IFA Magazine - April 2016 - Issue 47

For today’s discerning financial and investment professional

April 2016

Protection - are advisers too posh to protect?

Welcome to the new world of multi-strategy funds

I S S U E 47

Strategising your exit Part Three

Jonathan Willcocks on active and passive investing

CONTENTS April 2016

CONTR I B UTOR S

3 Sumer is icumen in

5 News

Brian Tora An experienced associate from one of the top investment management firms.

12 Woe, woe and thrice woe!

Lee Werrell a senior compliance consultant and industry adviser.

15 Promises, promises... A story of regret

Richard Harvey a distinguished independent PR and media consultant.

18 Keep it clean

Neil Martin has been covering the global financial markets for over 20 years.

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Strategising your exit Michelle McGagh brings a wealth of experience on industry developments.

24 Investing in technology

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Michael Wilson Editor in Chief editor ifamagazine.com

Active and passive investing - the great investment debate

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Sue Whitbread Commissioning Editor sue.whitbread ifamagazine.com

Alex Sullivan Publishing Director alex.sullivan ifamagazine.com

Scapegoats required

36 Welcome to the new world of multistrategy funds, say Aviva Investors

42 Is that all there is?

44 Career opportunities IFA Magazine is published by IFA Magazine Publications Ltd, Loft 3, The Tobacco Factory, Raleigh Road, Bristol BS3 1TF C

2016. All rights reserved

‘IFA Magazine’ is a trademark of IFA Magazine Publications Limited. No part of this publication may be reproduced or stored in any printed or electronic retrieval system without prior permission. All material has been carefully checked for accuracy, but no responsibility can be accepted for inaccuracies. Wherever appropriate, independent research and where necessary legal advice should be sought before acting on any information contained in this publication.

IFA Magazine is for professional advisers only. Full details and eligibility at: www.ifamagazine.com

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ED’S WELCOM E April 2016

Sumer is icumen in Loude sing cuckoo. By the time you read this, it’s a certainty that we’ll know a lot more about what David Cameron’s agreement with the other 27 EU member states really means for the 23rd June referendum on EU membership. And to that extent, we’d just be wasting our time if we tried to tell you more than you already know. Wouldn’t we?

Up to a point, yes. That doesn’t mean, however, that the issues aren’t worth considering in cool detachment from the electoral hoo hah that will be driving many of us to the duty free before June’s out. (Just one of the phrases that you thought you’d heard the last of ?) There are millions of people - not just advisers but also their clients – who have some pretty good questions to ask.

A Bigger Picture First in line, perhaps, are the two million UK passport holders who are currently resident in other parts of the EU. Will they stand to lose their automatic entitlement to pension and welfare benefits in their adopted homelands? (Possible.) Will their unlimited entitlement to work anywhere they choose be constrained? (Very possible,

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although we shouldn’t overstate the difficulty.) Will they be vulnerable to unfair tax treatment on the grounds of their nationality? (Yes, potentially. But then, that would be no change on the present inheritance laws in France or Spain, for example.)

Next, presumably, will come the foreign investors in the UK who will be worrying about the effects of a Brexit on sterling. Would it hurt trade, damage the pound and drive up UK interest rates? And if so, would that repel further investors, or would the higher rates attract them instead?

Where would it leave UK investors on fixed incomes, such as pension annuity holders, if inflation were to pick up as a result? We have absolutely no idea. But it does no harm to explore the issues.

And so to Regulation For advisers, not least, there’s the question of MiFID II, the “level playing field” European directive which is already shaping every Policy Statement that the FCA and PRA are currently preparing. All right, nobody has yet seriously suggested that we could simply tear up an arrangement which will extend all the way from Ireland to Malta and the

Baltic – even if some of us do harbour doubts about some of the more extreme measures that have so far been produced (and, largely, rejected.)

There was never much chance that those countries who once favoured banning execution-only trading for the small investor would ever get their way; but Europe is still making up its mind about complicated questions such as whether higher-risk instruments such as high beta ETFs should be sold to less affluent clients – and exactly how you define them.

Would Britain be able to ‘freeze’ MiFID II in its present (relatively mild) state, so as to protect itself from any future loopiness?

Maybe we should ask the experts. Switzerland, that other bastion of offshore financial services, has long got used to the need for general compliance with EU legislation, not just in spirit but by bilateral; treaties. Getting on with the neighbours, you might call it.

Michael Wilson Editor-inChief, IFA magazine.

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N EWS April 2016

Advisers see pension freedom changes as biggest development opportunity The vast majority of financial advisers (90%) see the UK pension freedom changes as their single biggest business development opportunity.

This is the conclusion of a new survey conducted by Vanguard Asset Management on the opportunities and challenges ahead for UK financial advisers.

What’s more, 94% of advisers cite helping clients achieve their life-time goals as the most important aspect within the client and adviser relationship. Also, two in three UK financial advisers (68%) state that clients come to them specifically to address retirement income planning.

UK consumers on how to spend and invest their lifetime savings. However, an even bigger challenge is to ensure people save sufficiently for retirement by encouraging them to develop a financial plan with clear goals.

“Our survey shows that financial advisers face great challenges ahead, but also tremendous opportunities. Vanguard is a strong believer in the value of advice and financial advisers, and we have been helping advisers to tell their story for many years. Most recently, we’ve published research that seeks to quantify the difference between the returns an investor might achieve with an adviser’s help and the return that they might have achieved if left to their own devices.

As for the challenges ahead, the survey revealed the top challenges for UK financial advisers in the year ahead were regulation (31%); client acquisition and retention (18%); and, managing client expectations (16%).

Head of UK Retail Sales for Vanguard Neil Cowell (pictured) said: “The pension freedom changes have raised a number of questions for

“This difference, which we call Adviser’s Alpha, is roughly 3% per annum over the long term and comprises seven different components, including asset allocation, behavioural coaching and other relationshiporiented services. These elements create real value for clients.”

Theme

Greatest Challenge

Regulation Client acquisition and retention Managing client expectations Defining your value proposition to clients Increasing fiduciary responsibilities Market volatility Keeping up to date with new Products Keeping up to date with education

31% 18% 16% 15% 9% 7% 3% 1%

Figure.1 Greatest challenges facing UK financial advisers, Vanguard

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N EWS April 2016

“Live & local” - FCA hits the road to help bring greater clarity for firms The Financial Conduct Authority (FCA) has launched ‘Live & Local’, a regional programme which will include a series of events, workshops and roundtables, taking place across 12 regions in the UK from March 2016 until March 2017. The programme will help firms in the investment, mortgages and general insurance sectors engage with their regulators and bring them greater clarity on their regulatory requirements.

Jonathan Davidson, Director of Supervision, Retail and Authorisations at the FCA, said: ‘We know how much firms value face-to-

face contact with the FCA - the success of our Positive Compliance workshops showed that.

So Live & Local builds on that and takes the FCA out on the road to meet firms on their own ground. For full details visit www.fca.org.uk

Changing the narrative on EIS, VCTs and BPR In the March edition of IFA Magazine, we reported a ground breaking new initiative led by Paul Wilson (pictured), Chairman of IFA Magazine publications to change the unwarranted negative narrative around EIS, VCT and BPR schemes where they are being erroneously associated with socially unacceptable aggressive tax schemes. IFA Magazine sister publication EIS Magazine is driving forward this initiative which is already taking shape. It argues that it is time these schemes should be considered in their own right as valuable investments, and for the broader impact they have on growth in the economy rather than simply for their tax efficiency.

Paul Wilson comments “We have now written to the heads of well over 100 fund management groups covering EIS and VCTs as well as EISA and the AIC and I’m delighted to report that we’ve already had a tremendous response. Large numbers have indicated that they wish to be involved in scoping out further developments via our proposals for a working group. The consensus is that both HMRC and the Treasury are fully behind the industry. Our focus will

therefore be on the media, MPs and advisers themselves to get the positive message about the underlying expertise that exists within the fund management groups, particularly as this de-risks the investment overall through sector expertise, due diligence and ongoing management, funding and mentoring.”

Wilson has also taken part in a round table discussion with other leading experts on the “SEED and EIS Hour” on the online TV channel IntelligentCrowd.TV. They will be looking further at the initiative in coming weeks. More news is expected in coming months as the initiative progresses.

WH Ireland Fined £1.2m By FCA WH Ireland Limited has been fined £1.2m by the FCA and has also been restricted from taking on new clients in its corporate broking division. The restriction will last for 72 days.

The FCA has ruled that WH Ireland failed to ensure it had the proper systems and controls in place to prevent market abuse being detected, or occurring, between 1 January and 19 June 2013.

Within the period under question, the firm had around £2.5bn of assets under management and some 9,000 private wealth clients. Director of Enforcement and Market Oversight at the FCA Mark Steward said: “We expect all firms to have the right controls in place to mitigate risks and protect their clients and the integrity of the markets.”

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N EWS April 2016

Assessing suitability: FCA reports findings from thematic review In February, the FCA issued findings from their thematic review of the research and due diligence processes carried out by advisory firms on the products and services recommended to retail clients.

This review was undertaken as previous work by the regulator had shown that this is one of the three root causes for poor consumer outcomes. The other two are risk profiling and costs.

They found that generally firms demonstrated some good practice when undertaking research and due diligence. However, few firms were consistently good across all products and services. The FCA are considering a range of options for communicating in more detail their expectations in this area to help firms raise standards and adopt good practices.

Greyfriars acquires independent financial services division Wealth specialists Greyfriars Asset Management has acquired the Independent Financial Services Division of Chesham Insurance Brokers.

Greyfriars, which is based in Leicester and has over £850m assets under management, says that the deal will add commercial and private insurance specialist assistance to its services.

The core business of Chesham is arranging commercial insurance for many different businesses, ranging from corporates to SMEs, across a broad range of industries.

Partner and Head of Advice at Greyfriars Gareth Roberts said: “Through this vertical integration, we have the ability to expand the proposition we offer to both corporate and private clients.

“We are thrilled that another high quality business has decided to provide their clients with Independent Financial Advice

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from Greyfriars.

“The partnership enables us to increase our specialist areas and widen our client proposition, setting the foundations for further expansion throughout the UK and internationally.”

CEO of Chesham Insurance Brokers Tom Bartleet said: “Our clients are increasingly looking for specialist independent financial advice from a trusted partner and we therefore wanted to build a solution that would cater for that demand.

“Finding the right partner to work with our firm was pivotal to the acquisition and we firmly believe that Greyfriars can provide the quality of advice and service we demand, given their trusted experience. We share the same ethos when it comes to putting the client at the centre of all we do.”

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N EWS April 2016

Getting to grips with the Financial Advice Market Review One of the more hotly-awaited elements of the Chancellor’s 16th March Budget was the outcome of the FCA’s long-awaited report on the Financial Advice Market Review (FAMR), announced last autumn and led by the FCA in conjunction with HM Treasury, in an effort to improve both the provision and the availability of financial advice for people with all levels of wealth. And yes, by the time you read this you’ll know for sure what sort of a reception the study has received. But it’s likely that the debate about the actual implementation of these findings will rumble on for a good while yet.

