Spectator Money March 2015

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ISSUE 2 • 7 MARCH 2015

ELECTION

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Keep calm and stay focused

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‘How are you?’ asked a health-obsessed friend of mine. ‘Fine,’ I said. ‘In fact, terrific.’ He stared into my eyes. ‘That’s often a warning sign. You should really get some tests done.’

And that’s the way it feels with the UK economy in 2015.

The better the news, the more we seem to worry about what might happen next. Jobs growth has been remarkably strong, real wages are rising at last, inflation is close to zero.

Public-sector borrowing, though still high, is on a more positive track as tax revenues begin to recover. In Europe, another Greek crisis has been averted by last-minute compromise. So why all the fear?

Well, as Liam Halligan says in our cover story, we’re just weeks away from a UK general election that’s highly likely to produce a hung parliament, a coalition perhaps led by Labour, and market turmoil for gilts, some equity sectors and the pound. Meanwhile, as Ros Altmann explains, the impact of Quantitative Easing may have done serious damage to our pension funds.

And Matthew Lynn thinks takeover fever in the telecoms sector is more likely to destroy shareholder value than boost it.

In such uncertain times, what should you do to protect your wealth and make it grow? In this issue we look at ways of monetising your home or your car in the ‘sharing economy’, at fine wines as an alternative investment, and at the pros and cons of commercial property. We offer advice on choosing the right trading platform to suit your needs and picking tech start-up winners. Finally, Louise Cooper tells us what a good financial adviser is really for — not least, to keep clients calm and well focused on the longer term.

I hope that’s the way you’re already coping with the tensions of this febrile pre-election season, and that Spectator Money helps you make the best of your portfolio, whatever the near future may bring.

WWW.SPECTATOR.CO.UK | 7 MARCH 2015 | SPECTATOR MONEY

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In this issue ON THE COVER Voting for uncertainty Liam Halligan

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How to protect your portfolio this election season The Speculator Freddy Gray

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Hold your nose and bet on Ed Miliband Pick the right platform Laura Whitcombe

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The best services for trading direct in shares and funds Interview: Neil Woodford Jonathan Davis

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The star fund manager on delusions of recovery How QE eats pensions Ros Altmann

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Retirement funds are being forced to buy bonds Too big to prosper Tim Price

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A bloated eurozone is bad for bond prices Make the most of your assets Edie Lush

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Generation Spendthrift Camilla Swift

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Find cash, fun and friendship in the sharing economy

Why twentysomethings can’t be bothered to save

Secrets of the angels Michael Hayman

Beware Bordelais greed Christopher Silvester 32

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What successful tech investors look for

An alternative investor’s guide to wine

COLUMNISTS

Sector watch Matthew Lynn

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The way to win the telecoms war game Property Ross Clark

Reality check Louise Cooper

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What’s the point of financial advisers?

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Should you buy an office block?

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Voting for uncertainty An indecisive general election could be bad news for gilts, bank shares and the pound LIAM HALLI G AN

o, what’s your election prediction?’ It’s a perfectly reasonable question, but one which has lately stumped me.

There’s just no easy way to summarise what might happen on Thursday 7 May — at least not in a single-sentence spiel that works at a drinks party. And how do you answer those who, prior to polling day, are wondering where to park their money?

In less than three months, the UK faces an election the outcome of which is extremely tough to judge. It’s almost certain we’re in for a ‘hung parliament’ with no overall majority, as the combined vote of the Conservatives, Labour and Liberal Democrats falls and voters flock to alternative parties that can no longer be dismissed as ‘minor’.

The identity of the British government will then depend on frenzied negotiations between a variety of parties that could leave the world’s sixth largest economy in political limbo for weeks or even months. ‘The permutations of potential coalition partners mean post-election politics will be messy and stay messy for some time,’ says Rick Nye, managing director at Populus, a polling company. ‘With over a 90 per cent probability of a hung parliament, we’re facing the most uncertain period in British A post-election power politics for 40 years.’

A prolonged struggle over powerstruggle could unsettle sharing — which could easily spark a investors and alarm the second general election, as happened UK’s foreign creditors in 1974 — will in turn raise big constitutional uncertainties as parties press their agendas. Will Scotland vote again on independence? Could there be a snap referendum on the UK’s EU membership?

Such doubts will at the very least unsettle investors, knocking equity markets as well as capital spending on plant and infrastructure.

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Various combinations of parties in government — in particular, a Labour-led administration propped up by the Scottish National Party — could also alarm foreign creditors, undermining UK sovereign debt. ‘As a “safe haven”, Britain has lately benefited from turmoil elsewhere,’ says Helen Thomas, founder of the Blonde Money financial blog. ‘If politics is suddenly more confusing, or the UK is possibly leaving the EU, that could definitely pose a risk for gilts.’

These deep electoral uncertainties stem from the demise of two-party dominance. While Labour and the Conservatives typically gained more than 90 per cent of the vote during the postwar years, and almost 80 per cent as recently as 1987, that share has since fallen to well below two thirds.

At the same time, having consistently commanded around 20 per cent of the vote, the Lib Dems are now polling less than half that level, turning smaller parties, once peripheral at Westminster, into potential king-makers.

The trend away from mainstream parties has accelerated lately— not least because of Ukip. Having won 3 per cent of the vote in 2010, Nigel Farage’s party is on course to command a 12 per cent share in May, and has consistently outpolled the Lib Dems since early 2013. This reflects not just rising concerns over immigration and a ‘remote’ politi-

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cal elite, but a growing sense that the single currency is incoherent and the broader European project discredited. With Greek once again on a knife edge, any renewed euro-lurch, even if a dramatic ‘Grexit’ is avoided, will boost Ukip further and generate even more electoral uncertainty.

Then of course there’s the even faster ascent of the SNP, which won just six Westminster seats in 2010 but could take up to 50 of the 59 Scottish constituencies in May, practically wiping out Labour north of the border. Last September’s referendum, in which independence was rejected by just a 5 per cent margin, clearly galvanised SNP support.

With party leader Nicola Sturgeon naming ‘no more austerity’ as her price for propping up Labour, and her predecessor Alex Salmond probably returning to the Commons, the SNP could force Ed Miliband leftward, pressing a Labour government into higher debt-funded public spending and raising borrowing costs across the economy.

While the Bank of England will probably react to an uncertain election by waiting for the dust to settle, further delaying any rise in base rates, other outcomes are possible.

The UK is shouldering a record external deficit of around 6 per cent of national income. Part of this gap now derives from the investment side of the national ledger, as we’ve shifted from receiving interest on loans made to foreign WWW.SPECTATOR.CO.UK | 7 MARCH 2015 | SPECTATOR MONEY

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24%

Probability of a Labour/SNP coalition — the likeliest outcome, according to Populus

20%

Probability of a Labour/Lib Dem coalition

governments to paying interest on much bigger net borrowings from abroad.

Given that position, concerns about an incoming profligate administration could see a sharp drop in the pound.

‘If the UK were to suffer significant capital outflows, rates might even have to rise to protect the currency,’ says Helen Thomas. Even if the Bank of England does sit on its hands, actual borrowing costs facing firms and households are determined in the market. And the market will make up its own mind about the election and any messy aftermath, whatever happens to base rates.

Populus calculates that both Labour and the Conservatives have only a 3 per cent chance of forming a majority government. Although the Tories look likely to win the most seats, Miliband has a two thirds probability of becoming prime minister, twice as high as David Cameron. ‘That’s because Labour has a wider choice of potential coalition partners,’ says Nye. ‘While the Tories are probably limited to the Lib Dems and Democratic Unionists, Labour can feasibly work with the Lib Dems or SNP, plus the Greens and Plaid Cymru.’

The most likely outcome, with a 24 per cent probability according to Populus, is the Labour-SNP government feared by many investors. There’s only an 11 per cent chance, meanwhile, of another Tory-Lib Dem coalition, but a 20 per cent chance of the Lib Dems teaming up with Labour. Whatever happens, a close election campaign involving ever-sharper rhetoric and subsequent squabbling means we’ll see considerable financial volatility during the second quarter. If Labour does take office, banks and energy stocks will take a beating. Higher property taxes are also likely, commercial as well as residential. Should Miliband need to woo the Lib Dems or even the Greens, that could push up alternative energy stocks.

The extra borrowing likely to follow a Labour government will put downward pressure on gilts and other related bonds. And whereas the reality of power usually tempers more radical impulses, the strains of formal or even informal coalition could result in policy extremism — not least if the SNP is holding Labour to ransom in a tight parliament. That could bring a series of sovereign downgrades, driving even the most sanguine UK investors towards gold and other ultra-defensive assets.

Even if there is a Tory majority, or a Tory-led government, the relief felt by many might be shortlived as the issue of EU membership comes into focus. While Ukip is expected to win between five and ten constituencies, its candidates will influence many more — by taking decisive votes from the Tories in some seats and Labour in others.

Thus as polling day approaches, Farage could become an explicit instigator of other parties’ policies — pushing Cameron (who has promised a referendum by 2017) and even Miliband (who still remains against) into an earlier EU vote. After the election, even a handful of Ukip MPs could play a pivotal role in the Commons, threatening to tip a no-confidence vote and sparking a second general election unless a snap referendum is held.

National opinion polls don’t always translate into actual seats, of course. Yet polling is becoming ever more sophisticated, with the Populus numbers incorporating constituency-level surveys, as do the polls commissioned by former Tory party treasurer Lord Ashcroft. Both sets of data 7

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­ redict a Scottish Labour bloodbath and a hung parliament. p And all this polling is likely to generate heightened tactical voting, increasing uncertainty even more.

The UK equity market is heavily populated with global companies deriving much of their profits overseas, which should partially insulate index-trackers from domestic politics. Yet this election is happening at a time of swirling international uncertainty too: not just potential eurozone break-up, but East-West tensions in Ukraine and escalating turmoil in the Middle East, which could make for yo-yoing oil prices.

