated but they are building. Although we are yet to see broad-based wage increases, it appears that increasingly tight labour markets, combined with rising commodity prices and high utilisation rates in the industrial sector, may finally be overpowering the deflationary forces of technology and demographics. So far, this backdrop of rising rates and rising yields, which is likely to exacerbated by the reversal of Quantitative Easing, is not considered to impact economic growth. Given this backdrop, we expect there to be increasing differentiation between those companies with and without pricing power and between those companies that have control over their cost base. We would expect companies with strong market positions boasting dominant and differentiated products, services or technologies to thrive in this environment. We also
believe that cash flow generation and balance sheet strength will become increasingly important as the price and availability of credit deteriorates.
Risks l 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. l Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy. l Changes in the rates of exchange between currencies may cause the value of investments to diminish or increase. Fluctuation may be particularly marked in the case of a higher volatility fund and the value of an investment may fall suddenly and substantially. Levels and basis of taxation may change from time to time.
Specific fund risks l Capital growth/income variation – Investors in this Fund should understand that capital growth is not a priority and values may fluctuate and the level of income may vary from time to time and is not guaranteed. l Charges from capital – Where some or all of the fund’s charges are taken from capital rather than income, this will increase yield but decrease the potential for capital growth. l Smaller company investments – maller company investments are often associated with greater investment risk than those of larger company shares. l Concentration Risk – Investment risk is concentrated in specific sectors, countries, currencies or companies. This means the Fund is more sensitive to any localised economic, market, political or regulatory events. n
Important information. This material is for distribution to Professional Clients (as defined by the Financial Conduct Authority or MiFID Rules) and Qualified Investors only and should not be relied upon by any other persons. Issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel: 020 7743 3000. Registered in England No. 2020394. For your protection telephone calls are usually recorded. BlackRock is a trading name of BlackRock Investment Management (UK) Limited. Any research in this document has been procured and may have been acted on by BlackRock for its own purpose. The results of such research are being made available only incidentally. The views expressed do not constitute investment or any other advice and are subject to change. They do not necessarily reflect the views of any company in the BlackRock Group or any part thereof and no assurances are made as to their accuracy. This document is for information purposes only and does not constitute an offer or invitation to anyone to invest in any BlackRock funds and has not been prepared in connection with any such offer. © 2018 BlackRock, Inc. All Rights reserved. BLACKROCK, BLACKROCK SOLUTIONS, iSHARES, BUILD ON BLACKROCK, SO WHAT DO I DO WITH MY MONEY and the stylized i logo are registered and unregistered trademarks of BlackRock, Inc. or its subsidiaries in the United States and elsewhere. All other trademarks are those of their respective owners.
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MAKING THE MOST OF DIVERSIFICATION
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he bond bull market has supported returns from traditional balanced portfolios over the past 30 years. But with bond yields at extremely low levels the bull market could well be coming to an end, meaning this tailwind could transform into a headwind in the coming years.
Mike Brooks, Head of Diversified Multi-Asset Mike Brooks is Head of the Diversified MultiAsset team. The team manages a range of highly diversified portfolios investing in a broad universe of expanding asset classes which includes asset backed securities, alternative risk premia, litigation finance, peer-to-peer lending, aircraft leasing, trade finance, farmland and healthcare royalties. Mike joined Aberdeen in 2015 from Baillie Gifford where he was an Investment Manager in the Diversified Growth team.
The problem this presents is not insurmountable, however. Diversification – once memorably defined as the one free lunch in investment – can moderate the negative effects of a bond bear market. Most investors could dramatically improve their long-run returns and/or reduce risks by having a more diversified portfolio.
Diversify, but do it effectively It’s said that you can’t teach an old dog new tricks, and the same applies to many investors who have become set in their ways and closed to new ideas. On the other hand, some are all too ready to jump on the latest bandwagon without performing adequate analysis. The successful investor must navigate a sensible path between these extremes. In an investment universe that is constantly changing, some of the most fruitful investments are those that initially appear to be “outside the box”.
Adopt a long-term view Many investors judge a manager based on their recent performance. This can be misleading: Successive academic studies have shown that a focus on short-term performance often leads to investors firing managers with poor recent performance and hiring those with good recent performance. The net effect is a significant escalation of transaction costs – unaccompanied by an improvement in subsequent performance. The lesson? Focusing on short-term performance may be bad for your wealth!
Behave rationally In investment, we are often our own biggest enemies. We are all prone to various behavioural biases that can result in poor investment decisions. The best we can do is to try and be aware of these biases and employ disciplines to mitigate them. Personally, I find a diversified approach helps keeps most of my biases at bay. It helps me avoid the temptation to bet heavily – possibly excessively? – on my favoured investments, with the subsequent regret when things go wrong. It also gives me a greater ability to think clearly and pick up bargains in times of market stress. n
The value of investments and the income from them can go down as well as up and you may get back less than the amount invested. Important information. Aberdeen Standard Investments is a brand of the investment businesses of Aberdeen Asset Management and Standard Life Investments. The above marketing document is strictly for information purposes only and should not be considered as an offer, investment recommendation, or solicitation, to deal in any of the investments or funds mentioned herein and does not constitute investment research as defined under EU Directive 2003/125/ EC. Aberdeen Asset Managers Limited (“Aberdeen”) does not warrant the accuracy, adequacy or completeness of the information and materials contained in this document and expressly disclaims liability for errors or omissions in such information and materials. Issued by Aberdeen Asset Managers Limited which is authorised and regulated by the Financial Conduct Authority in the United Kingdom.
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