How, the committee asked, could the financial advice industry broaden its reach to less affluent consumers? What regulatory barriers were still standing in the way of mass-market advice? How could we encourage innovation in the advice market? How do we address the lack of understanding and confusion around the distinction between guidance and advice?

Big questions, all of them. We certainly hope that the committee was listening to an event organized by the Tax Incentivised Savings Association (TISA), at which Charles McCready, Programme Director of The Savings and Investments Policy (TSIP), outlined his hopes and concerns.

The TSIP project works with a wide range of financial service companies, trade bodies and consumer groups to develop pan-industry proposals. And McCready had some sobering insights to offer.

Consumers are not in control of their finances Recent research from the Money Advice Service (MAS), he said, had concluded that 40% of adults are not in control of their finances.

This leads to higher levels of debt, low levels of saving and financial insecurity in both working life and in retirement. Furthermore, MAS also found that 12 million people are not saving enough for their retirement, with two-thirds not knowing how much they need to save, or if the amount they are putting aside is sufficient.

McCready said: “Whilst TISA has focused its response on proposals for guidance services, much of the industry is also trying to address access to financial advice and how these services are provided as this remains a challenge for both the Government and financial services. Much of the focus of the FAMR is centred on how to fix the ‘advice gap’, and the industry responses show that there are significant opportunities to both simplify the

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advice services that consumers receive, whilst simultaneously developing those services that fit people’s needs and their appetite to pay for advice.

Greater clarity is needed “At the heart of the proposed changes lies the need for greater clarity and simplification around the rules of advice and the options available to consumers. There is also a growing appetite amongst the financial services industry to align advice regulations with MiFID and EU regulations and remove some of the additional requirements placed on them in the UK. This would move us closer to a single EU set of standards, retain consumer protection and facilitate a reduction in additional compliance costs that could be passed onto the consumer.

We have also heard a strong call for the interpretation of rules to be made clearer so that the FCA, the financial services industry and FOS are all operating under the same understanding of those rules.

Technology can help “Additionally, there is a critical role for technology to play through greater use of online tools, particularly for information and guidance services, to help consumers understand how to better manage their finances. In an ever changing environment, it is important to find new ways to appeal to younger savers who have new perspectives and attitudes to saving. FAMR is a particularly important initiative in seeking to address the key issues that are affecting the financial health of both households and individuals.

“We want to work with HM Treasury, the FCA and Financial Ombudsman Service (FOS) to help the industry provide appropriate guidance and advice support for consumers, to enhance their financial wellbeing, and encourage a savings culture.”

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N EWS April 2016

Paraplanners are doing it for themselves One of the hottest topics amongst the paraplanner community at present is the lack of consistenty when it comes to standards within paraplanning. Richard Allum (pictured) of The Paraplanners has been helping to drive forward the paraplanning agenda in the UK for many years. As well as running his own Paraplanning business, he has also organised a series of popular PowWow events aimed exclusively at paraplanners. Allum comments “There is a very strong feeling amongst the paraplanner community that we need to develop a set of specific and agreed paraplanner professional standards which are recognised by professional bodies, advisers, businesses and of course paraplanners themselves. It’s important that we can demonstrate the core characteristics of the paraplanner role so we have clarity around what is actually involved. The fact that anyone can call themselves a paraplanner means that there is confusion. We need proper standards. When you consider the lack of dedicated paraplanner development material too, change is well overdue. The fact that this is being driven by the community itself and not by any regulatory requirement makes it even more powerful. ”

Allum is working with other paraplanners to organise a series of four Howwows, events which are running throughout March at venues in London, Leeds and Edinburgh. An online Howwow is also scheduled for 17th March. All are exclusively open to paraplanners. More than 100 have already agreed to participate in the discussions, which are expected to bring a range of different opinions to the table. It is hoped that this debate and discussion will result in practical ideas and strategies that will ensure that greater shape and structure can be developed around paraplanner standards going forwards. A full report is expected in May.

Tilney Bestinvest acquires Ingenious Investment management and financial planning group Tilney Bestinvest has acquired Ingenious Asset Management.

Tilney Bestinvest was recently in the news as a possible suitor of Towry; rumours which were quickly denied by both parties.

Ingenious, which has £1.8bn of client assets under management and 41 staff based in London, is a discretionary investment manager servicing high net worth and ultra-high net worth clients. It also offers investment services to financial advisers.

As usual the deal is subject to regulatory approval and is expected to complete in April.

The enlarged group will be responsible for £11.2bn of assets, of which over 80 percent will be managed, or advised.

Chief Executive of Ingenious Asset Management Guy Bowles will become Head of Investment Management (London) for Tilney Bestinvest and David Rosier, Chairman of Thurleigh Investment Managers (acquired

by Ingenious Asset Management in April 2014), will become a Senior Adviser to Tilney Bestinvest Group.

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Chief Executive of Tilney Bestinvest Peter Hall: “The acquisition of Ingenious Asset Management will significantly increase our investment management capability in London and our business supporting financial intermediaries. The team at Ingenious Asset Management are very high quality professionals and their investment approach is complementary to our own so we believe this represents an excellent combination.”

Bowles said: “When we launched Ingenious Asset Management in 2003, we were determined to create a business that combined modern investment techniques with a traditional emphasis on delivering a highly personal service. In Tilney Bestinvest we have found a firm which very much shares that approach and has a similar investment process to our own, with a strong emphasis on proprietary investment research. Tilney Bestinvest is also investing heavily in systems and has an excellent infrastructure to support and grow a modern investment management business.”

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AR ARMAGEDDON? MAGEDDON April 2016

Woe, woe and thrice woe!

Volatility, political upheaval, currency destabilisation and a global commodity crisis. Not just another bad day on the market, then.

Brian Tora takes a look at the background What a change a year makes. Back in April last year, markets were hitting new high ground around the world, Chinese shares were seemingly unstoppable, and all in the garden appeared rosy for investors.

Now you can hardly open the business pages of the press without reading of impending Armageddon.

What’s more, volatility is back in spades – redoubled!

Quite what is behind this reversal of fortune has even the experts bemused. And with every major stock market in the world stuck in negative territory as we got to midMarch, it seems fair to ask whether all this is something that will just blow over?

Bulls quitting the China shop Back in the summer, when it was beginning to look as though the global bull market had run its course, blame was being laid at the foot of China, which had ramped up its market, presumably

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to offload more state assets - only to find stock market confidence undermined by a sharp slowdown in economic growth.

Attempts by the Chinese authorities to stem the rout had only made matters worse. Suddenly, investors were poring over a lot of numbers which were not entirely trusted anyway, and concluding that a hard landing was in prospect. Commodity shares and the oil price were trashed as a consequence.

Now you can hardly open the business pages of the press without reading of impending Armageddon As we now know, this had particular implications for the FTSE 100 Share Index, where mining and oil stocks hold an unusually important position. Attention focused

on the implications of a falling oil price. Short term assistance to consumers through lower fuel and energy costs were outweighed by the devastating effect it could have on economic prospects for those nations dependent on supplying the world with oil and other raw materials.

Talk soon developed on whether a deflationary recession could be avoided.

The end of cheap money And then, in the middle of all that, the United States decided to commence unwinding its easy monetary policy by raising interest rates.

There were those, of course, who said that they had left it too late - and subsequent dovish remarks by Federal Bank Governor, Janet Yellen, only served to attract the same reaction as that to the Chinese intervention in its stock market decline.

Indeed, it brought back to centre stage the elephant that had been lurking in the room for several years – discussed

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AR MAGEDDON? April 2016

quietly in discreet circles, but largely ignored by the wider investment community. What, we asked, would happen when central banks withdrew their support to economies through cheap money, and reverted instead to more conventional economic management methods?

Today, this worry is better expressed as a widespread belief that central banks have simply run out of ammunition, at a time when economic prosperity is faltering and when commercial banks also still have some way to go before their balance sheets are resilient enough to withstand a global recession.

While this new worry might explain the evaporation in investor confidence that has taken place, it may not account fully for the nature of the bear market that has seemingly been thrust upon us. Markets have become extremely volatile, with some individual sectors suffering hugely while others are barely touched.

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Don’t underestimate the program traders Indeed, the economic data that has been emerging - while certainly pointing to a slowdown around the world and generally more difficult trading conditions hardly justifies the wholesale pessimism that has grasped the investor community.

True, markets are meant to anticipate events, but they do not always get it right.

In early 1988, Chancellor Nigel Lawson loosened monetary policy in a reaction to the stock market crash of October 1987.

In the event, this proved to be an unwinding of an overbought situation created in the preceding year that had been exacerbated by the unexpectedly exaggerated contribution of the futures and derivatives markets.

And, as a consequence of that rout, circuit breakers have been built into systems all around the world.

But markets do not stand still. And, while the influence of derivatives might not have been fully understood back then, the fact remains that the market participants themselves are very different today. For one thing, computers play a much greater part in the investment world, with ETFs, high velocity trading and investment algorithms all contributing to market

behaviour. Indeed, it has been suggested to me that recent volatility should be laid at the door of one or more hedge funds quietly liquidating their portfolios.

It may be some time before we learn if that is the case.

Geopolitics dominates Investors always need to remember that markets always travel too far – in both directions. This seems particularly true of the Chinese market last spring - and who knows, perhaps we are merely seeing an unwinding of an overbullish take on the future?

Two very real worries do exist, though. Geopolitical tension is now as high as it has been in my experience - with Russia flexing its muscles in Europe and the Middle East, China adopting expansionist attitudes in Asia, and the rise of Islamic fundamentalism threatening to redraw both the boundaries and the alliances. (Think of Turkey and the EU, or Russia in Syria.)

And finally, of course, there is the bigger worry that too much cheap money has found its way into financial assets.

Of one thing we can be sure. 2016 is unlikely to be straightforward for investors.

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A STORY OF R EGR ET April 2016

Too posh to protect?

Has providing protection advice become unfashionable? This is the question asked

by Colin Sutton (pictured), Wealth Planner and Head of Office at Sanlam Wealth Management, Bristol as he sends a strong reminder to fellow advisers of the need to put protection back at the top of the financial planning agenda. Combining with Giles Cross, who shares his very personal story on page 16, both deliver a highly compelling message about the importance of planning for unforeseen events.

I believe passionately in the importance and value of “protection”. To me it’s an intrinsic part of the financial planning process.

It’s something that should occupy a position of primacy in our minds and the minds of our clients.

We advise on the creation of wealth, its growth, its management and its transfer through generations. Surely we must also ensure its protection? Surely it’s at the heart of what we do?

Through advising on life assurance, critical illness cover, income protection benefit and private medical insurance we underwrite dreams and lifestyle, both in the present and in the future;

we influence the well-being and lives of current and future generations; we deliver piece of mind; we do our job.

Speaking to fellow advisers I am concerned that protection advice seems to have become unfashionable. That in our search for professional justification we have chosen, as a profession, to focus on investment advice and that, in our desire to distance ourselves from our life assurance roots, we may have become “too posh to protect”. Also, it may be that the proliferation of financial price comparison websites which prioritise cost above suitability have created a consumer perception of protection products as being

“second class”; something that can be sorted out cheaply, without the need for advice, at a later date or abandoned altogether.