It is this deeply volatile international backdrop which, along with domestic factors, makes me conclude that we’re facing the most uncertain period in peacetime British politics not just since the double election of 1974, but since the introduction of universal suffrage in 1928.

So how’s this for a single-sentence summary of the upcoming election: ‘If you’re not confused, you don’t really understand what’s going on.’

Liam Halligan is an economic commentator for the Telegraph and editor-at-large at Business New Europe.

THE SPECULATOR » FREDDY GRAY

Hold your nose and back Team Ed

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olitical betting is serious business these days. About £10 million’s worth of bets were placed on the 2010 election; this year the sum is expected to surpass £40 million. It can’t be long before some self-righteous MP — step forward Tom Watson, your country needs you — calls it a national disease.

Why all the wagering? It must be partly, at least, because 7 May is likely to be the most exciting general election of recent times (for the reasons Liam Halligan sets out above). It’s revolt on the right, on the left and in Scotland, as Ukip, the Greens and the SNP all profit from the decline of Labour, the Conservatives and the Liberal Democrats. The two-or-three-party hold on parliament has been broken, and we can expect more coalitions and minority governments. William Hill reports that one high-roller has put £200,000 — the largest bet ever made on a general election, apparently — on a hung parliament come 8 May. But when everyone is predicting the unpredictable, it’s time to be contrary, to dare to be dull. When all the hype is about new kids on the Westminster block, the odds on the old parties inevitably drift long. On Betfair’s exchange, for instance, an outright Labour majority is trading at about 17/1.

That’s an incredible price: by way of comparison, William Hill is offering just 7/1. Yes, Labour is 8

being murdered by the SNP in Scotland — recent polls suggest that they may be reduced to four seats north of the border — and, yes, their leader is Ed Miliband. But look at the fundamentals: the electoral system very much favours Labour; put simply, they can still win with a considerably smaller vote share than the Conservatives. Moreover, Labour is heading into the election with 257 MPs. As our political editor James Forsyth pointed out in these pages back in 2010, only three oppositions have failed to win from such a strong starting position since 1884.

An outright Labour win remains unlikely, but in the next ten weeks momentum is bound to swing back and forth between red and blue, and the great thing about exchange gambling is that you can back ‘Labour majority’ now and lay out for a profit when the odds drift in to a more accurate price. The Oracle Forsyth tells me this would be about 5 or 6/1.

The odds on David Cameron winning after 7 May have shrunk in recent months. The boom in employment, and the faint whiff of future prosperity in the air, have all helped: another Conservative/Lib Dem coalition is currently favourite in the ‘next government’ markets, at 4/1; Labour minority second at 9/2. Again, the opposition seems underpriced. As Mike Smithson, who runs politicalbetting.com, puts it, ‘If you were to toss a coin

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Price for a Labour majority on Betfair

7/1

Price at William Hill

6/1

James Forsyth’s estimate

n interesting side market can be found on Betfair: ‘Which of Clegg, Farage and Salmond will be MPs after the election?’ ‘All three’ is priced at just 6/4, which seems short, given that they all face stiff opposition.

Clegg is unloved, to put it mildly, even in his own seat in Sheffield.

Farage is throwing everything he has at South Thanet, but he has to overturn a 17 per cent Tory majority.

Salmond, meanwhile, is by no means guaranteed to land the Gordon seat — it’s part of Scotland which said ‘no’ to him in the independence referendum last year, where the falling oil price makes a mockery of SNP fiscal plans and where, I’m told, the main unionist parties will effectively pull out to give the Lib Dems the best possible chance of holding the seat. You can back ‘none of’ Nick, Nigel and Alex to be in the next parliament at 50/1.

Worth a fiver, surely?

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and somebody were to offer you better than evens on it being tails, you’d take it. That’s what it’s like on Labour now.’

Miliband may poll far behind Cameron in the leadership ratings, but in the likely event of a toss-up hung parliament, that might not matter. So pinch your adenoids and plump for Team Ed. Think of it this way: you’ll be considerably worse off if Miliband does reach No. 10. It could be a much-needed consolation.

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Pick the right platform

But not all cover all three. Some — including AXA Self Investor, Cavendish Online, Chelsea Financial Services, Nutmeg, rplan and Willis — don’t offer Sipps. Others, The best services for trading direct in shares and funds Owen such as Chelsea Financial Services and Retiready from Aegon, don’t LAURA W HITCOMBE have share-dealing accounts. So when looking for a platform (or indeed a ‘fund supermarket’), first find out whether it actually offers access to the products you’re interested in. ou’ve decided to go it alone and make your own Your next consideration should be the level of supinvestment decisions. You’ve worked out how port on offer. Some platforms are aimed at first-time DIY much you can afford to risk. There’s one thing investors, so their sites are packed full of useful tools such left to do: choose a trading platform. With at as calculators, fact sheets and risk and investment filters. least 20 vying for your custom, it can be tricky to They usually have good help desks too — online, over the whittle them down. So here’s an overview of which might phone or both — and some are even open on Saturdays. suit your needs, and how much they will charge.

One useful tool for novices, offered by many platforms, Let’s start with the basics. What are platforms? Ste- is a model portfolio, ‘a pre-loaded portfolio designed to ven Nelson of research group the Lang Cat sums them save you the trouble of choosing’, explains Nelson. Fidelup nicely. Platforms ‘do four basic things for you. They ity Personal Investing has a range of such portfolios, help you buy stuff you want to invest in; hold it while you including the PathFinder range — which it describes as a still want to invest in it; report on it so you know how it’s list of ‘well diversified, mixed-asset options that savers can doing; and sell it when you’ve had enough of it.’ choose from, based on their attitude to risk’.

Historically, there have been two types of platform, Some platforms list ‘best buy’ funds, which usualone focusing on funds and the other on shares. Financial ly offer investors a discount on fees. For example, Haradvisers used them to arrange clients’ investments, earn- greaves Lansdown’s Wealth 150 comprises funds for ing themselves nice commissions from the platforms in which it has negotiated lower prices. According to the the process. Today, thanks to regulatory changes that put Lang Cat, there are 90 funds on the list with an average paid to that type of commission and forced advisers to annual management charge (AMC) of 0.65 per cent, and charge upfront fees instead, most platforms reach out a further 27 funds in the super-discounted Wealth 150+ directly to investors. They have realised that savvy clients that have AMCs averaging 0.54 per cent. ‘Normally you’d would rather handle some investments themselves, rather expect to stump up around 0.75 per cent to access these than pay advisers a penny more than necessary. funds,’ says Nelson.

To attract these investors, platforms have made it easHowever, he also warns investors not to assume such ier for individuals to get in on the act. Most now enable lists comprise a selection of the best-performing funds users to invest in both funds and shares through popu- available. Some top funds may be excluded if they refuse lar ‘wrappers’, such as Isas, Sipps and dealing accounts. to offer the platforms a discount. For this reason, the Lang

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A trading mechanism that magnifies risks and rewards If you’re looking for something racier than funds or shares, the world of spread betting can seem exciting — and again there’s a choice of readily available platforms. Spread betting allows you to bet on market rises or falls without the need to buy the underlying asset.

And because you’re not trading directly, gains are tax-free.

However, unlike funds or shares, spread betting is a leveraged product: a small deposit gives you a much larger market exposure, magnifying potential risks and rewards.

The experience of one group

of spread betters offers a parable of the dangers involved. Investing through IG, they had exposure to the Swiss franc in January when the Swiss National Bank removed the peg against the euro.

Investments of 20–30,000 Swiss francs swiftly became losses ten times larger.

The investors don’t dispute that the nature of these bets put their capital at significant risk, but they believe IG didn’t give ‘best execution’ to exit their positions after stop-losses were triggered — which it’s legally obliged to do.

In other words, they believe it

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National Bank on 15 January 2015, there was an unprecedented period of illiquidity in the Swiss franc, when all the various global bank liquidity providers stopped offering prices. As soon as IG was able to source sufficient trading liquidity, we closed out all relevant client trades and chose not to retrospectively requote any prices, despite this resulting in a negative financial impact for the company.’

The moral of the story?

Spread betting is a sophisticated and risky form of investment, only to be considered by experienced investors.

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took IG too long to settle their accounts, meaning their positions were not finally closed until the market had dropped well below the level at which they thought the stop-loss would kick in. One investor told Spectator Money: ‘Quite a few members of my group are now facing bankruptcy and losing their homes.’

An IG Index spokesperson replied: ‘At IG we source our foreign exchange prices from a large number of global banks to ensure we give our clients the best prices and execution possible. Following the sudden announcement by the Swiss

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JEFF HAYNES/AFP/GETTY IMAGES

Some forms of trading are not for DIY investment novices: the Chicago Mercantile Exchange in the era of ‘open outcry’

Cat refers to best buy lists as ‘best-friend deals’, though ‘platforms really don’t like it when we call them that’. So before you stuff your basket full of ‘best buys’, check the small print as to what qualifies them for inclusion.

Other platforms help first-timers get started with dummy accounts. The Share Centre’s Practice Account gives users £15,000 of ‘fantasy money’ to invest wherever they want ‘without risking a penny’.

Of course, fees are an important consideration too. ‘A lot of platforms have endless hidden charges including set-up charges and exit penalties,’ warns Nick Hungerford of Nutmeg (which offers a range of fully managed investment portfolios that clients can invest in rather than being a conventional trading platform).

While there’s a long list of potential charges investors need to watch for, the most common are the platform fee and fund trading and/or share-dealing fees. The platform fee is an annual charge that may be expressed as a percentage of the fund held or a fixed amount. ‘Whether a percentage or fixed fee is more cost-effective depends on how much you are investing and how often you intend to trade investments,’ explains Justin Modray, founder of the financial guidance website Candid Money.