Therefore our challenge must be to change these perceptions and put protection back at the top of the agenda.

We have to diarise and allow time for this topic in conversation and ensure it has appropriate significance within the fact finding process. No one enjoys facing up to their own mortality or the possibility of severe ill health but we must not allow ourselves or our clients to simply brush over the protection sections and we must be firm and precise in

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A STORY OF R EGR ET April 2016

our questioning. If a client with a family thinks that life cover which covers only a mortgage is enough, then our questions have to probe deeper. Does your client pay £25 per month to protect their iPhone but pay nothing to insure the life of their wife and mother to their children? Valuable jewellery and antiques may be insured separately on a contents insurance policy, but that cost may be seen as the reason why there aren’t sufficient funds in the family budget to afford CI cover. Does the client realise that in deferring buying policies they may be at risk of higher premiums or even be uninsurable? We have to ask these probing questions as a matter of course.

Advisers must therefore go further than thinking that protection is about “selling a policy” to a client. It should be about providing confidence, financial security and very real and practical solutions in the event of a crisis. Money is a great facilitator, so an insurance policy which pays out sufficiently can stop a

family spiralling downwards during unexpectedly difficult times. We must ensure that we discuss these issues and evaluate client needs properly so that we can provide appropriate and affordable protection solutions.

This is really important to me. Giles Cross, who shares his personal story on page 16, is my client. I had made sure he had all that he “needed” to cover the basics but not what he “wanted”. I allowed him to procrastinate. I let him off.

Why? Because he’s a “mate”?

Because he’s a colleague? No excuse. It won’t happen again.

On my desk I keep a little quote by Winston Churchill.

It will be new to some and old hat to others, but I’ll share it anyway. It’s a reminder of our obligation to our clients, our colleagues, our families and our friends. It’s where I believe our true value sits:

“If I had my way, I would write the word “insure” upon the door of every cottage and upon the blotting book of every public man, because I am convinced, for sacrifices so small, families and estates can be protected against catastrophes which would otherwise smash them up forever.”

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A STORY OF R EGR ET April 2016

Promises, promises...

A story of regret

By Giles M. Cross, Head of Marketing & PR: Sanlam U K “It had been nagging at me for some time but I just hadn’t got around to it. It was something I wanted and needed to do, but somehow, for some reason, I just hadn’t got my act together. So, sitting at my desk last week, I pushed all excuses to one side and made a call to my financial adviser he never expected to receive.

“I want to increase my life assurance.”

I saw him that afternoon.

He’s an excellent fellow and, as expected, he asked me all the right questions. Were my liabilities covered? What did my wife earn? At what age did I think my children would finish full time education?

What death in service benefits did I have? What was my existing provision? It was nice to know that I had all the bases covered.

But it wasn’t enough. I had all I needed but not what I wanted. Back in time, after I’d got married and shortly before we had children, I’d made a promise that, however our lives unfurled, however things came to pass, that if anything happened to me, I would make sure that everything would be ok. That everything would be the way I’d promised and planned it would be.

To me, having more life assurance wasn’t about being adequately insured, it was about the fulfilment of promises. I wanted to make sure that if I “wasn’t there” not only would the debts

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be paid and some money be available for education but that I could still pay for all the things I envisaged I would – the first cars for my boys, the family holidays, the help with first homes and weddings, the “nice” things; and, most importantly, make sure that those who had supported and stood by my side never, ever, had to worry about money. I suppose, in a way, I wanted to make sure I could still participate in the family I had made in the event of my death. I guess I wanted to be remembered well. To underwrite my legacy.

So I’d done some basic maths. Using the notion of an assumed 5% annual return I worked out a sum that would need to be invested after my death to reproduce my income for ever. Taking away from that sum what I had already in place, we came up with an amount, roughly double and we made an application.

I had done it, I’d kept my promises. I have rarely felt so good about anything.”

Postscript (January 2016): I wrote this “blog” in October 2015 and immediately decided not to publish it. It wasn’t me; it was too personal. But then something happened, something I hadn’t envisaged.

My application was declined.

It turns out that whilst I was procrastinating, I was getting older; and one day, unbeknownst to me, during that period, the way my body works no longer works the

way that it’s supposed to.

It’s not life threatening or debilitating but it does mean, for the foreseeable future at least, I’m not insurable. I can’t have the life assurance I want.

At 46.

And I’m gutted about it. Seriously. Not because my veneer of masculine invincibility has been dented or because I now probably have to take tablets for the rest of my life, but because I can’t keep my promises. Because I can’t create the legacy I wanted and because I can’t underwrite my family’s future in the way that I’d like.

All because I waited. All because there was always something more important to do.

So whether you like this blog or not, I guess that within it there’s a call to action. If you’re a financial adviser, speak to your clients about their protection and, if you’re not, speak to an adviser. I’m quite happy to pass on the details of mine.

Biog: Giles Cross is Head of Marketing & PR at Sanlam UK. Increasingly in demand as a speaker and guest writer, he is fascinated by the role financial services has to play in society and the importance and value of corporate responsibility. A self-confessed marketing geek, he lives in the Cotswolds with his family and a menagerie of animals.

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A STORY OF R EGR ET April 2016

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TITLE March April 2016 2016

Keep it clean The laws on mis-sellling are toughening, says compliance consultant Lee Werrell. Are you doing enough to stay out of trouble?

On 24th February 2016, The National Audit Office released a report that was snappily entitled “Financial Services Mis-Selling: Regulation and Redress”.

And its findings, said the FCA, had been immediately welcomed and accepted. So what did it say?

Well, you can read the entire report at www.nao.org.uk/ wp-content/uploads/2016/02/ Financial-services-misselling-regulation-andredress.a.pdf, but here’s a summary.

We all know that mis-selling of financial services products can result in serious harm to both clients along with reputations of firms and also the wider industry. Not really that mis-selling is a specific definitive and purposeful act or group of behaviours in all cases - after all, mis-selling could take various forms.

These mis-selling events, the NAO says, are not solely due to the large institutions - many IFAs have also been swept up in issues due to poor compliance or governance. As we’ll see.

What is ‘mis-selling’?

In 2013, the outgoing Financial Services Authority (FSA) defined mis-selling as “a failure to deliver fair outcomes for consumers” including providing customers with misleading information or recommending that they should purchase unsuitable products. In fact it has been many kinds of product areas, including bank accounts, insurance, consumer loans, UCIS and other investments.

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Overall, the regulator regards action against misconduct as an essential part of rebuilding confidence across the entire financial system – including, of course, financial advisers.

Many IFAs have also been swept up in issues due to poor compliance or governance To take only the biggest example: between April 2011 and November 2015 financial services institutions disbursed at least £22.2 billion in compensation to purchasers of payment protection insurance. And that, on top of the benchmark rigging scandals, was enough to lead the Bank of England to cite the collective misconduct by banks as a specific risk to financial stability.

Let’s put that £22.2 billion into context. In 2013, the value of goods and services generated in the UK financial and insurance sectors was over £120 billion - or about 7% of the UK’s GDP. Who’s doing the regulatory stuff?

That’s a better question than it sounds. Up until April 2013, the vast majority of financial services sector by value had been regulated by way of the FSA, acting as a single regulator. But the Financial Services Act 2012 had split the task, creating the Financial Conduct Authority (FCA) and the Prudential Regulation Authority, which

was involved primarily with the banking institutions.

The FCA was inaugurated with a mandated objective to ensure that the relevant markets function well.

The FCA’s three statutory operational objectives are: • To secure an appropriate degree of protection for consumers; • To protect and enhance the integrity of the UK financial system; and • To promote competition in the interest of consumers.

Several other bodies besides the FCA have a significant interest in the mis-selling of financial services. The Financial Ombudsman Service (the Ombudsman) aims to resolve individual complaints between consumers and businesses. The decisions it can make can be and are usually binding on firms.

The Financial Services Compensation Scheme (FSCS), as all IFAs know, pays compensation to consumers if a financial services firm cannot, or is likely to be unable, to pay claims against it. And the Money Advice Service aims to further improve people’s understanding and knowledge of financial matters and their ability to manage their financial affairs.

How to keep up with change?

The costs of regulatory responses to mis-selling, and of arranging for redress for consumers, are of course substantial. Not only are the

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banks having to set aside vast tranches of money, but costs are also being driven up by the additional changes to the regulatory system involved in the changes necessary to the conduct risk agenda, and the implementation and expansion of the Senior Managers’ and Certification Regime across the entire industry.

It is clear that Compliance Officers already struggle to keep up to date with changes, but that many only “think” they know all about compliance until another Compliance Officer is fined, or even prohibited, for breaching one or more of the Principles for Business.

(Usually 3, 6 or 9.) Which is where Independent Compliance checks, although they might appear costly, can save you potentially from going into liquidation.

Take, for example, the case of Robert Shaw, who was fined £165,900 in August 2015 and had his CF1 permission withdrawn by the FCA. In addition to which he was prohibited from performing any significant influence function in relation to any regulated activity. Mr Shaw’s firm had been engaged in advising some 1,660 customers who were considering transferring their pension funds to unregulated investments such as biofuel oil, farmland and overseas property via self-invested personal pensions (SIPPs). And when it went wrong, the FCA found, he had miserably failed to acknowledge or mitigate a string of conflicts of interest.

And yes, if these people are out there, in the business community, the string of mis-sellings at a local level

and higher up will continue to damage the industry.

The costs of compliance We know that the direct operating costs of the FCA, the Ombudsman and FSCS in the 2014-15 fiscal year came to £523 million, £240 million and £71 million respectively. But there is no complete estimate of the costs of their mis-selling work partly because mis-selling issues cut across several areas of regulation.

If Compliance is not managed effectively, the consequential costs can be huge In the first instance, of course, these costs are met by financial services firms themselves; but ultimately consumers pay too, through the fees and charges they pay to every firm. Firms may also incur the costs of independent reviewers appointed by themselves or by the FCA (in the case of S166 Skilled Person’s Reports) - which might be not just financially substantial, but which will have the hidden costs of additional management time, staff involvement, stationary and other ancillary costs.

The FCA reports that nine firms have paid £300 million for Skilled Persons Reports for work on the interest rate hedging products redress scheme alone.

If Compliance is not managed effectively, the consequential costs can be huge. Although specific Compliance costs are difficult to assess accurately due to the unknown situation of determining what firms would be doing in the absence of

regulation, each business model is susceptible to differing compliance risk exposure and therefore costs.

The FCA, unsurprisingly, does not estimate the overall costs of complying with regulations. But smaller firms often face proportionately higher costs, since, as many of their compliance officers are active in their own business in the customer facing function. Smaller firms are therefore less able to develop significant or substantially effective in-house regulatory expertise. That in turn results in ‘unknown unknowns’, and a gap then appears which can sometimes grow at an alarming rate unless external influence identifies and changes the situation.

Whenever there are proposed new rules, the regulators estimate likely benefits and costs in advance - and this typically includes compliance costs.

But this, unfortunately, does not routinely mean the undertaking of postimplementation reviews, which would provide empirical data and improve its understanding of actual impacts of regulatory interventions, specifically the effects on smaller firms.

New regulations created for and aimed at preventing the sale of unsuitable products could possibly have unintended consequences, such as discouraging innovations that could benefit consumers.

Firm’s may become more reluctant to introduce new products, because they could subsequently be regarded as too high risk and are then dubbed as ‘mis-sold’ if they prove to be unsuitable for some consumers.

The FCA, worried that we might be moving toward

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TITLE March April 2016 2016

a marketplace of timidly ‘vanilla’ products has established an innovation hub to allow firms to develop new services and products in an environment of regulatory support, advice and challenge.

Preventing further mis-selling Away from the various banking debacles that we’ve all heard about, the FCA is also acting to change other causes of mis-selling within firms. The regulator has, for instance, promoted changes to governance and internal controls - mainly in response to prompting from the Parliamentary Commission on Banking Standards (PCBS), which was originally set up to consider the professional standards and culture of the UK banking sector and to report on lessons to be learned from that one. It had become

obvious, however, that the old rules were inadequate and that they didn’t anticipate the collusion and manipulation that was rife in the industry.

And the follow-on for all managers You may have heard about the Senior Managers Regime, which went live for banking sector firms from 7th March 2016, and which is designed to make individuals more accountable for their actions.

(It has been touted in the press as ‘a tool for jailing failing bankers.) What you may not know is that this sweeping reform will be rolled out across all financial services firms by 2018.

Yes, all. And although consultation and final adapted rules for smaller firms have yet to be aired, it is reasonable to suggest that firms should

start to make changes now starting with devoting more senior management time to their internal risks of misselling and misconduct.

It is understood and acknowledged by both firms and the FCA that changing the ‘sales’ culture throughout firms can be challenging, and due to remuneration and incentives schemes, particularly at middle management level, can be difficult to embed, however bonuses and other rewards need to be carefully managed.

Firms should ensure that they have reviewed and amended any part of their policies or procedures that could be construed as a breach of conduct rules or infringe the treating customers fairly outcomes that we all know so well.

From Approved Persons to Post S166 Projects, and Governance to Risk Management We Improve Your Condition Experienced - Qualified - Flexible MAKING COMPLIANCE WORK 20

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STRATEGI S I NG YOU R EXIT April 2016

Strategising your exit In her third and final article in the series, Louise Jeffreys, Managing Director, Gunner & Co investigates what you need to know today to make the right decisions for tomorrow.

In my articles over the past two months, I’ve tried to help those advisers looking to sell their businesses to better understand and implement different sustainable growth strategies. This is essential to any business and will have a dramatic effect on your eventual exit plans in the future. I also looked at the more practical points of preparing your business for a merger or acquisition.

This included a number of sound action points on how to maximise the value you have already built up in your business. This month we’ll take a look at how you can realise that value, and what the different options might look like.

Often when I ask advisers what they are looking for upon exit the answer I get is “I don’t know”. This makes

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sense of course when you don’t know what options might exist. So let’s explore them here.

What are the different options?

1. Partnership models When talking about partnership models, I am referring to large scale advisory businesses that bring on smaller advisory firms, not individuals entering a business partnership.

Partnership models are typically most appropriate for those advisers who are looking to work on for some time, but have a clear plan for the final exit, and potentially be looking for support in terms of compliance, marketing, administration etc. By entering a partnership model you are de-risking your exit plan, because you have a clear

idea of who will be buying your business eventually, be that the partner themselves, or another business within the partnership.

Most partnership models offer a number of similar features, such as new business and marketing support, client newsletters, back office management, compliance support and training and development facilities. What tends to differ is the financial approach. Some may include a small capital event upfront with a clear timeframe to a full buy-out, where others have no initial capital event, and leave it up to you (within reason) as to when you wish to leave and complete the sale.

In my opinion, the big advantage of partnerships is that by delegating significant amounts of administration, and with new business

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STRATEGI S I NG YOU R EXIT April 2016

support, you have more time to work on retaining your client relationships and building new ones too. This can also typically result in growing your funds under management thereby increasing the value of the business. It also makes the final exit much simpler, with little to no need for due diligence, and a clear understanding from both parties of the desired outcome.

A sticking point with this approach can be the potential need to follow a different investment approach. However most partnerships invest significantly in investment research and provide sound portfolio management options to meet clients’ different needs. The good news is that typically you can keep your brand and business operations as they are today, so the level of disruption to your clients is minimal.

2. Advocacy models Writing in an article for FT Adviser recently, Kevin O’Donnell picked up on the so-called advocacy model of acquisition as a refreshing approach. He said “I like this approach, not just because it is worthwhile financially, but because it also recognises the value of the long-standing and personal relationships between advisers and their clients, a factor often overlooked in the stampede to acquire assets under management” Advocacy models generally suit single-adviser businesses best. Essentially the adviser sells his business and deauthorises, but continues as an ‘advocate’, maintaining a

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relationship with key clients, in return for a proportion of recurring income. If your client suggests they are looking to make new investments, you would refer them to the business you sold to, and as your client’s FUM grow, so too does your ongoing income.

There are many benefits to this approach. It recognises that you have built longlasting relationships with your clients, and don’t necessarily want to just walk away from

Buyers, like deals, come in all shapes and sizes, and what’s right for one seller may not make sense to another them, it also de-risks any loss of clients, which in a classic acquisition agreement devalues your capital payments. And often, you can choose to continue that face to face contact with only certain clients, and hand over others entirely to the buying business. Furthermore, if the FUM of your clients’ grow, whether it be through your introductions or reviews with their advisers, so your recurring income grows.

The draw back perceived by some of this approach is that there isn’t a lump sum payment, although when you do the maths, typically assuming your funds remain at a similar value as when you ‘sell’, you will be better off – with the trade-off that payment is made over a significantly longer than average period. And if

through your introductions and the business IFA’s efforts the funds grow, so too does your reward.

3. Classic acquisition Whilst perhaps the first option most people think of when planning an exit, there is no such thing as a ‘typical’ acquisition. Buyers, like deals, come in all shapes and sizes, and what’s right for one seller may not make sense to another.

I think it can help to think of buyers in different categories, as there can be some similar veins when you approach it this way.

Large nationals and consolidators The large nationals and consolidators dominate the press with their acquisition activity, since a strong driver of their growth activity is through acquisition. If you look at a business like Bellpenny, their entire strategy from conception has been to build by acquisition.

The great things about these firms is their experience in acquisitions – they have been through the process so often you don’t need to worry about some common pitfalls, which can save you valuable time.

They also have a track record for making staged payments (‘most’ purchases are made with 3 payments over about 24 months), alleviating concerns you may have of receiving your money.

Since their acquisition strategy is so well-defined, it can mean you will find a less flexible approach to negotiating, and there will be certain things that are set in stone. Also, if you plan to

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work on it is likely you will be expected to fit their ways of working, which is something you need to be sure you can adapt to.

Mid-size regional acquirers There are a number of mid-size businesses which again have acquisitions as a key element of their growth strategy, although with clear geographic boundaries.

This allows them to grow in a considered manner and maximise the resources they have local to that area.

These businesses can have anything from 2 ‘hub’ offices to up to 10, and at times will look at purchasing businesses in a specific location including the premises, to build out that growth strategy (something which is much more unusual with a consolidator purchase).

They also have good experience of acquisitions, often having completed tens of acquisitions, which gives you the opportunity to get some references.

Small local acquirers There are a lot of smaller businesses also seeing the opportunity of making one or two choice acquisitions, to allow them to perhaps use up some capacity they have in their existing adviser base, or buy a business where there are some of the team staying on to continue servicing the clients.

When it comes to businesses they like to buy, geographic location becomes even more important. Often the level of handover is a key factor, to ensure the business integrates new clients effectively – it is always in the interest of both parties to ensure clients are comfortable: the motivation of the buyer is to boost business, and the seller’s payment terms will generally be set around the full business value over the payment period, not solely

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at the point of purchase.

With negotiation, these deals tend to be the most varied and flexible, since they are not harmonising multiple deals. Smaller buyers of course are generally in the market for smaller businesses – this group are most active in the ‘less than £50M’ FUM space.

A key element of selling to a small business is buyer due diligence. Whilst you may feel

more comfortable selling to a business that looks more like yours, being sure of how they will pay, and what their track record of a healthy balance sheet is to complete the staged payments is imperative.

Other buyers It’s also not unusual these days to see acquisitions coming from outside the advisory space. Private equity companies look at all industries for businesses which can deliver strong returns, and with baked-in recurring income, advice businesses are strong low risk options. Similarly we have been seeing deals from providers and platforms, such as Old Mutual launching Old Mutual Private Clients, an advice arm which supports the growth of their platform.

The motivators of platform or provider purchases are obvious, and that may or may not align to your existing investment approach.

Private equity firms are looking to make a return on their investment, so the operational rhythm is likely to change considerably post this type of sale, with well-defined and likely aggressive growth targets going alongside potential streamlining. A highly rewarding culture, but not necessarily very similar to your prior approach.

In conclusion As you’ve seen through this series of articles, there is a lot to think of when you’re preparing your business for exit. The good news is professional brokers such as Gunner & Co. are working with these situations every day, so you don’t have to worry about not knowing where to start.

We even run seminars around the country dedicated to understanding more about the process, and how to be really well prepared. To find out about a seminar near you visit www.gunnerandco.com or get in touch today.

In the meantime, if you are actively looking to exit now and would like to have a confidential, noncommittal conversation I am always happy to share my insight.

T: 07796 717346 E: louise.jeffreys@gunnerandco.com

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I NVESTI NG I N TECH NOLOGY April 2016

Investing in technology Only active managers who understand technological disruption can thrive in the next decade argues Robin Geffen, CEO of Neptune Investment Management Over the past decade the most crucial concept for active managers to understand has been the financial system. A proper understanding of the mechanisms for financial shock and recovery has determined the ability of managers to cope with the Global Financial and Eurozone crises.

This will of course continue to be important but another aspect we think may be an even greater determinant of success in the ten years to come is our understanding of technological disruption.

History doesn’t lie We think of the 1930s and the Wall Street Crash as a desolate period. Yet it also gave birth to a wave of innovation unseen since the industrial revolution. In the face of crisis, companies were forced to work smart. The innovation this triggered produced the patents that led to – among other things – the modern airline industry and television.

It is no overstatement to say depression era innovation is what enabled the globalisation that we have seen ever since.

We believe there is every evidence that we are about to reap such an innovation windfall again. A simple analysis of the number of patents approved in the United States since the mid1950s shows that the years following the Global Financial Crisis have seen a clear breakout from the trendline.

But the innovation we see is

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not just changing the future for technology stocks. Every sector of the global economy looks to be facing radical change. This will have a number of implications.

An even greater determinant of success in the ten years to come is our understanding of technological disruption

Moving with the times Firstly, using traditional financial analysis tools in isolation to understand businesses will miss this change and no doubt leave fund managers staring into the abyss of businesses whose models will break more quickly than their analysis had predicted. We believe that in the future all analysts across all sectors will need to be technology experts - guided by technology specialists who are themselves valued as among the most crucial members of any investment team. Secondly, in our view we can expect index investing to pay very poorly for investors – failing as it does to understand those businesses that can rapidly accelerate in the face of innovation.