‘In very general terms, fixed-fee platforms such as Alliance Trust Savings and Interactive Investor tend to be more competitive above around £50,000 for Isas and around £100,000 for Sipps, versus lower-cost percentagefee platforms such as Cavendish Online, Charles Stanley Direct and Fidelity.’

Analysis from the Lang Cat backs him up. Interactive Investor’s fee structure — an £80 investor fee with

two free trades per quarter, which equates to £120 a year based on 12 fund switches — makes it prohibitively expensive for stocks-and-shares Isa investors with smaller portfolios. Other platforms charging percentage-based fees, such as Barclays Stockbrokers, would cost an investor with a £10,000 portfolio just £35 a year, or £70 for a £20,000 portfolio. But for Isa portfolios of £50,000 and above, Interactive’s £120 fixed charge makes it one of the cheapest platforms: for a portfolio of £100,000, its £120 charge compares to £750 from Nutmeg and £450 from Hargreaves Lansdown.

As for dealing fees, percentage-fee A lot of platforms have platforms seldom charge for buying, sellendless hidden charges ing or switching funds, whereas fixed-fee platforms typically charge around £10 including set-up fees per trade. As Modray explains, ‘Fund and exit penalties trading fees are probably not an issue if you only trade a few times a year, but could become prohibitive if, for example, you make several fund trades each month. For £100,000-plus portfolios, trading a couple of times a week, iWeb, Clubfinance, SVS Securities and x-o.co.uk are likely to come out cheapest.’

Keen to have the last word, Steven Nelson from the Lang Cat says: ‘Pricing is only one part of the deal. What the platform does for you, how you feel about using it, is the other part. The two together make what we call “value”. But — this is important — we can’t tell you what you value. Your circumstances are exactly that, yours.’

Laura Whitcombe is deputy editor of Moneywise and co-author of Money Manual 2015.

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INTERVIEW » NEIL WOODFORD

In the 25 years Woodford spent working for his former firm, it grew from a start-up based in Henley-onThames with some £300 million under management to a multi-billion-dollar megalith run, following its takeover

by Invesco, from Atlanta in the US. His own funds, a go-to choice for thousands of professional and private investors in the UK, accounted for £33 billion of the total, more than any This star fund manager believes talk of a return other UK fund manager. The consistto economic normality is wishful thinking ently strong performance of his funds established his reputation as one of JONATHAN DAVIS the most respected (and highly paid) figures in the business.

Yet leaving to set up his own firm, running the money himself while his t’s quite rare to come across successful profession- colleague Craig Newman runs the business, has proved to als lobbing grenades at the industry that has brought be a liberating experience. The environment at Invesco them fame and fortune. When did you last hear a Perpetual had become, he says, ‘quite difficult for a long ‘magic circle’ City lawyer or a bulge-bracket invest- period of time’. With 60 years of experience between ment banker complaining about the level of fees them, ‘Craig and I, starting with a blank sheet of paper, their firms charge? It doesn’t really happen. It’s a grown- have been able to design a business that works well not up world out there and you take what you can get. just for the fund managers and the employees of the So it’s both interesting and refreshing to hear 55-year- organisation, but better for clients as well.’ old Neil Woodford, one of the biggest hitters in the fund What that means in practice is streamlining operamanagement industry, pointing out some of the ways in tions, cutting the management fee investors have to pay, which top firms in his line of work come up short. Quit- and providing much more information about how ting his job at industry giant Invesco Perpetual two years and where the fund is investing. ‘We’ve got a very disago to set up his own fund-management business was, he ruptive pricing model and we’re a lot cheaper than we says, an opportunity to do things differently — and better. were before. We’re able to communicate very openly and

‘The world is a very difficult place’

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Lonely road: for years, Neil Woodford has shunned ‘Big Oil’ shares

transparently. Nobody else comes close to providing what we’re providing. We’re treating our investors like grownups. We haven’t got anything to hide.’

This is a pointed reference to the way many firms that sell funds to the public have traditionally disguised quite how much investors pay for the privilege. After years of dithering, the so-called Retail Distribution Review two years ago led regulators finally to ban commission payments to financial advisers and other intermediaries, and require fund managers to give more information about the all-in cost of their charges.

Woodford’s view is that ‘RDR is changing the business for the better. There’s more change to come too. The industry needs to change and maybe the pace should pick up a bit. It’s been a little complacent. While I am not necessarily a supporter of all the regulation that we’re subject to, I’m all for the notion that there should be more transparency about how and what you charge a client.’

His hope is that greater disclosure will prompt more money to flow to those funds that are genuinely adding value and away from so-called ‘closet trackers’, funds that charge hefty fees for doing little more than copying what’s in the main The consensus view that market indices. Some 30 per cent of the we’ll soon be back to 2,500 funds sold in the UK are guilty of where we were before the this practice, a dirty little industry secret crisis is utterly wrong which Woodford rightly describes as ‘outrageous’. His own investment style being predicated on never following the herd, it’s not something of which he himself has ever been accused.

Woodford’s success and reputation as an investor rests on his rare but proven ability to think for himself and plough a lonely course even when majority professional opinion is against him. For years he has invested heavily in two sectors (tobacco and pharmaceuticals) that most investors like to hate, and avoided two others (‘Big Oil’ and banks) that make up a significant proportion of the UK equity market. The refusal to own BP and Shell is particularly striking given that his funds are ‘equity income’ funds and that the two big oil companies account for a sizeable chunk of all dividends paid by UK-listed companies. Woodford’s argument is that Big Oil is overinvesting in an ultimately futile effort to replace the reserves that once provided supernormal profits.

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Jonathan Davis is the founder of Independent Investor and a columnist in the Financial Times.

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Another way in which Woodford has ploughed his own furrow has been his willingness to put a chunk of his fund into smaller, early-stage businesses, some of them not even listed yet. These are higher-risk, potentially higher-return investments that require different skills to pick and monitor. So convinced is he by the merits of this style of investment that he has announced the launch (next month) of a new closed-ended fund that will invest in nothing else.

The aim is to help fill the notorious funding gap that exists particularly for university-sourced scientific breakthroughs — the gap between venture capital, private equity and public equity markets. Most fund managers are too short-term and risk-averse to make these kind of investments, which Woodford believes are vital if the UK is ever to match the US in the development of world-beating technology businesses. ‘It’s the failure of my industry to understand the needs of the science and innovation community, or even to want to participate in it, that is the single biggest factor behind our failure as a country to translate the great science we have into commercial success.’

That said, Woodford’s optimism about the potential of early-stage businesses is matched by his pessimism about the general economic and political environment. He admits to being a fully paid-up supporter of the ‘secular stagnation’ thesis advanced by Larry Summers and others.

The idea that the world will return any time soon to the kind of growth we experienced before the global financial crisis is wishful thinking. ‘My view on the world is that it’s a very difficult place. We are a long way away from the consensual view that just around the corner there’s a return to normal, when economies are going to start to grow, inflation will normalise, interest rates will normalise, QE will be a thing of the past and we will be back to where we were before the crisis. I think this consensus view is completely and utterly wrong. It isn’t the product of rational analysis. It’s a wish.’

Only the US has had any real success in fixing its banking system and reducing debt in the private sector, he says, though even over there the risk of a policy error, raising interest rates too soon, remains high. The relative success of the US economy is ‘for me the counter-factual that proves how policy has gone wrong in Europe, and to some extent in the UK’. The idea that you can ‘insulate the economy from all the nasty effects of a crisis and somehow magically growth will return’ is fanciful. ‘It won’t and it can’t.’ In the meantime political risk and uncertainty are growing.

So where does this leave investors? Remember, he says, that reinvested dividends account for the great majority of equity market returns over time, so equity income remains a tried and tested approach. Investors need to remain highly selective in what they look for, however.

‘That’s what I’m paid to do and that’s why I believe I can deliver single-digit returns per annum over a three-tofive-year view. That’s what I said when we started the new fund and that’s what I would say now, but I don’t disguise it’s going to be bloody difficult.’ If even the UK’s most famous fund manager thinks that, you have to worry even more about the rest.

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28%

Fraction of pension funds held in gilts and bonds in 2006

44%

Fraction of pension funds held in gilts and bonds last year

60%

Fraction of pension funds held in equities in 2006

35%

Fraction of pension funds held in equities last year

How QE is eating our pensions

rates are good for the economy, there are negative impacts that have so far been overlooked or ignored. In particular, the low-bond-yield environment has damaged pensions — which could actually depress growth. During last year, company scheme deficits rose by more than £200 billion, as Retirement funds are being forced to buy pension assets increased by around bonds that could bring significant future losses 10 per cent but liabilities (which increase when bond yields fall) rose by over 25 per cent. The resulting defROS ALT MANN icits have caused serious problems for corporate UK. But so far, the Bank of England has shown scant concern for such negative impacts of its policies.

It is not just company pensions that have been hit. Private pension ix years ago, after reducing short-term interest funds have been damaged too. Annuity rates depend on rates nearly to zero, the Bank of England start- bond yields — and the lower yields fall, the lower retirees’ ed its emergency policy of Quantitative Eas- annuity pensions will be for the rest of their lives. This too ing (QE) — creating billions of pounds of new could be a future drag on growth. money to buy UK government bonds (gilts) in When QE was first announced, the Bank of England order to force long-term interest rates lower too. The aim did not buy long-dated gilts for fear of distorting the assets was to stave off economic collapse: any impact on pen- used by UK institutional investors. However, it now owns sions was a secondary consideration. But even though more than half of the entire free-float of many long gilt the economy has recovered, the base rate remains at issues. Although it has promised not to buy more than 0.5 per cent and the Bank continues to buy gilts, forc- 70 per cent of the market in any one bond, the extent of ing bond yields down further. Are low rates still needed? official purchasing is self-evidently distorting markets by Could they be doing more harm than good on a longer- shrinking supply in the face of rising demand. By concenterm view? And what are they doing to our pensions? trating so much of its asset purchases on the gilts that are Although most commentators assume low interest particularly relevant for pensions, the Bank is distorting

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pension fund valuations and annuities. Many companies have poured billions of pounds into their pension funds in an effort to fix the consequent shortfalls, only to find deficits increasing further as the fall in gilt yields makes it difficult to manage their pension situation. There has been a huge spike in bond prices over recent months, with 25-year UK gilts now yielding just over 2 per cent.