To understand the depth of change we can examine it sector by sector. In manufacturing we see the impact of robotics as immense in the years to come. A robotic assembly arm has fallen in

price by 90% over the past two years. Simply believing cheap labour can support your manufacturing base could leave some countries grappling for global market share. In healthcare we believe the impact of sensor technology will be enormous.

It enables patients to selfmonitor their health and receive remote care. A greater level of personal control of our health information also contributes to a powerful cultural movement towards health and wellness.

This has knock-on implications for food producers and retailing.

In consumer finance the enormous number of start-ups made possible by technology could have a significant impact on the globalbanking sector. McKinsey recently estimated disruptive brands could put up to 60% of profits from non-mortgage retail lending under threat.

The impact could be felt particularly sharply in areas such as car loans and credit cards.

We believe that in the future all analysts across all sectors will need to be technology experts - guided by technology specialists who are themselves valued as among the most crucial members of any investment team.

The growth of connectivity There are also single technological innovations that have the potential to impact all sectors. The growth of connectivity means that consumers only wish to

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engage with companies that operate effectively within their existing technology ecosystem. Consider for example old-fashioned businesses such as washing machine detergent makers. Washing machine manufacturers are teaming up with Amazon to enable automatic re-ordering of detergent. Firms that can successfully negotiate these partnerships and protect their pricing point have the capacity to secure long-term recurring revenue.

In our view those that can’t, face a grim future. Investors should remember that we have already seen the emergence of the world’s largest two retailers – Amazon and Alibaba – both of whom own no shops. The world’s largest hotel group AirBnB owns no hotels and the world’s largest taxi company Uber owns no cars. These companies did not invent the technology they are built on. Rather they showed themselves able to exploit it better than others, delivering sharper business model planning and organisational innovation. This is why imagination is as

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crucial to technology investing as the analytical elements of research.

Passives can’t seek out what your manager can As always with technology, picking the winners is crucial.

Too many active managers are easily wowed by the slick talking and urbane approach of technology firms and their investor relations departments. Recent research from Alliance Bernstein on the longterm performance of technology companies finds that the sector has an

unusually high dispersion of returns – this is no market for passive investing. Yet it also finds that style bias is of little help as an investment strategy.

In short, careful stockpicking from knowledgeable individuals is the only sensible way to exploit the opportunity in technology. An investor who had bought the technology index at the start of the smartphone revolution would have owned more Blackberry and Nokia than Apple. At Neptune we talk about our investment process as being a ‘Real World’ process. Over the next decade we believe it is those asset managers looking outwards to understand the paradigm shifts taking place who will deliver alpha for investors.

Those who claim to only look at stock metrics or exploit value opportunities will end up investing in yesterday’s companies – desperately clinging to the fact that they look ‘cheap’. In our view, the truth is that these firms will become cheap for a reason; they are not ready for the very different world that will emerge in the years to come.

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ACTIVE & PAS S IVE April 2016

Active and passive investing - the great investment debate When it comes to selecting which investment strategy to follow, the comparison between active and passive approaches has always generated strong opinion and discussion amongst advisers and fund managers alike.  In this interview with IFA Magazine, Jonathan Willcocks, Managing Director and Global Head of Retail Sales at M&G Investments shares his opinion by considering the wider issues involved when looking at the merits of both approaches, and why it shouldn’t be about one or the other, but one and the other.

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So what do you see as the main argument for active investing over index tracking?

J.W

Well I think it’s a very interesting debate.

The narrative has really gathered momentum in the last few years on the case for passive investment, and we’ve seen a lot of articles espousing the virtues of the passive approach.

In my view, however, some of the empirical evidence which I’ve seen in the last few years perhaps slightly misses the point. Most of the data I see focuses primarily on the numbers of funds within any particular given sector rather than the weighted assets in that sector.

Let’s take a simplistic point of view. If you think the market represents all stocks in a particular index, and you then look at the number of funds, say there are a hundred funds, you would expect those one hundred fund managers to take different views across the market. The median fund would actually match the median returner, or the return of the index.

However, when you’re running an active investment fund, charges are incurred. By default, your average active fund should

therefore underperform the benchmark by around 75, 100 or 150 basis points, depending on the fees charged.

Putting it simply, that is why all the empirical evidence suggests that the average active fund underperforms the average index, or therefore, by default, the passive fund which typically has a lower charge.

In reality, money invested in any given sector is not spread equally across all the underlying funds. You do get survivorship bias. You do see investors tending to congregate and move their assets towards the most successful funds over time.

So when you start to look at the weighted average of assets in any given sector, you tend to find that over five and ten-year time periods, 60% or more, maybe sometimes even 2/3 of active funds, actually outperform the market.

This is because the active average investors’ experience is actually better than the empirical evidence would suggest from the passive camp.

Where do you reckon passive funds may still have the edge over active funds?

J.W

Well, I think it is about time horizons. If you invest in an actively managed fund, most managers will be taking a three or five-year view, in terms of investing in underlying stocks.

They need time to let their investment thesis play out.

So, for those investing in an active fund, personally, I would suggest that you have to take at least a three to five-year view and possibly longer for the fund manager’s strategy to play out, in terms of performance and returns for the investor.

When you look at the passive approach, obviously you’re just getting market access to an index.

In my opinion, if you are investing with a shorter term view, you want to just access beta or a particular region, perhaps to asset allocate to a particular country on a three, six-month or even a one-year time horizon, then I think passives are a much better tool. This is because you are not therefore second-guessing the time horizon that the active manager will be looking at.

Cost is often a major factor, as you’ve acknowledged, but in the post-RDR world to what extent do you see cost as still being a differentiating factor?

J.W

I think cost has been the big driver. It is very interesting to look at what has been going on in the area of passive investing over the last few years. The death of active management has been called many times. Yes, we have seen the popularity of passives come through quite frequently in the last 20-30 years, but it has never really gained traction in the same way as it has this time round. I think the contributing factor, undoubtedly, is cost.

When you look at the impact of RDR, there are many interesting points. In the “old” world, let’s say an average equity fund may have

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had 150 basis points of total charge - not the ongoing charges figure (OCF) but the total charge, the annual management charge (AMC).

Within that, 75 basis points may have been retained by the fund manager, with 25 basis points going to the platform, and 50 basis points to the introducing intermediary as trail commission. However, in the unbundled world that we now have post-RDR, most platforms have a spread of between 15 and 60 basis points, depending on the assets you have got on that platform, and the bells and whistles which that platform offers.

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J.W

These days, you’ll find that many IFAs are charging not just 50 basis points but possibly 75 or 100 basis points for the all-in financial planning element of the service they provide for their clients.

Overall, therefore, if you add a slightly wider range in platform charging and an increasing range in perhaps adviser charging, when considering the total cost post-RDR of acquiring a fund, via financial advice, via a platform, I would argue that for many investors the total cost has probably gone up, not down, since RDR. The charging is now inverted. Instead of being provider-set charging, you now have effectively adviser-set charging or platform-set charging.

And at the end of the day, they’re closer to the consumer, but they have to generate revenue to make the whole concept of the delivery of a financial advice service a commercial success.

Looking at it this way, you can see that the

pressure is now coming back on to the asset management component part.

In a low return world, of course, many people in that part of the value chain will be looking to try and drive down the investment management part of the total cost.

This is why I think you start to see passive funds finally gaining traction in the way they have done. I think cost has definitely been a major contributory factor. When I look at Europe now with MiFID II coming along and trying to emulate parts of RDR, I’m starting to see traction in the passive space in Europe as well.

Undoubtedly, I think that it has not been the market so much that has driven the increasing use of passive investment, it has actually been regulatory change that has focused the minds of many advisers and consumers on the element of cost.

Which areas of investing do you think are particularly suited to an active management approach? What are your reasons for this?

J.W

That’s a really good question. For me, what makes active management so interesting is that you need to look at all asset classes in all aspects of the market. In certain markets and sectors, it’s very hard to replicate an index. In property, for instance, you can’t really replicate the index; so, in cases like these, active management works incredibly well.

When you look at some of the core equity markets, which are arguably efficient or very efficient and well researched, then it is much harder for an active manager to generate consistent alpha over time. However, there is plenty of evidence to prove that there are some very successful asset managers in this industry - and fund managers, specifically - who have generated consistent alpha successfully over time.

In some of the smaller markets, such as smaller companies or even mid/small-caps, or you get to some of the more esoteric markets, then there is a greater opportunity for active managers to generate alpha.

It also works well with more flexible mandates, for example with flexible bond funds, strategic bond funds, or indeed assetallocating funds - where actually it is down to an individual’s view of the world, or their team’s view of the world, how they’re going to asset allocate between different asset classes, or different parts of the equity market, different parts of the fixed income market. Here I see that active management can play a very important part going forward.

To even things up, are there any areas where you believe that the passive approach of index-tracking is more appropriate?

J.W

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I think that index-tracking is appropriate, firstly from the element of cost, but we’ve already talked about this.

I think the second element is where you have a shorter time horizon, where you simply need to get access to market beta. You may have a view that a market perhaps is too cheap and you want to get exposure to that.

Thirdly, I think in some markets where active management struggled perhaps to outperform consistently over time - we’ve seen that in the US for instance - then I can see why many investors or advisers would argue that passive investing for core US market exposure, for instance, could be appropriate within a portfolio.

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ACTIVE & PAS S IVE April 2016

Focusing specifically on bond funds, is the need to have the highest weightings in the most indebted countries a fatal flaw for passive bond funds?

J.W

This is an interesting element, because when you look at passive investment from a fixed income and from an equity perspective, you’re right. When you look at passive investing in the fixed income sector, then most bond market indices are made up of those issuers which have got the largest amount of debt in the market. So, arguably, if you are a passive investor in fixed income, you’re destined to buy the index of the biggest sinners; those corporates that have the biggest amount of debt in the market.

From that perspective, we saw the impact of it back in 2008 when many of the banks were huge issuers of debt. When the market rolled over in 2008, credit spreads ballooned out and the financial sector, particularly, took the brunt of that hit. A lot of passive indices saw huge widening of spreads. You also saw a lot of active managers getting caught by that if they were just religiously following the index. Of course, passive bond funds got caught up in that maelstrom.

So, I think there’s definitely an element of danger if you’re just destined to buy the index of the biggest sinners.

However, we also saw the same thing happening in the equity markets, for example, in the tech boom of 1990-2000, when tech stocks became a major part of mainstream indices. By taking a passive approach, investors were therefore compelled to buy those stocks that had gone up the most, and which continued to drive those stocks even higher. Essentially, you had a distorted marketplace. You saw this with oil and gas companies also, where simply by being a passive investor you’re just owning the largest stocks in any given index. If those indices roll over, and those large stocks are responsible, or the driver for those indices roll over, then you have nowhere to hide.

For a passive investor just buying blindly, market capitalisation can leave you with some quite nasty shocks at certain market correction cycles.

The trade body ESMA recently found that perhaps one in six large active funds might actually be a closet tracker. What are your thoughts on that?