As long-term investors, pension funds would normally look through the current environment in anticipation of QE unwinding, but as gilt prices have driven pension deficits up, pension advisers have increasingly recommended that trustees reduce the risks of their pension schemes.

The traditional way to do this has been to buy more bonds and sell shares, so trustees have felt forced into buying bonds, whatever their long-term value. This adds to downward pressure on long bond yields. It’s a vicious circle.

Investors frightened of missing out if rates keep falling buy bonds or increase their hedging — which pushes yields down further and also forces them to compete with the Bank of England for scarce long gilt supply. This could become a classic asset bubble, in the very assets that are supposed to be ‘risk-free’. The trouble with bubbles is that they are so damaging when they burst. Yet the dangers seem to have been ignored by the central bank, which is continuing to buy more of the long-dated bonds sought by pension investors.

Even though current bond yields seem divorced from economic fundamentals, pension funds are selling shares and moving into bonds as their deficits keep increasing.

There has been a dramatic reduction in stock market investment. In 2006 pension funds held over 60 per cent of their assets in equities, but it is now only 35 per cent (with UK equities being less than 20 per cent), while holdings of gilts and bonds have risen from 28 to 44 per cent.

Movements in bond yields are therefore now far more important for pensions than share prices. When interest rates rise, pension funds could suffer huge losses — so chasing bond yields lower may actually be increasing risk to pension portfolios. Indeed, investing in bonds does not even provide a proper hedge for pension risks. Pension liabilities move in line with longevity, earnings and prices, not just interest rates.

I believe pension funds should be diversifying their asset holdings, perhaps into infrastructure and property, which could more directly boost the economy, rather than buying bonds. However, the impact of monetary policy is forcing them to buy bonds which are not necessarily boosting growth at all.

It is difficult to imagine interest rates of around 2 per cent being maintained for the next 30 years or more.

At some point, official purchases will have to stop and rates will rise. When that happens, pension funds could suffer a significant capital loss on their bond holdings, which could further compound their deficits. I fear we could be repeating mistakes of the 1990s tech stock bubble, when pension funds piled into ever-rising stock markets because the markets kept going up even though valuations made little sense on a fundamental view.

It will be some years before we can properly assess the effects of QE on investment markets. It is obvious that QE has distorted the gilts market and this may mean all asset markets are now distorted. Gilts are supposedly the 18

least risky asset, and this drives the relationships on which most investment risk models are historically based. But if gilts are no longer risk-free, what will happen when the bubble bursts? Indeed, with an election coming up, there is also a danger that markets will sell off in fear of higher government spending under a new administration.

This raises important questions. Should the Bank of England stop all further purchases of long-dated government bonds, or even sell some back into the market? How long can it keep artificially interfering with such an important market? And even more importantly, is keeping long rates so low really stimulating the economy?

It‘s quite possible that the negative effects outweigh the positives once yields have fallen so low, as rising pension deficits become a threat to many companies and annuity rates fall. Economic growth responds more to short rates, via the impact on mortgage borrowing; long rates are less relevant, Pension funds should but low long rates are having negative be investing in assets effects by depressing pension and annuthat can boost growth ity values.

I am concerned that pension funds in the economy have pulled out of stock markets and are buying bonds at ever more expensive levels, rather than investing in assets that can boost growth. The implications of continued falls in bond yields on long-term economic performance are being ignored by policy-makers even though there are clear risks of dangerous asset bubbles: QE has distorted investment markets in ways we do not yet understand, and pension funds may be adding much more risk than they realise in their efforts to be prudent.

The Bank of England needs to engage with the negative impacts of low long-term bond yields. The jury is still out on the long-term effects of QE. The easy part was introducing it. The really hard part will be managing the fallout when it ends.

Dr Ros Altmann CBE is an independent expert on pensions and investment and the government’s Business Champion for Older Workers.

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Governor Mark Carney: should he stop buying long-dated gilts?

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SECTOR WATCH » MATTHEW LYNN

How to win the telecoms war game

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ficionados of early 1980s teen movies will remember with affection WarGames, starring Matthew Broderick as a teenage hacker who accidentally cracks the system that controls the American nuclear arsenal. In the climactic scene, Broderick has to teach a computer pre-programmed to nuke the world about the futility of what it is about to do. ‘The only winning move is not to play,’ the computer eventually decides, calling off its first strike on Moscow.

It’s a lesson worth learning for anyone contemplating the less dangerous but still costly games of mergers and takeovers now being played out between UK telecom and media giants. In a deal-making frenzy that has a 1980s flavour to it, the telecom firms are paying billions to take control of one another. BT has just forked out £12.5 billion for EE, a mobile network itself made up of what used to be Orange and T-Mobile. Hong Kong billionaire Li Ka-shing is merging his Three network with the larger O2, controlled by Spain’s Telefónica. Sky is muscling in with a deal to buy capacity from O2, allowing the broadcaster to sell mobile lines to its customers.

Every broker’s note in the sector is now pushing the line that Virgin, TalkTalk and of course the biggest player of all, Vodafone, are under intense pressure to come up with deals of their own — or risk getting left behind as their deal-making competitors race ahead of them.

Except, of course, it may not be as simple as that. In fact, this latest round of telecoms and media mergers is unlikely to turn out any better than the last one 15 years ago, which destroyed wealth on an epic scale.

The big idea behind these deals is These mergers will turn something called ‘quad play’. Despite what Spectator readers might expect, out no better than the that isn’t a new way of playing your last ones, which destroyed old Who albums. It refers to packaging wealth on an epic scale mobile, fixed-line, broadband and TV, and selling the whole lot in a single bundle. Customers, we’re told, find that far more attractive than buying each one separately. If you can’t offer them the whole lot, you’ll lose customers to someone who can.

On that logic, BT reckons it has to own a mobile company and a football channel, while Sky has to offer mobile lines — and Vodafone needs to buy in both.

On closer examination, however, the quad play idea turns out to be remarkably flimsy, and certainly hardly 20

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worth the £10 billion-plus cost of joining in. True, Sky has had a lot of success from selling broadband connections alongside its pay-TV packages, and TalkTalk has made some progress in bundling up fixed lines, broadband and a modest TV package, while BT has made an initial success of its sport TV business. But it’s a big jump to argue that customers automatically want to buy all their media from the same company.

In most industries, customers are fairly resistant to ‘bundles’. A surprisingly large number of us have credit cards and bank accounts from different companies, even though it would be hard to think of two more complementary products. No one thought much of the clothes on sale at Tesco, and if John Lewis tried to sell cars, it would probably be greeted with widespread indifference. In fact, quad play is mostly investment-bank hype.

There is no evidence customers care one way or another. They will buy a bundle or pick and mix, depending on the quality and price of each product. If you give away free football, as BT has been doing, they’ll take it, just as they’ll take any free offer. Likewise, if Sky gives away broadband as a bonus for subscribing to its pay TV, they’ll take that as well. They’d also take a free case of wine if it was offered.

Whether they will pay for it is another ­matter.

But while the benefits of that ‘bundling’ are very hazy, the costs aren’t. Companies have to pay vast sums to acquire each part of the quad. And as they get bigger, they inevitably get harder to manage. Are you looking forward to getting hold of customer services at your quad play provider when you have a technical problem? No, I thought not. Meanwhile, the core business of providing fixed and mobile lines is under pressure as the internet becomes ubiquitous, and access is mostly free.

The number of calls on both is falling steadily. Mega-deals are usually a poor way of reinvigorating a core business in trouble.

In reality, these telecoms deals are mostly driven by corporate egos and fee-hungry bankers. BT could have been a dull but successful provider of broadband, but has chosen to reinvent itself as a multimedia conglomerate.

Three and O2 and even Sky could be heading down the same route. Right now the big winner looks to be Vodafone, which — perhaps too scarred by its blockbuster deals at the start of the 2000s — has so far sat this one out.

Not playing — as Matthew Broderick discovered in WarGames — might be the winning strategy.

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Too big to prosper A bloated eurozone is bad for bond markets TIM PRI CE

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couple of years ago, a bookseller sent me ‘a little gem of a book’, namely The Making of the Euro by Claudio Hils. This is a somewhat humourless coffee-table hardback which is only partially redeemed by one or two beautiful photographs of printing presses. It recounts the

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literal making of the euro, and it is all pure hubris. Take, for example, this introduction by Dr Jürgen Linden, lord mayor of the city of Aachen in Germany: ‘The euro is being awarded the International Charlemagne Prize of Aachen for 2002. At first sight, this seems wholly inexplicable. A currency is to be awarded a prize intended to honour an individual’s contribution to the unification of a continent?

In actual fact — and this is something we have already noticed after only a few weeks — the unifying effects of the common currency in, for the time being, 12 countries have proved to be highly significant. The degree of acceptance of the euro has been surprisingly good wherever we look.’

One doubts whether the euro will be up for many awards this year.

Fears over a ‘Grexit’ seem to have distracted investors from the main event: the common currency is a deflationary neutron bomb slowly detonating across the economies of the eurozone. The euro is acting like an anti-Midas: whoever embraces it gets poorer.

All of this was forecastable.

Among those who foresaw the threat of state gigantism in Europe was Leopold Kohr — an Austrian Jew who escaped Hitler’s Germany just before the outbreak of the second world war. He was born in Oberndorf in central Austria, a village of just 2,000 souls, and Oberndorf’s modest size would come to play a crucial role in his thinking. Kohr graduated in 1928 and went on to study at the London School of Economics alongside his fellow Austrian Friedrich von Hayek.

In September 1941 Kohr began writing his masterwork, The Breakdown of Nations. He argued that Europe, far from expanding, should be ‘cantonised’ back into the sort of small, autonomous regions that had existed in the past and still thrived in Switzerland, with a commitment to private property rights and local democracy. ‘We have ridiculed the many little states,’ wrote Kohr sadly. ‘Now we are terrorised by their few successors.’

Kohr showed that there were natural limits to the growth of societies, and the complexity that becomes a feature of larger systems: ‘Social problems have the unfortunate tendency to grow at a geometric ratio with the growth of an organism of which they are a part,

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Barroso: ‘More unity demands more integration’

while the ability of man to grow with them, if it can be extended at all, grows only at an arithmetic ratio.’

As the European Union and its common currency bloc have grown ever larger, they have collided horribly with the logic of Kohr’s thesis. Consider José Manuel Barroso’s 2012 State of the Union address as President of the European Commission: ‘Globalisation demands more European unity. More unity demands more integration. More integration demands more democracy.’ But the words and concepts smeared together by Barroso have no real meaning beyond a perfunctory Orwellian doublespeak.

Has an economically battered eurozone, beset by deflationary trauma throughout its periphery, really become more democratic since the launch of the single currency?

Another sceptic of the bulging state was the American physicist Professor Albert Bartlett, who died in 2013. He warned that the greatest failure of the human race was our inability to comprehend the power of the exponential function: how growth at a modest-looking but fixed percentage rate over time can lead to unimaginably huge escalation. He also warned that for any organism that reaches maturity, further growth equates to either obesity or cancer. The eurozone, according to this theory, is either bloated or diseased. It is clearly not healthy.

A debt-ridden world such as ours requires constant economic growth simply to service the debt. We have become addicted to growth. But we have also become addicted to debt. After the financial crisis, and the deepest recession since the second world war, expectations were high that the world’s economies would pay down their debts. But as a recent study by the McKinsey Global Institute makes clear, nothing of the sort took place.

The very concept of austerity, so hated by the left, is mostly mythical. In fact, since 2007, global debt has grown 22

Tim Price is director of investment at PFP Wealth Management.

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by $57 trillion. (All figures relating to the size of accumulated government debts are eye-watering.) Far from contracting, global debt to GDP has risen by 17 per cent. If those debts were unpayable back in 2007, and they probably were, they are even more unpayable today.

This makes any analysis of the bond markets today frankly terrifying, because there are only three ways of dealing with a world clogged with too much debt. One is to generate sufficient economic growth to maintain debt service. In the eurozone, that prospect now looks wildly implausible. The second is to default. Since our global monetary system is based on debt, a default by any major player in the bond market will equate to Armageddon.

The third and final option also happens to be the one to which desperate states have resorted throughout history.

It is called inflation. The debt simply gets inflated away.

Conclusion: since the likely outcome for bond markets will be some combination of options two and three, choose your bond investments with extreme care. At the very least, check what your pension fund is exposed to.

If it’s bursting at the seams with UK government bonds offering pathetic yields, you may wish to diversify into other, higher-yielding assets. (Ros Altmann on page 17 points out that many pension funds have little discretion other than to keep buying government bonds, forced to do so by regulatory pressure. Time will tell whether this leads to a favourable investment outcome for pensioners.)

And the eurozone finds itself in a pickle. The one thing that would ease the pressure on the periphery economies, beset by rising unemployment, stagnant growth and falling prices, is the one thing made impossible by membership of a currency union: competitive currency devaluation.

‘Across Europe today economists are counting the movement of prices to clearing levels,’ warns the financial historian and analyst Russell Napier —meaning not only the prices of some There are only three financial instruments and other assets, ways to deal with a world but also wage rates. ‘What they obduclogged with debt: growth, rately refuse to count, or for that matter default or inflation even to countenance, is the unwillingness of the peoples of Europe to surrender their sovereignty to a federal state as part of that process.

That refusal is evidenced by the rise of Syriza, Podemos, Front National and others which make it clear that clearing prices within a federal state are not the future, whatever the numbers might say.’

Not only has the single currency forced a ‘one size fits all’ monetary policy — and now outright deflation — on the disparate states of the eurozone, it has also forced an increasingly disgruntled electorate into the arms of political extremists bearing dubious and dangerous promises of salvation from this process.

My bookseller friend bought the last remaining 200 copies of The Making of the Euro for one euro each. ‘Not surprisingly it was remaindered,’ he tells me. ‘The difference is that books that don’t sell find their way on to the remainder tables very quickly in the UK. In Europe it takes a little longer to own up to mistakes — especially state-sponsored ones.’

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Make the most of your assets How to find cash, fun and friendship in the sharing economy EDIE LUSH

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oining the ‘sharing economy’ is a little bit like a hotly anticipated first date. It could end in tears, a broken heart or that colossally irritating feeling of having wasted your time. But it’s also exciting — and if it goes well, could open up a whole new world.

The sharing economy is the term most people have settled on for the concept of monetising what you own by renting it out to others. It’s also called ‘the peer economy’ or ‘collaborative consumption’. Sharing and renting are hardly new concepts, but the fact that we now live in a hyper-connected mobile world means it’s easier than ever to earn money from your loft, Lamborghini or ladder — even your labrador.

PriceWaterhouseCoopers estimates the sharing economy in the UK is worth £500 million and that the figure could be £9 billion by 2025. The innovation charity Nesta reckons that 25 per cent of the UK population took part in some form of internet-enabled ‘sharing’ last year. In sectors such as car use and holiday homes, the sharing economy could grow to encompass half of all transactions over the next ten years.

How much could you make out of this revolution?

EasyCar Club, a car-sharing website, estimates that British households could make an average of £7,803 a year by renting their assets to others. Londoners have the most to gain, with the estimated potential takings per household topping £9,500. In Scotland, at the bottom of the scale of potential earnings, an average household could still reap more than £6,500 a year.

The easiest place to start is by renting out your driveway through JustPark. At last count, 675,000 people are doing so and making an average of £465 a year (£810 in London). The figures rise dramatically for homes close to airports, railway stations and stadiums, where driveways can earn owners more than £3,000 a year.

Then there’s your car. How often do you actually use it? The typical British household owns a car that stands unused for 2.7 days each week. EasyCar Club owners monetise their cars to the tune of £1,800 a year. Do you have a second family car that doesn’t get used much at weekends, or that sits around while you go to work?

This might well be an option for you. EasyCar provide the insurance, and sorts out the repairs if the car comes back dented.

The really big-ticket item is your home. Californiabased Airbnb is the pioneer in this sector, and a typical London home-owner using the website earns about £3,000 a year. Debbie Wosskow, founder of rival LoveHomeSwap and author of an independent review for the gov-

HULTON ARCHIVE/GETTY IMAGES

ernment on the sharing economy, says swapping homes through her site saves users in London around £3,300.

Some clients are swapping their homes and enjoying an ‘adult gap year’ — saving up to £50,000 a year on the way. Some hosts use it to visit children and grandchildren in Australia or the US. ‘Lifesaver!’ said one user I spoke to. ‘My in-laws came for six weeks but stayed a Tube ride

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It’s patriotic too: car-sharing, 1940s style

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Can I interest you in a timeshare? BorrowMyDoggy matches owners and ‘borrowers’

£50

Average rate for rooms rented to workers for the day on Vrumi

£465

Average annual earnings of a parking space on JustPark

£1,800

Average annual earnings from sharing your car via EasyCarClub

away, which meant they could come hold the baby during the day but I didn’t have to make them breakfast.’

The innovation that Wosskow brought to her site is the ability to do ‘three-way’ swaps with two other homeowners. You can also gift your credits to others — your children, for example.

But you don’t have to go on holiday to rent your space out. Vrumi, which launched at the end of last year, allows householders to let rooms for people to work in during the day — a small business that needs a kitchen table and a coffee pot, a psychiatrist who needs a couple of comfortable chairs and a window, or a freelance writer who needs a loft space with a view. It’s perhaps too soon to be sure about this one, but hosts are already earning an average of £50 a day. At that rate, one room rented one day a week generates income of £2,400 a year.

Once you’ve seen the power in unlocking underused personal assets, the sky’s the limit. Don’t want to buy a drill to put together the flat pack this weekend? Peerby and B&Q’s Streetclub let you hire your neighbour’s. Have a house in Cornwall with a surfboard? List the surfboard on Quiver. Own a field? Offer it on Fieldlover for wedding and fireworks parties, or when the Tour de France comes past. Going away and need your dog looked after?

DogVacay or BorrowMyDoggy. Do you have skills worth sharing, like knitting or photography or command of French? Check out TaskRabbit, WoNoLo, Thumbtack, Etsy or PeoplePerHour. Spare nuclear reactor parts?

Nuclear Connect (seriously!).

If this seems a little overwhelming, try conducting a ‘sharing audit’. I met April Rinne, an adviser on the sharing economy, who says there are three things that usually help people decide what to share. First is the purchase price.

‘Higher purchase price means higher trade-offs of owning the asset. That’s why boats are easily shared.’ The second is frequency of use. ‘You probably use your coffee pot all

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the time, so don’t share it. But how often do you use your waffle iron?’

And third? Sentimentality. ‘For many people, it’s more difficult to share things they’re emotionally attached to.’ This might well apply to your house, but you could overcome it by locking your treasured possessions in one room. Together with the £3,000 you’re earning, that might make you feel less ­sentimental.

The next generation of sharing goes beyond earning straight cash. On sites like Yerdle you can earn credits for unwanted stuff that you would rather exchange for things you do want: send off your unwanted tent, earn credits for new boots. Fon allows you to share your WiFi, safely, with passers-by; in exchange, you get free WiFi access when you go out of town.