J.W

Now that was an interesting piece. I know that they looked at over 2,000 mutual funds.

In the market, of course, there are more than about 30,000 mutual funds in Europe. I think they looked at around 1,200-1,300 equity funds.

Active market share is a tool by which you can judge whether a fund is perhaps a closet tracker or not; whether or not it has taken sufficient active risk against the benchmark. It is a relatively blunt tool in its own right because, like all measures when you look at the market, it is rear-view mirror driving.

Frankly, I was not surprised to see that ESMA had undertaken this study and to find that maybe 15% of these funds in the marketplace had an active share of less than 60%, or a tracking error of less than 4%.

My overall view on this is that with active share, it is much easier to get an active share of 80 or 90% if you’re investing on a regional or on a global basis. This is because you have a broad range of stocks in the index and therefore you can take significant bets against the market or against the index.

However, it should also be noted that if you look at single-country indices where there are a limited number of stocks, and some of those stocks may carry quite a high weighting

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within those indices, then trying to get an active market share above 60% can actually be a challenge. It is difficult, therefore, to just apply a broad-brush 60% rule to determine whether a fund is active or not. Because it depends if we’re looking at a global index, or if we’re looking at a single-country index or a single-sector index.

What is interesting is that over the last 20 years, I think we have seen a lot of mediocrity build up in active management.

As a consequence, you end up with lots of funds just hugging their benchmark for fear of underperforming it. This has an impact on investors’ perceptions and, of course, upon fund managers’ remuneration too.

I see a very interesting dichotomy building up. You will end up with more of a polarised world. If you just want market beta, go and buy a passive fund. You can get it for seven basis points these days. If you want active management, there’s lots of evidence that good active managers can consistently outperform over the long term. Yes, of course there will be cycles where they don’t perform, but if you take a long-term view then people will pay 75, 80, 90, 100 basis points for a good active manager, if that active manager is outperforming by 3 or 4% per annum. That’s worth paying for.

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ACTIVETITLE & PAS S IVE March April 2016 2016

J.W

Where the middle ground gets squeezed, and it has never been squeezed properly before, is this new world in which we live today. Now you have got these two barbell approaches, with passive at one end and active at the other, I think this middle ground, comprising the socalled index-huggers, which is essentially what this piece of work has identified, I think will struggle to generate their value, or the valueadd they’re giving to investors. At the end of the day, the money will walk and it will go either to

a passive or an active fund.

So, I’m not surprised to see the study. I think it is good that this debate is taking place, but just focusing on active share in its own right, or indeed your tracking error, are also rear-view mirror pieces of data effectively. You cannot just look at them in isolation. They should be considered within a context of a number of different metrics.

Do you believe passive funds make markets more or less efficient?

J.W

It is an interesting debate whether passive funds make markets more or less efficient. Can you define what you mean by efficiency? To me efficiency means that all information is available to all investors at the same moment in time.

I’m not entirely sure whether it is just passive funds themselves which make that happen. For markets to be efficient they would have to have all information available to all investors at the same time.

One would argue that in the larger cap indices, the markets are reasonably efficient because underlying stocks are so heavily researched. All the underlying stocks are covered by all the broking houses, by all the fund managers. In essence, therefore, the edge that you would get as an active manager is a little bit harder to obtain, because everybody has access to that information at one moment in time.

When you consider smaller or mid-cap indices, some of the more esoteric equity

markets or indeed fixed income markets, such as high yield etc., then I think those markets are less efficient from an information perspective.

It is, therefore, easier for an active manager to potentially outperform.

Going back to your question in terms of passive, and making markets efficient… what I think is an interesting by-product of this is that if more and more money pours into passive funds, then more and more money will pour into the larger cap or the indices components.

The result is that you get a crowded trade in those larger capitalisation stocks. This means that the stocks at the bottom end of those indices will fall out of those large indices.

Perhaps, they get less well researched, less bought and probably become cheaper.

To me, the more money that flows into passive funds, the easier it might be, arguably, for an active manager to outperform. It will provide an edge, in terms of research and delivering alpha, because all the money is crowed into the passives.

The press likes to talk about an active versus passive approach. Would you think it is more helpful to think in terms of active and passive rather than the former?

J.W

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Yes, indeed I do. The debate should not be about active versus passive, because that suggests that one approach is better than the other. I don’t think that is the case.

It is about the two different styles sitting as natural bedfellows. At the end of the day, if you want to try and drive down investment costs, do you do so by forcing an active manager to try and run money for 50 basis points? This means they can’t invest in the business, can’t invest in their research, and therefore you create an environment which is less conducive to generating alpha.

If you want to blend down your total cost of the investment management component of the overall service to the investor, then actually you’re probably better off selecting a range of passive funds at one end to keep that cost

element down. It allows you more flexibility to go and seek out the active managers, who may be running capacity-constrained products, and therefore they will have a slightly higher charging structure. You would still end up with a blended fee where you might want to get to, and you can make that your own decision, that balancing act amongst yourselves. The reality is that then you can get passive beta market exposure for the core element of equity or fixed income exposure, on the one hand, and then can try and generate long-term alpha on a five or ten-year view by trying to pick the right active manager.

We come back to the point that you pay for what you get. Again, a lot of this industry is fixated, and a lot of the narrative I see in the press is fixated, about price. In my view, you

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ACTIVE TITLE & PAS S IVE April 2016

do not see sufficient narrative about value for money. If you find an active manager who can consistently generate - and I appreciate that it’s a cyclical industry - but who can consistently over time generate 200, 300, 400 basis points

above the index, then why wouldn’t you pay 80 or 90 basis points for that? You are still better off than being in a passive. So, I think the two sit side-by-side. It’s active and passive and not active versus passive.

How do you see these two styles of investing evolving over the next, say, 10 years?

J.W

Well, I think there are a couple of elements to look at here. We have already talked at length about the active/passive debate. I think you will probably see more and more core equity exposure being accessed through passive funds.

I absolutely understand that. It therefore means you might find more money going to the active managers in areas where it is easier, arguably, to generate alpha: those under-researched areas of markets, more esoteric asset classes, more esoteric building blocks, and, to a further extent, flexible bond funds, asset allocation funds, global equity funds. In such areas, active managers can do well because they have a much broader canvas on which to paint. The more flexible a mandate you give to a fund manager, then the greater the chance they have to generate outperformance, and the greater tracking error against whatever index you are looking at, the greater the active share from that perspective.

There’s another element here too. Maybe, for the last 30-40 years, most fund management groups have built products, because they have found a fund manager is particularly good at running a particular strategy - say an Indonesian widget small-cap fund, for example.

It has then been the job of those asset managers to take those products to market, and try and convince the end consumers of the merit of investing in an Indonesian widget smallcap fund.

But since 2008, the world has changed. We have moved away from chasing inputs. If you look at the last 20 years, everybody has been looking for growth. Why were we looking for growth? Because 75% of the investable wealth in the western world is owned by the babyboom generation, who are now aged 55-plus.

They have been trying to generate growth for their retirement pot. You are now in a world where that generation is retiring and now needs to generate income. But it’s not just income for today, it’s income for maybe 20 or 30 years, looking at the mortality rates that are currently extending.

The world is different. Instead of just trying to chase growth to build up a retirement pot,

you now have a generation, the vast bulk of savers in the western world, who are retiring and are now looking to generate growth against inflation in the long term, and income today, and an income that’s going to grow.

In this environment, we are changing. Asset managers have to change. We need to think a lot more about what the consumer needs, what they need to have to meet their objectives, and what we can do in providing solutions to help them do so.

If we are now looking at providing solutions to consumers, we tend to really think about what sort of products we offer. In fact, the asset management industry has already been responding. A raft of multi-asset funds are now available, providing the required asset allocation for the consumer. There has also been a big increase in income multi-asset funds, recognising that long-term demographic need and the shift towards income. Many more equity income products are also being launched. All of this shows that the industry is already responding.

So is it a debate about active and passive and over that long-term trend, how will they both do? Both will play their own part as building block components to those solutions. The bigger debate for me now is that, as an asset management industry, we have to get much smarter about understanding the consumers’ needs and objectives and building products that help them to meet those.

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SOAPBOX April 2016

Scapegoats required Banks are in the news for all the wrong reasons, says Michael Wilson.

But how much of the current opprobrium is really deserved?

Sometimes it’s just too easy to start casting around for scapegoats. Especially if you’re simultaneously trying to call them bellwethers, which are another sort of animal precisely. So when Deutsche Bank announced on 7th February that it could in fact afford to make payments due on its convertible junior debt during 2016 and 2017, the market responded as though it was denying that it had a much bigger problem. The entire banking system took a hit.

Deutsche’s share price duly plummeted the next day on a nagging suspicion that there was more here than met the eye. Psychology’s like that sometimes. To be slightly more specific, the investors were fretting that its capitalisation might not be quite up to the required European standards.

And that was, of course, a chimera. Albeit an understandable one in the light of Deutsche’s fairly woeful performance in recent years. The problem for the rest of us, though, was that as soon as the spotlight had been cast on one black sheep (er, goat?)

- attention shifted in no time at all to all the other banks.

Lloyds got a bashing, Standard Chartered got mauled after

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announcing a $1.5 bn loss (which it blamed on $1.8 bn of restructuring costs), and everyone started asking whether RBS or HSBC could maintain their dividends.

Goodbye to ‘Too Big to Fail’ So why the over-reaction?

One of the reasons might be that the financial powers that be have been insisting recently that the giant bank bail-outs of 2008 are now a thing of the past, at least in Europe, and that the state will no longer be quite so quick to step in as it was with RBS or Lloyds. Mark Carney, the Governor of the Bank of England, had himself declared that the era of “too big to fail” was definitely over.

And that, of course, was what would have worried Deutsche Bank’s shareholders and bondholders if there’d been any truth in it.

up hundreds of billions of pounds from their respective budgets to shore up Fred Goodwin’s successors.

There were other good reasons for the stock market to be feeling queasy, to be sure– the slowing global economy, the arrival of negative interest rates in some countries, and a nagging suspicion that emerging market banks were concealing their bad debts. But for some reason the scapegoat tag kept on coming back. The majority of banks, at least in Europe, have been holding up pretty convincingly in the face of a difficult period.

It doesn’t look as though there is. As Europe’s economic growth slips back and the unemployment rates in many countries refuse to budge, it was a politically astute thing for the politicians to say that they wouldn’t be tying

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SOAPBOX April 2016

Sure enough, three weeks later Deutsche was able to sort out its little cashflow problem by buying back bought back €1.27 bn of debt from its investors, and at a higher price than it had initially proposed – But once again, the story was in the dog that did not in fact bark.

More than half of the bank’s investors decided they didn’t want to sell out, so it was only €1.27 bn of the proposed €3.0 bn that got bought back. Which, in turn, was a sign that the investors were actually feeling much more confident about Deutsche than they were letting on. If you see what we mean?

Kicking a dog with a bad name But that its own didn’t ease the pressure very much in this country. Things weren’t quite so great, for example, at Lloyds Bank, whose loyal shareholder George Osborne announced on 26th January that the government was postponing a planned sell-off of its 10%

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remaining equity stake because ‘market forces’ had destabilised its value. Sure enough, the bank’s shares had lost around a third of their value in the ten months to mid-February. Ouch.