By now you probably have a list of questions about regulation and tax as they apply to sharing. And you’d be right to ask. This is an emerging and shifting space. If your home is a sharing asset, you need to be sure of your insurance cover. The British Insurance Brokers’ Association publishes a guide listing 11 companies who will write policies for sharers. Airbnb finds itself in a legal grey area in some London boroughs, due to a 1973 law that requires owners to obtain planning permission to share their property.

But if the Deregulation Bill, now in the House of Lords, is passed in full, these limitations will be removed. Income earned through the sharing economy is currently taxable above £4,250, but some pressure groups are calling for the threshhold to be raised to £10,000.

The good news is that the UK is poised to be one of the leaders of the sharing economy. According to Rinne, ‘No other country has done a review like Wosskow’s and it’s a great first step towards deeper understanding and engagement.’ A sharing economy has resonances with the Conservative theme of the Big Society, and a positive Downing Street response to the Wosskow review was anticipated as we went to press.

And there’s something else to be gained besides money in the sharing economy: the human connection that comes through the organised random encounters on which it depends. Car owners genuinely enjoy the buzz that comes from meeting someone they don’t know and letting them in — just a bit — to their life. People who use BlaBlaCar ride-sharing could take the train, but like meeting people they don’t know and sharing journeys.

When you home-swap on Airbnb you’re essentially lifeswapping — which has that frisson of the first date where we began. Debbie Wosskow quotes Harper Lee: ‘You never really understand a person… until you climb into his skin and walk around in it.’

Whether you’re after feelgood or hard cash, the sharing economy is the place to put your assets to work.

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SCOTTISH MORTGAGE INVESTMENT TRUST

SCOTTISH MORTGAGE WAS ORIGINALLY LAUNCHED TO PROVIDE LOANS TO RUBBER GROWERS IN MALAYSIA IN THE EARLY 20TH CENTURY.

While others stick to the indices, we are free to choose.

Scottish Mortgage Investment Trust has its own way of doing things. So it’s hardly surprising that the Trust’s portfolio looks nothing like the index, after all, we are active rather than passive investors and we firmly believe that the index is an illustration of ‘past glories’ rather than future prospects. In fact, our abiding principle has always been to invest in tomorrow’s companies today.

We give ourselves time to add value by being patient investors in an impatient world. But don’t just take our word for it, over the last five years Scottish Mortgage has delivered a total return of 150.7%* compared to 64.6%* for the index.

And Scottish Mortgage is low-cost with an ongoing charges figure of just 0.50%†.

Standardised past performance to 31 December each year*: 2009-2010

2010-2011

2011-2012

2012-2013

2013-2014

Scottish Mortgage

33.9%

-15.2%

30.1%

39.8%

21.4%

FTSE All-World Index

16.7%

-6.6%

12.0%

21.0%

11.3%

Past performance is not a guide to future returns.

Scottish Mortgage Investment Trust is managed by Baillie Gifford and is available through our Share Plan and ISA. Please remember that changing stock market conditions and currency exchange rates will affect the value of your investment in the fund and any income from it. You may not get back the amount invested.

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For a free-thinking investment approach call 0800 917 2112 or visit www.scottishmortgageit.com

Baillie Gifford – long-term investment partners †† For a limited period and new eligible ISA clients only. Terms and Conditions and minimum investment amounts apply. *Source: Morningstar, share price, total return as at 31.12.14. †Ongoing charges as at 31.03.14. Your call may be recorded for training or monitoring purposes. Baillie Gifford Savings Management Limited (BGSM) is the manager of the Baillie Gifford Investment Trust Share Plan and the Investment Trust ISA. BGSM is an affiliate of Baillie Gifford & Co Limited, which is the manager and secretary of Scottish Mortgage Investment Trust PLC. Your personal data is held and used by BGSM in accordance with data protection legislation. We may use your information to send you information about Baillie Gifford products, funds or special offers and to contact you for business research purposes. We will only disclose your information to other companies within the Baillie Gifford group and to agents appointed by us for these purposes. You can withdraw your consent to receiving further marketing communications from us and to being contacted for business research purposes at any time. You also have the right to review and amend your data at any time.

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25/02/2015 17:14

PROPERTY » ROSS CLARK

Why not buy an office block?

F

rom taxi drivers to hairdressers, half the world seems to own residential buy-to-let property. But why does hardly anyone own an office building or a lock-up industrial unit? That was my first thought when I saw an office building for sale in a local village for £330,000, with tenants in situ paying a combined £30,000 a year in rent. Try finding a flat with a gross yield of over 9 per cent.

The answer, I suspected, lay in television. Homes make good telly. We identify with couples who dart from one property to another, accompanied by TV crews, prodding worktops and making plans to demolish walls. We’ve all been there, and depending on our temperament we either want those couples to succeed or fall flat on their faces.

But how do you make good telly out of empty office blocks and exhausts-while-you-wait garages in south London railway arches? Commercial property goes for a song, I reasoned, because it has passed by the goggle-eyed audience who have bid up residential prices.

I didn’t get far into my office block before I realised there’s a bit more to this question. The yield looked high because the building needed a fortune spending on it: the boiler room was full of asbestos. But there was a bigger and more general problem: since 2008, commercial landlords have been liable for full business rates if their property has been empty for more than three months. The bill threatened to be far larger than a council tax bill: it was equivalent to nearly half the rent. In other words, if my office block had remained let, I would receive £30,000 in rent; but if the tenants moved out — say to the empty office building just up the road — I would have negative income of nearly £15,000 a year.

Shares in commercial The risk would be reduced if I owned a portfolio of commercial properties, in property firms have which case I might expect a certain prooutperformed prime portion always to have tenants — at least London residential prices until there was a recession and businesses shrunk or disappeared overnight. I’m sorry to say that I can’t afford to buy a whole portfolio of office buildings, but there’s a simple alternative if you want exposure to the sector: buy the shares of commercial property companies. In contrast to residential property, a sector which offers few FTSE companies to invest in, there are a number of prominent firms which allow you to own a spoonful of the very cream of commercial property, not just lock-ups in Streatham.

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Whenever I find myself in the City of London, I can now look up with pride, knowing that I own a tiny piece of the ‘Cheesegrater’ — perhaps the bolts which keep falling off. The building (122 Leadenhall Street) belongs to British Land, a FTSE100 company which also owns a host of retail parks and shopping centres. I also own a small lump of the ‘Walkie Talkie’ (20 Fenchurch Street): maybe a potted plant in its much-slated indoor ‘park’ or one of the windows blamed for frying a nearby parked car when they focused the sun’s rays. The building is owned by Land Securities, another FTSE100 giant.

Shares in commercial property firms have outperformed even prime London residential property in recent years. Land Securities is up 22 per cent in a year, 90 per cent over three years. They also yield a little more. British Land pays 3.45 per cent: you’ll struggle to find a London flat with a net yield that high. Moreover, keep your shares in an Isa and you won’t have to pay capital gains tax or any tax on the dividends — unlike your buy-to-let.

At the moment, the commercial property market in London seems a little stronger than the residential market. Knight Frank recently reported that of 6.7 million square feet of office space in London currently under construction, 46 per has been pre-let. The London retail market, too, is strong, with rents buoyant and only 3 per cent of space unoccupied. In spite of the changing nature of retail, with its unloved ‘big shed’ out-of-town parks, the best provincial sites are doing well. As for shops in fading town centres, they are not necessarily a bad investment — and changes to planning rules under the coalition have made it easier for owners to convert to residential accommodation, which generally has a higher value per square foot.

But if you think house values are prone to boom and bust, try commercial property. Land Securities’ share price hit 2,333 pence in 2007. In 2009 it fell to 357 pence.

At around 1,225 pence today it is still little more than half its peak. There are people who have lost that much on a residential property — like the lady who bought a house in Torquay which fell down a cliff — but they are few and far between. Common sense tells you that commercial property, being the preserve of professional investors, ought to be less prone to bouts of irrational exuberance and the inevitable fallout. But over the past decade, you have been safer in the company of the over-excited amateurs of the residential market.

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LONDON THURSDAY 19 MARCH 2015

25/02/2015 24/02/2015 17:41 10:47

BLOOMBERG

that requires careful navigation. For insights into how to ride the wave, I spoke to three of London’s top investors — and learnt three key lessons: back the idea, trust the experts and choose your founders carefully.

First, the big idea. ‘I look for something that’s simple, the things that have the potential to be used nearly every day,’ says Frank Meehan, partner at SparkLabs Global Ventures and the discoverer of Nick D’Aloisio, the teenage developer who sold his app Summly to Yahoo! for £19 million in 2013. Meehan was also one of the first investors in artificial intelligence start-up DeepMind, bought last year by Google for £400 million, and has served on the boards of success stories from Spotify to Skype.

The power of ideas is also high on the agenda for Eileen Burbidge — founding partner at early-stage venture fund Passion Capital, which has funded start-ups such as business information service DueDil and analytics platform GoSquared — but it’s also a matter of judgements about people. ‘What we’re looking for are unique characteristics about the entrepreneurs themselves,’ she says.

If you’re not investing in a big idea, don’t expect a big return. But ideas alone are not enough for success. It’s a crowded, complex sector, for the most part populated by pioneers who really want to make a difference. But as in any frontier market, beware the snake-oil salesmen promising easy money. To avoid them, get to know the network and the people with the real know-how. ‘Everything I’ve ever been involved in has come from a referral,’ Meehan told me.

‘I wouldn’t be investing into real estate or mining, I know nothing about it… similarly with tech, you Tips for novices from top tech start-up investors need to leave it to the people who know how to sniff out what’s going MICHAEL H AYMAN to work and what’s not, how to boost things and how to break things.’

Such expertise does not come here’s definitely more money than talent out quickly or easily. Manish Madhvani, co-founder and there.’ That’s the view of one seasoned Lon- managing partner of GP Bullhound, told me about the don tech investor, and it presents an important exhaustive research process undertaken by his boutique truth to those looking to enter a market that investment bank in its hunt for ventures worth backis rapidly heating up. In a resurgent economy, ing. ‘We adopt a very thematic investment and advisory siren voices promise fast money. But the wisdom of War- approach, in that we choose a sector we think is ripe for ren Buffett deserves to be heeded: ‘Be fearful when others disruption — a good example being digital music six or are greedy. Be greedy when others are fearful.’ seven years ago. We thought streaming was going to be the Where professional money is flooding in, private prominent force, so we met 50 of the streaming companies investors can profitably follow — but this is a market across Europe, which we do for all of our sectors. Every Spot the talent: Nick D’Aloisio in 2013, after selling his app to Yahoo! at the age of 17

Angels and unicorns

‘T

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time we do this, we meet one or two that are so clearly the standout companies to try to invest in.’

Given the level of research and expertise that spotting breakthrough companies requires, both Meehan and Madhvani are adamant that investing in a fund, or coinvesting with experienced angels, is the way to go for novices. Too many first-timers have a tendency to back people with similar professional backgrounds to their own, Meehan says, rather than casting the net wide for the best opportunities. Put another way, a career in City pinstripes doesn’t mean you’ve earned your stripes as a tech investor. Many of the best investments today are in highly technical fields like big data, requiring deep skill sets in science: no place for those who are just playing at it.

If a nose for ideas and a belief in expertise can help you navigate the market, only the top talent can turn your investment into riches. The third leg of the stool is the team behind a business, particularly the founders. ‘Startups have to pivot three or four times to find the successful business model,’ Madhvani says, ‘and if you haven’t got a CEO who’s experienced and able to do that, your chances of success are massively reduced. If the jockey isn’t right, then we won’t do the investment.’

According to Meehan, two founders are generally better than one. ‘Co-founders who complement each other are critical. You need one person who can just focus on the product and articulate it over and over again, while the other is running round looking after investors.’ The team matters most of all because this sort of investment is a marathon and not a sprint. Many angel investors,

Madhvani says, ‘go in thinking this is going to be a threeyear play, when in reality, if you’re lucky enough to get into a King.com or a Spotify or Just Eat, it takes ten years plus to go on and build these billion-dollar companies.’

The billion-dollar valuation is the new barometer of tech success. Last year GP Bullhound found that there were 30 such ‘unicorn’ companies across Europe, a total Madhvani expects to be far exceeded this year. Some might say this is a sign of a market taking leave of its senses: valuations of early-stage businesses with tiny revenues and no profit If you’re lucky enough to can often be staggering. In many cases, get into a Spotify, it will an initial listing represents a high-water take ten years plus to build mark that will soon recede. a billion-dollar company But that’s the nature of the sector.

When the fast food chain Just Eat went public last year, its £1.47 billion valuation was more than 100 times 2013 earnings; within less than a year, that valuation is £2.25 billion. Some pundits predict an unhappy ending, but investors have made a fortune so far. The scent of such profits is driving a great deal of activity in pursuit of breakthrough ventures. According to London & Partners, venture capital investment in London’s tech sector increased twentyfold between 2010 and 2014. But while the unicorns are out there, they’re not easy to find and it’s never a quick buck: so be patient, be wary of pitfalls and back those who know the sector best.

Michael Hayman MBE is co-founder of the campaigning company Seven Hills.

In Any Other Business, an anthology of his very best writings from The Spectator and elsewhere, Martin Vander Weyer brings a sharp eye and a very personal style to bear on often controversial topics, alongside recollections of life in the City and dissections of the current state of play; deliciously evocative accounts of travel, culture, food and daily life; and, very occasionally, reflections on the travails of middle age. Beautifully written, this collection offers a warm, witty and insightful perspective on our changing times.

“The most oracular and

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available now at The Spectator Bookshop at the discounted price of £13.99. www.spectatorbookshop.co.uk IsBn: 978-1-78396-016-3 | £18.99 at all good retailers Published by elliott & Thompson | www.eandtbooks.com

WWW.SPECTATOR.CO.UK | 7 MARCH 2015 | SPECTATOR MONEY

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JEFF MITCHELL/GETTY IMAGES

Generation Spendthrift Why twentysomethings see no point in trying to save CAMILLA S WIFT

Y

our first pay packet, in your first ‘proper’ job, almost seems like a miracle. So much money, coming straight into your bank account, every month? But once you’ve got over the novelty and worked out how much you’ll have left after you’ve paid your bills and rent, reality begins to kick in. Every twentysomething knows they ought to be setting aside a chunk of their income for ‘savings’. But ‘ought’ is the operative word. Because most of us — particularly those living in the capital — just can’t see the point.

Why not? Well, mainly because it’s generally accepted that unless you have a helping hand from somewhere, getting a foot on the property ladder is nigh-on impossible — and why else would we save? The young who do have some form of financial security tend to be either junior bankers or the offspring of senior ones. Those who actually manage to put aside part of their monthly salary are few and far between. The main reason is the London rental market: a room anywhere within Zone 2 and a reasonable commute is going to cost a fair whack — say £650 to £1,000 a month — meaning it’s difficult to save and pay rent at the same time.

Is my generation of twentysomethings so different from those that preceded us? Probably not, but lifestyles have changed. In the 1960s, the average age at first marriage for women was 22; by 2008 it had risen to 30. With house prices as they are, it’s no surprise that the only people I know who have managed to buy their own property without parental help are those who have bought as couples. If you’re unwilling to make the commitment of marriage until your thirties, then you’re probably also unlikely to want to commit to the shared burdens of property ownership, from mortgages and council tax to Those who manage to finding builders and plumbers. put aside part of their Much of this is London-centric: anyone who has the slightest interest in the monthly salary are property pages knows that our capital is few and far between now one of the world’s most expensive places to live. But is it not worth saving anyway, for a rainy day or a more comfortable future?

After all, just because buying a house may not be on the cards in the next decade, it doesn’t mean that children and their accompanying costs are not. Every twentysomething I spoke to knew they ought to be saving — for the house, for the baby, for the far-distant prospect of retirement — but the reality of doing so was just too tough.

Credit cards and other financial products don’t help much, either. There’s a split among my friends between those who feel they ought to have a card for the benefit 30

of their credit rating but don’t want to get into debt, and those who have a purse full of cards used up to the max.

Savings accounts with decent rates can look attractive and some of us do try to top them up on payday — but funnily enough, as the month-end approaches, those funds seem to trickle away.

Meanwhile, our parents are surprised — if not appalled — that we’re willing to spend almost £10 on a single drink.

But most people I spoke to wouldn’t describe that as willingness, more resigned acceptance. If you live in the capital, you are trapped in a Catch-22. You have five or six years’ employment under your belt; you know you ought to be growing up, getting a foot on the property ladder, being sensible, settling down. But you can’t see a way of reaching that first rung, so rather than squirreling away cash… when a colleague asks you out for a drink, or you fancy that new Topshop dress, why not? There’s no point saving for something that feels as if it’s never going to happen.

Perhaps it’s just my friends who are unusually profligate — but I honestly don’t think so. I spoke to a range from new graduates to those in their late twenties, and most seemed to have similar opinions. This piece wasn’t supposed to be about property but about twentysomethings’ attitudes to money; yet for everyone I spoke to the most important financial issue was property prices, and the cost of rent.

Don’t despair of my entire generation, though. One twentysomething described how she and her husband had saved for a house, with no help from parents, by sacrificing holidays and swapping nights out for nights in and baking.

But again, she’s an example of a combined effort of two.

And said house happens to be outside any of the London Tube zones. There are sensible savers among us, but the general attitude is one of spending, rather than saving. It may not be wise, but at least our landlords are happy.

SPECTATOR MONEY | 7 MARCH 2015 | WWW.SPECTATOR.CO.UK

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Save for a home I’ll never afford? I’d rather go shopping

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23/02/2015 11:14:27 25/02/2015 17:16

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Diappointing vintage: the 2011 harvest in Bordeaux

ALTERNATIVE INVESTMENT » WINE

because of flawed business models or a surfeit of redemptions.

The past four years have witnessed three years of declining prices for Bordeaux wines followed by six flat months, but there are now signs of upward movement. Buying en primeur has been a disaster in recent patient years. The 2013 vintage was disappointing and overpriced, as were the two previous vintages. The 2009 was a great vintage and 2010 was almost as good, but both have fallen in value since issue. In particular, prices of first growths — the main wines of the five leading châteaux of Latour, Lafite Rothschild, Margaux, Haut Brion and Mouton Rothschild — have fallen the most.

‘A big factor has been what happened with the ’09, a brilliant vintage, in which a huge number of wines were given perfect scores of 100 points,’ says Tom Hudson of Farr Vintners. ‘You had Pétrus and Le Pin getting 100, but you also had Smith Haut Lafitte and Léoville Poyferré getting 100. In the eyes of the consumer, the value is in the cheaper wine with the very high score rather than the expensive one. This has had an effect on the marketability of young first growths at extremely high price levels.’

Beware Bordelais greed Claret is back — but choose carefully and be CHRISTOPHER SILVESTER

T

he world of wine investment has certainly changed since I last wrote about it for The Spectator in 2011.

Alan Rayne, who more or less invented wine investment in Britain in the late 1970s, retired last year and sold his company Magnum Fine Wines to Farr Vintners, while Premier Cru Fine Wine Investments, founded in 1995, was sold to the up-andcoming Cult Wines. Added to these developments was a trickle of wine investment companies that drifted into insolvency, or whose principals were prosecuted for fraud, while other wine funds have been forced into liquidation

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British wine merchants have written an open letter to Bordeaux producers urging them to price the 2014 vintage sensibly. Otherwise, they believe, disaster beckons.