The Lloyds sale was being planned for March but it might still happen in the late spring - or then again, it might not. And then there was a report from the Financial Ombudsman Service, which declared in late February that another 92,000 complaints against the banks had come in during the last six months of 2015 – with 164,347 new cases being opened during that period – f which 56% had been PPI issues. Now, that was 6% less than the corresponding period of 2014, but it hardly supported the argument that the PPI tidal wave was now diminishing and that it could all be comfortably moved toward a planned conclusion in 2018.

Did it now?

And yet there are voices still willing to stand up for the beleaguered banks. Not just because they say that the institutions have withstood the tempestuous conditions of the last 12 months relatively well, but because most of them been able to sustain their dividends in spite of it all.

And then again, most of the UK’s banks are planning to split off their investment arms in the very near future, in the wake of the Vickers report and the subsequent

discussions. That ought to bring them two significant benefits which should spread out to the wider economy.

Firstly, because the Bank of England will feel more confident in backing and guaranteeing the activities of banking-only banks.

The nightmare of 2008, when banks were pulled down by their investment risk exposures, should (theoretically) be a thing of the past.

LLoyds bank shares had lost around a third of their value in the ten months to mid-February

Secondly, because the Prudential Regulation Authority has let it be known that the ring-fence around the investment arms won’t entirely stop them from transferring profits from their trading and investment arms back to their core banking operations. A sort of one-way loophole will allow them to shovel money through to their banking arms, but not the other way.

That will help to keep the banks’ shareholders and bondholders sweet, while also deflecting some of the banks’ complaints that they were being placed at a competitive disadvantage to their foreign rivals who were still running multi-banking profitably.

But yes, we’d also have to concede that political lobbying has played a part in the PRA’s change of heart.

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SOAPBOX April 2016

Would it be indelicate of us to point out that both Standard Chartered and HSBC had overtly threatened to decamp to another tax base unless the government watered down the ring-fencing requirements. And wasn’t the government also hoping to pick up a few billions from the sale f its remaining Lloyds stake?

Everybody’s credibility starts to slide, and the yields on their corporate paper go up, and the stock market comes under pressure Back to the helicopter?

But let’s not run away with the idea that troubled banking is just a European thing. Over in America, Bank of America had lost 26% of its value YTD by the third week of 2016 – and a third since the start of December. Sure, things were going badly at BoA, but why such a deep rout? And why was the sentiment turning against other US banks as well?

Could it be that BoA itself had said on 8th February that the chances of a US recession in 2016 were “only” 25%? Nobody seemed to be very sure on Wall Street, except that with the oil price at $25 for West Texas

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Intermediate this was felt to be ‘a bad time to receive bad economic news’. And out had come the technical charts which seemed to show that although the yield curve and the ‘growth opportunity indicators’ were pointing toward a slim prospect of strong US development during this election year, the omens were really not good enough to match up to the current expectations of foreigners.

Make of that what you will. But the phrase that was starting to creep back into the argument was counterparty risk. And counterparty risk, if you remember, was what sent the rest of the banking system down in 2008 after the Lehman collapse. The principle of it is that if one borrower defaults, for whatever reason, then his bankers won’t find it so easy to pay your bankers, and then they won’t be so well placed to honour their obligations elsewhere - and so everybody’s credibility starts to slide, and the yields on their corporate paper go up, and the stock market comes under pressure.

We’ve seen all this over here in Europe, of course, with the Greek, Irish, Spanish and Portuguese institutions requiring support from the European Central Bank, which they eventually got.

But we are, of course, crossing our fingers that Europe can maintain its feeble growth

rate. (GDP growth in final quarter 2015 was just 0.3%, and the OECD global forecasts for 2016 are close to zero.)

Things have rarely been this slow.

Mario Draghi, the President of the European Central Bank, probably scared as many people as he encouraged by pledging on 15th February to implement what bankers call a stimulus and we’d call a deeper descent into negative interest rates – plus, of course, another slab of quantitative easing so that the EU can achieve its 2% inflation target instead of its neardeflationary performance.

If that sounds uninspiring to you, we won’t be surprised because, as a fiscal policy, it doesn’t encourage structural growth so much as prop up a demand situation that’s already run out of puff. And sure enough, as we went to press, voices were heard demanding another global tranche of ‘helicopter money’ (quantitative easing, by any other name).

So far, so dispiriting for the banks which are having to mind their backs, their fronts, their capital reserves, their trading offices, their margins and their reputations at a time when default risks are quietly worsening. Honestly, who’d be a banker these days?

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S PON SOR ED FEATU R E April 2016

Helping clients to achieve an attractive and sustainable level of investment income is a key challenge for advisers. Multi-Strategy funds provide a new solution for this new age argues Aviva Investors

In association with Aviva Investors

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Multi-Strategy Funds

S PON SOR ED FEATU R E April 2016

Welcome to the new world of multi-strategy funds, says Aviva Investors In today’s world, obtaining an attractive and sustainable level of income is challenging. Bond yields and annuity rates are at, or near, record lows while equities are potentially more risky than usual given the recent high levels of volatility. The new generation of over55 investors, who may be looking to secure income in the short or medium term, have been particularly hard hit. In addition, radical changes to pensions and the introduction of pension freedoms have shifted the responsibility of funding retirement on to the individual – and, by extension, to their advisers.

Recent research by Aviva Investors highlights investors’ concerns. Around 52 per cent of pre-retired investors are worried that they may not have saved enough for retirement. Meanwhile, 32 per cent of those investors who have already retired are concerned about the sustainability of their income.

Indeed, individual investors regard the ability to offer a sustainable, regular income as being the single most

Multi-Strategy Funds

important responsibility of an investment provider.

from government bonds and savings accounts.”

A perfect storm Annuities were formerly the automatic choice for the newly retired. However, James Tothill, Head of Third Party Sales at Aviva Investors, says that this is no longer the case. “Low interest rates have driven annuity rates to very low levels and there are too many complex products.

In addition, people are living longer, and they are not convinced that the state will fund pensions forever.

These factors combined with persistently low interest rates and the new pension freedoms are putting the onus on the individual to ensure that they have sufficient income to last through their retirement.”

Nor is the situation likely to change in the foreseeable future “Given the lack of inflation and the high levels of debt burdening the global economy, interest rates are likely to go up gradually and peak at much lower levels than in the past,” says Tothill.

“That means annuity rates will likely remain low, and the same applies to income

Four per cent is the new five per cent This economic backdrop has shifted the expectations for income generation “An annual return of five per cent was once a realistic return, now it is four per cent. When you consider that the 10-year gilts yield is under 1.7 per cent (as at 25 January 2016), four percent is a pretty decent income,” Tothill points out.

He is not alone in holding this view. A large majority (84 per cent) of advisers and a significant majority of investors (60 per cent), told Aviva Investors that they believe an annual yield above four per cent is unlikely to be sustainable.

A new solution for a new age Aviva Investors has devised a new solution for those seeking income: the Aviva Investors Multi-Strategy (AIMS) Target Income Fund, the second fund in their AIMS range Jerome Nunan, investment director of multi-assets, at

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S PON SOR ED FEATU R E April 2016

Aviva Investors, says the AIMS range of funds is built on the simple idea of investing from the clients’ perspective.

“As an industry,” he says, “we are investment-led, and have perhaps lost touch with the world in which our investors live. If you think about what clients want, you find that their desires are simple.”

According to Nunan, “investors have four simple needs: achieving consistent capital growth; securing a reliable income; obtaining a return that exceeds inflation; or meeting a future liability such as university fees. Our ambition in creating the AIMS range was to build portfolios that meet the specific outcomes that matter most to today’s investor.”

The AIMS range currently consists of the AIMS Target Income Fund, which aims to generate a stable and regular income, while seeking to preserve capital, and the AIMS Target Return Fund, which is designed to meet the needs of clients who are looking for capital growth over the medium to long term.

The reassurance of an absolute income The AIMS Target Income Fund, Nunan says, is an absolute income fund - which he describes as “a unique proposition, because instead of just a yield, we target the Bank of England base rate plus four per cent before corporation tax on the fund”.

“If the base rate rises, then the amount we have to

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deliver each year also goes up.

Investors should draw a lot of comfort from that.”

Nunan is emphatic that the AIMS Target Income Fund focuses on producing a “natural income”, whereby capital is not eroded in order to pay out income.

“The objective, then, is to deliver stable, sustainable income…month after month, says Nunan.”

Multi-strategy funds are a natural evolution from multi-asset funds Multi-strategy and multiasset funds invest across a diverse range of asset classes, including equities, fixed income, property and alternatives such as commodities. By spreading their risk, both types of fund seek to offer investors more attractive risk-adjusted returns than are available by investing in single asset classes alone. Although they differ in important respects, we believe they should be seen as complementary strategies with both having a role to play in meeting investors’ needs.

However, there are key differences. Multi-asset funds are ‘long-only’ funds. “They vary the amount invested in each asset class. For example, they may look to raise exposure to US equities, while simultaneously reducing their position in US treasuries”, explains James.

“But the important point is that they can’t profit from a decline in prices. The aim of multi-strategy funds is to

perform well in all kinds of market environments. In order to do this, their managers tend to employ a wider investment universe than is available to managers of traditional multi-asset portfolios. They can take ‘short’ as well as ‘long’ positions.”

Furthermore, managers of multi-strategy funds tend to invest in a more precise fashion. For example, a multi-strategy fund manager may look to invest in a particular segment of the stock market rather than the market as a whole. They may also target debt of a specific maturity or attempt to exploit perceived anomalies in the relative valuations of two similar, but different, assets or to profit from a change in market volatility.

Overcoming the correlation challenge Multi-strategy funds have one further key advantage over multi-assets funds.

Returns tend to be lowly correlated to equities, bonds and other traditional asset classes. “This is an important factor given that in recent years, swings in asset prices have been far more correlated than was previously the case,” says Tothill.

Historically, rising equity prices, for example, were associated with falling bond prices and vice versa. Stronger economic growth would boost corporate earnings and hence share prices, whilst causing interest rates to rise, undermining the appeal

Multi-Strategy Funds

S PON SOR ED FEATU R E April 2016

of bonds. Thus, the risk of investing in equities could be offset to some degree by allocating part of the fund to bonds.

A new world order?

However, the aggressive monetary policy adopted by central banks around the world in response to the global financial crisis of 2008 has boosted asset prices simultaneously in recent years, argues Tothill. “Equity and bond prices have risen in tandem, while commercial property has also risen strongly in many markets.

Thus, investing in a mix of assets will reduce a fund’s risk by less than previously.”

Consequently, the traditional approach of targeting equities for capital growth, bonds for income and as a safe haven in times of trouble, and alternatives for extra diversification, no longer appears as valid.

Advisers clearly understand the appeal of multi-strategy funds. According to the Aviva Investors’ survey, 75 per cent rated multi-strategy funds as an attractive proposition.

Five diverse sources of income Building a portfolio that aims to meet clients’ income goals is complicated, not least because the income generated by individual asset classes can fluctuate and be irregular.