For those with long memories, the last few years have been reminiscent of the last Bordeaux slump, when a weak, overpriced 1972 vintage followed by the 1973 oil crisis caused market collapse. As Wine Asset Managers put it in a recent blog post, the key factors were ‘a combination of Bordelais greed, denial, obduracy and macroeconomic shock’. Again, since 2011, greed has coincided with shock, namely the sudden departure of Chinese buyers from the market owing to restrictions on ‘gift-giving’ by state officials and corporate executives: the result is another slump.

For investors coming into the market now, Hudson recommends blue-chip wines from 2000 and 2005 and possibly 2009, whose prices are much cheaper than on issue: ‘Some 2009 first growths are nearly back to 50 per cent.’

Lafite 2008, for example, once considered the greatest investment wine because superstitious Chinese prize the number eight, peaked at £16,000 a case, but Farrs were selling it in February at £5,200. A year ago Gary Boom, the former City trader who founded Bordeaux Index, was recommending vintage champagnes and Italian reds, especially the ‘Super Tuscans’. They have outperformed since, but now Boom believes that they have been overbought and that market strength is returning to claret. ‘Bordeaux is back,’ he says, ‘and it’s back with a vengeance.’

The combination of low prices and a strong dollar against the euro means that American buyers are return-

£16,000 Peak case price of Lafite 2008

£5,200

Case price of Lafite 2008 at Farrs last month

ing after several years. Also, the better vintages are coming into their own. ‘The ’05s could be one of the greatest vintages, if not the greatest vintage since the ’61s,’ Boom says. ‘Ten years on, they’re just starting to drink and they’ll last for ever. The 2000s are another beacon and are starting to be ready to drink, a long life ahead of them, still available at reasonable prices and in some cases 35 to 40 per cent below where they were three years ago.’

Boom predicts across-the-board growth in Bordeaux prices of 6 to 8 per cent this year. Among ‘super seconds’ (the best second-growth Bordeaux wines) Boom recommends Léoville Poyferré and Montrose, and has recently been selling Montrose ’05 at less than £1,000 a case.

Beyond Bordeaux, Boom advises investors to steer clear of Burgundies, which he believes are overpriced, whereas he believes the 2010 Tuscan vintage was one of the greatest ever and Barolos are underpriced. From Spain, he finds only Vega-Sicilia and Dominio de Pingus investible, because Spanish wines are not much traded, making it difficult to get growth in value from them.

Wine investment is for the patient investor. It is taxefficient for the simple reason that, as a wasting asset, wine is not subject to capital gains tax unless you deal in it as a business. Wine is best kept in a bonded warehouse (free of VAT) if you ultimately intend to sell for profit. With too many cowboys offering wine investment services, it’s best to do your own research and choose an established merchant or broker. Berry Brothers & Rudd, Corney & Barrow, Farr Vintners, Bordeaux Index and Cult Wines are all names that have earned the trust of investors.

W E D N E S D AY 1 8 M A R C H | S H A k E p E A R E ’ S G l o b E S E 1

sPeAKers

Andrew neil Chairman and editor-in-chief of The Spectator magazine group

FrAser nelson Editor The Spectator

JAmes Forsyth Political Editor The Spectator

Join Andrew Neil, Fraser Nelson and James Forsyth to discuss George Osborne’s last Budget before the general election. The Spectator’s chairman, editor and political editor will be looking at the government’s spending plans in the run up to polling day, the new measures introduced, and what it all means for the economy. The discussion will be followed by a Q&A session. to booK: www.spectator.co.uk/budgetbriefing 020 7961 0044 | events@spectator.co.uk

Drinks: 6.30 p.m.

Discussion begins: 7 p.m.

Tickets £35 (includes drinks and canapés)

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REALITY CHECK » LOUISE COOPER

What’s the point of a financial adviser?

N

ot to come over all Jeremy Clarkson, but speeding fines irritate me. There are plenty of other dangerous drivers who get away with lethal behaviour. But speeding is easy to measure, dangerous driving less so.

What’s this got to do with investment? Well, it illustrates a problem with financial advisers because, like the police, I fear they focus too much on what they can measure. In reports to clients, emphasis is placed on how much money the client has made. But this, surprisingly, is not what you’re paying an adviser for.

‘Not everything that can be counted counts and not everything that counts can be counted.’ That’s a great quote from American sociologist William Bruce Cameron. Just because things can be measured — like investment returns or car speeds — doesn’t mean they are important. And factors that are difficult to measure, such as danger, are often ignored but shouldn’t be.

So why pay a financial adviser for help? What value or so-called ‘adviser alpha’ does an Independent Financial Adviser offer? Most advisers exhibit little skill in picking top-performing funds or timing market rallies. Consequently this is not a reason to pay for their advice. Tax mitigation using Isas, pensions and financial planning is clearly of benefit to clients, but that represents only part of the reason to use an IFA. I think the most important benefit An IFA’s prime purpose from having an adviser is to save the is to teach clients not financially naive from themselves. If you’re a doctor or a barrister, why would to chase short-term you know about finance? Most novice market movements investors make the same mistakes over and over again. And in my opinion it’s the adviser’s job to stop that happening.

The US low-cost fund manager Vanguard recently published research that showed the main way an adviser adds value is by ‘being an effective behavioural coach.

Helping clients maintain a long-term perspective and a disciplined approach is arguably one of the most important elements of financial advice.’

Jonathan Gunby, chief development officer at Transact, a leading platform for advisers in the UK, agrees: he calls it ‘behavioural alpha’ — preventing non-expert investors 34

Louise Cooper CFA is an independent financial commentator at www.coopercity.co.uk.

SPECTATOR MONEY | 7 MARCH 2015 | WWW.SPECTATOR.CO.UK

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making mistakes such as selling a market at the bottom or buying it at the top. The S&P500 is now trading at 2,100 compared with a low just below 700 in 2009, yet many investors sold after the big falls, when they should have been buying. In the 1999 dotcom boom, investors piled into small tech stocks, many of which have since gone bust.

They also tend to buy the most recent top-performing fund just as its performance is peaking, and sell funds that are performing badly just as they start to recover.

Investors are also too worried about stock-market swings. Being 44, I’m at least 20 years from retirement, so volatility is irrelevant to me. I know I can’t predict what the market will do each year but I do know that long term, shares deliver the best returns. So no matter what, I keep putting money away every month. But some investors don’t. Volatility is scary, but for long-term savings — and most are — such short-term fears should be ignored.

An IFA’s prime purpose, then, is to keep clients invested and teach us not to chase short-term market movements, because very few do so profitably. The key to successful investing is to build savings over decades, benefitting from compounding returns. Advisers add value by keeping clients disciplined and focused on the long-term goal.

And that’s why I compare an IFA’s role to that of a personal trainer or a Weightwatchers meeting. Losing weight and keeping fit requires the same self-discipline as saving. The instant gratification of chocolate in front of the television needs to be resisted for long-term benefit.

It’s the same with money: too often I’m tempted by a pair of shoes when I should be putting cash away for my kids and my retirement.

We pay IFAs to keep us on the financial straight and narrow and save us from our own failings. They should draw up a plan which forces us to save each month. They should stop us over-reacting emotionally to investment, as we might resort to a takeaway curry and a bottle of wine after a stressful day. Both losing weight and growing savings require willpower and self-discipline: I just need to find an adviser who will stop me buying shoes.

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26/02/2015 11:36

Hans Wegner Swivel Chair Estimate: $ 8,000–12,000 LA Modern

Portrait of Alfred Hitchcock Estimate: £ 2,500–3,500 Dreweatts & Bloomsbury

Rolex, circa 1989 Estimate: £ 16,500–18,500 Watches of Knightsbridge

ALL AUCTIONS IN ONE PL ACE

Jeff Koons, Balloon Dog (Red) Estimate: £ 4,990–7,490 Sotheby’s

Andreas Gursky Estimate: $ 600,000–800,000 Phillips

Doucai ‘Lotus & Bats’ Vase Estimate: £ 150,000–200,000 Peter Wilson

Troika Pottery Mask Estimate: £ 600–800 Chorley’s

A Tahitian Necklace Estimate: $ 2,000–3,000 Aspire Auctions

Robert Indiana ‘Golden Love’ Estimate: $ 3,000–5,000 Wright

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26/02/2015 12:31

The Fundsmith Equity Fund invests in a small number of high quality, resilient, global growth companies that are good value and which we intend to hold for the long term.

An English language prospectus, a Key Investor Information Document (KIID) and a Supplementary Information Document (SID) for the Fundsmith Equity Fund are available on request and via the Fundsmith website and investors should consult these documents before purchasing shares in the fund. This financial promotion is intended for UK residents only and is communicated

by Fundsmith LLP which is authorised and regulated by the Financial Conduct Authority.

Past performance is not necessarily a guide to future performance. The value of investments and the income from them may fall as well as rise and be affected by changes in exchange

rates, and you may not get back the amount of your original investment.

Fundsmith Equity Fund Performance Since Inception

+86.3%

Fundsmith LLP does not offer investment advice or make any recommendations regarding the suitability of its product.

Fundsmith1 Equity Fund

% Total Return Year to 31st Oct

2014 2013 2012 2011

Fundsmith Equity Fund1

+15.6 +26.4 +13.7 +12.1

Average IMA Global Equity Fund2

+2.7

+24.2

+4.3

+0.0

1st

2nd

1st

1st

Quartile Rank3

+33.2% Average2 IMA Global Equity Fund

1 Source: Bloomberg T Class Acc Shares in GBP, net of fees, priced at midday UK time. 2 Source: Trustnet, IMA Global Equity Fund Average Performance. 3 Source: Financial Express Analytics.

TERRY SMITH

1st Nov 2010 to 31st Oct 2014

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