The AIMS Target Income Fund invests in a diverse

Multi-Strategy Funds

range of income-producing assets, meaning that the level of income generated is for the most part fairly predictable.

Distributions are paid from income receipts alone and not out of the fund’s capital.

The fund generates its income from five main sources: • Equity dividends • Government bond coupons • Corporate bond coupons • Real-estate investment trust (REIT) dividends • Option premia Individually, these financial instruments can produce irregular, and sometimes volatile, streams of income.

The balance between risk and reward also varies across these investments. The relatively high income generated by equities, for example, has to be offset against the greater volatility of this asset class and the income it generates.

Government bonds, by contrast, currently generate relatively low amounts of income, however they do so at reasonably regular intervals.

By gaining exposure to all these instruments the fund can build a balanced portfolio that looks to maximise income while also seeking to preserve capital.

Generating absolute income “The income generated from each source is combined and smoothed with the aim of delivering consistent

monthly income payments”, according to Nunan. “One of the criteria we apply to the income-producing strategies that we select to include in the fund is that they produce natural income.

Managing risk Investors and advisers also need to be reassured that they can receive a sustainable level of income without being exposed to excessively high levels of risk.

This is a critical consideration given that according to the Aviva Investors’ survey, 60 per cent of investors say they are not prepared to accept more risk in order to achieve their income requirements.

The way the strategies in a multi-strategy fund are expected to interact across a range of market conditions is crucial to managing a fund’s risk exposure and delivering the performance investors expect. “Our multi-strategy portfolios consist of three types of strategies: market, opportunistic and riskreducing,” explains Jerome.

Coping strategies for an income hungry world The `market` strategies seek to generate returns when markets perform as we expect.

This group of strategies essentially performs the role that equities have traditionally played in multi-asset funds.

For example, we are long global equities, a position

39

S PON SOR ED FEATU R E April 2016

designed to deliver income from the dividends received.

The strategy also t exposure to equity risk. `Opportunistic’ strategies strive to exploit opportunities arising because not all market participants seek to maximise profits. Examples of this are pricing anomalies that result from the actions of central banks, pension funds or structured product providers. These strategies can be implemented in ways that either deliver income, or help to protect capital against market downturns.

For example, we have adopted a short Japanese yen position. This is based on our belief that the Bank of Japan will undertake further quantitative easing to try to boost economic growth. That should lead to a drop in the yen’s value.

This position is implemented via currency options. “That means that we can generate income from our view that the Japanese authorities are unlikely to allow the yen to strengthen above certain levels,” says Nunan. In this way, we deliver income to the fund from our currency views – an asset class that is

40

unlikely to find a place in conventional multi-asset income funds. `Risk-reducing` strategies are designed to cushion performance when markets behave unexpectedly. Their aim is to provide protection against market turbulence, by offsetting the losses that might be sustained in periods of market stress by the incomegenerating market strategies.

Strategies can be added or removed from the funds to refine risk exposures and ensure the fund is appropriately positioned as the outlook for economies and markets changes.

As an example we are seeking to exploit our view that the market is mispricing the relative volatility of the US and Korean stock markets.

Korea’s economy tends to be more cyclical, and hence its stock market more volatile.

“This position should help in preserving capital, notably in periods of market stress”, says Tothill.

“We are confident that these factors – diverse and interactive strategies, flexibility and the use of strategies that benefit from falling markets – will enable

our multi-strategy funds to be successful in their pursuit of specific targets – whether it be capital appreciation or consistent, sustainable income – for today’s investor.”

Supplementary information The fund’s income target is based on the daily value of the fund and is measured from 1 April to 31 March each year. Corporation tax (currently 20%) is payable on some of the fund’s income. As a result, the income received by investors may be up to 20% less than that generated by the fund. Although corporation tax paid by the fund cannot be claimed back by investors, distributions from the fund will carry a tax credit which may reduce their overall tax liability.

The Aviva Investors MultiStrategy Target Income Fund is a sub-fund of the Aviva Investors Funds ICVC. For further information please read the latest Key Investor Information Document and Supplementary Information Document. Copies of these documents and the Prospectus are available in English free of charge on request or on our website. www.avivainvestors.com

Multi-Strategy Funds

AV I VA I N V E S TO R S For all market conditions

AIMS TARGET RETURN FUND The Aviva Investors Multi-Strategy (AIMS) Target Return Fund offers a compelling investment opportunity for investors looking for capital growth in today’s uncertain world: – it targets long-term capital growth in all market conditions – targets an average annual return of 5% above the Bank of England base rate before charges over any three-year period – combines diverse long-term strategies with the flexibility to adjust the portfolio if the outlook for markets or economies shifts – actively manages portfolio risk aiming for less than half the volatility of global equities over any three-year period.

To find out more about the AIMS Target Return Fund call 0800 015 4773* or visit avivainvestors.com

AIMS Target Return

Sustainable Income | Capital Growth | Beating Inflation | Meeting Liabilities

For today’s investor

For professional clients and advisers only. Not to be distributed to or relied on by retail clients. The value of an investment and any income from it can go down as well as up and outcomes are not guaranteed. Investors may receive less than the original amount invested.

Ratings as at 1 February 2016. Ratings are not a guarantee of future performance and can change. The Aviva Investors Multi-Strategy Target Return Fund is a sub-fund of the Aviva Investors Investment Funds ICVC. For further information please read the latest Key Investor Information Document and Supplementary Information Document. Copies of these documents and the Prospectus are available in English free of charge on request or on our website. Issued by Aviva Investors UK Fund Services Limited, the Authorised Fund Manager. Registered in England No. 1973412. Authorised and regulated by the Financial Conduct Authority. Firm Reference No. 119310. Registered address: No. 1 Poultry, London EC2R 8EJ. An Aviva company. www.avivainvestors.com. *Telephone calls may be recorded for training and monitoring purposes. Calls are free from UK landlines and mobiles.

CI063669 02/2016

R ICHAR D HARVEY April 2016

Is that all there is?

Richard Harvey takes a look at how pension freedoms are changing the way people of a certain age are approaching their financial planning The late American jazz chanteuse Peggy Lee once had a hit with “Is That All There Is?”, a contender for the world’s most cynical song.

In it, she wearily recalled her disappointment with a childhood trip to the circus; her disenchantment with a broken romance; her disillusion as her house burnt down; and even her dismissal of the inevitability of “that final curtain”.

It was the sort of tune which could have had you reaching for the Scotch bottle and revolver, but in fact was a salty counterpoint to all the ‘June, spoon and moon’ love songs of the time.

It came to mind when I met up with a bunch of chums of a similar vintage for a Club Grumpy lunch the other day.

After the usual preamble about pills and potions and who-takes-what (the medicinal intake of my mates is responsible for a large chunk of the NHS’s spiralling debt), the conversation turned, inevitably, to pensions.

Their savings ranged from the fat and comfortable (for those who had worked - guess where? - in the public sector) to the thin gruel of the State pension and a couple of ISAs. However, regardless of individual circumstances,

42

they all seemed bound and determined to work their way through their respective pots before facing, as Ms Lee would have it, “that final curtain”.

The conversation may have been influenced by the fact that we all attend more funerals than weddings nowadays, and are increasingly aware of our mortality.

Their savings ranged from the fat and comfortable (for those who had worked - guess where? - in the public sector) to the thin gruel of the State pension and a couple of ISAs There has been a distinct change in attitude. No longer the conservative, save-atall-costs, attitude of our parents’ generation. Instead, a rebellious enthusiasm for blowing it all, having a good time, and the devil take the hindmost.

Our most voluble companion, reinforced by his second bottle of claret, summarised the general attitude of the assembled oldsters - the kids will get the house; there’s no point having more than £38,000 in assets, otherwise you’ll have to pay ruinous care home charges;

and you might as well have a good time before you enter the Kingdom of GaGa. So while George Osborne came in for a good kicking, on the grounds that this government was less Tory, more Soviet, in its dismissive attitude to pension savers, he did at least merit a toast (a good excuse for another bottle of the red medicine) for allowing us instant access to the dosh we’d tucked away thus far.

Mark Carney was also the recipient of a tongue-lashing.

Personally, I’ve always liked the guy, even if he looks more like a bit part actor from ‘CSI’ than the Governor of the Bank of England. After dangling the tempting prospect of an interest rate rise this year, he has now whipped that away as the world’s economy is apparently going to Hades in a wheelbarrow (again).

Is it therefore any wonder that those over 65 are now booking holidays in Bermuda, ordering a new Harley Davidson, and acquiring an expensive wardrobe to look smooth like, well, Mark Carney?

Messrs Osborne and Carney might like to recall that Peggy Lee also sang a great version of “Call Me Irresponsible”. It could be the theme tune of today’s older generation.

I FAmagazine.com

R ICHAR D HARVEY April 2016

I FAmagazine.com

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CAREER OPPORTUNITIES Position: Independent Financial Adviser (Ref: 23041) Location: Bristol Potential Earnings: £100,000 - £150,000 This is a self-employed Financial Planning position with plenty of support provided to include lead generation, Compliance, Administration & Paraplanning enabling you to get on with what you do best; developing and cultivating relationships.

Working alongside Directors to have the opportunity to influence the business and play a part in its succession planning. This will give you an opportunity to implement ideas and concepts at a strategic level and enhance both your commercial and soft skills.

This is established IFA firm where you will benefit from a very successful lead generation process, producing a high volume of quality leads for prospective clients in the Bath and Gloucester areas.

Full back office support is available to allow you to concentrate on holistic Financial Planning with a varied client portfolio.

Candidates will ideally be Level 4 qualified or above.

Position: Employed IFA (Ref: 23876) Salary: £30,000 - £35,000 OTE DOE Location: Reading An established IFA practice with a strategic growth plan seeks a level 4 qualified adviser to join their team. The successful candidate will provide holistic financial planning advice to both prospective & existing clients within the firm. Existing experience as an independent adviser is required, plus ideally CAS status and particular experience of pensions. A high level of confidence, sales & presentational skills and interpersonal skills are also key.

Job Title: Senior Paraplanner (Ref:24160) Salary: £35,000- £45,000 Location: London A reputable and extremely well- established Financial Services firm with a great reputation, great staff retention and positive stance on staff development is looking to recruit a Senior Paraplanner to join their successful team.

Are you looking for that next step in your career that really puts you on the map? This could be it This firm has an excellent reputation in the market, has great staff retention and encourages their staff to develop their skills and experience to become the best that they can be.

Position: Administration Manager (Ref: 24266) Location: Bristol Salary: £30,000 - £40,000 Depending on the Individual Are you someone who has experience in managing and leading a team? Do you have passion and enthusiasm for processes and ensuring high levels of quality at all times?

Opportunity presents to support the growth and development of an existing team, the quality of the work and overseeing the organisation and administration being completed.

A background in a Financial Services company is preferred but not essential as is having a background in a training or event organisation plus management experience.

Position: Senior Administrator (Ref: 24239 Location: Bromsgrove Salary: £18,000 - £25,000 DOE Are you someone who has experience in in financial services, takes pride in your work, and strives to hit deadlines in time and provide compliant, bespoke administration?

Are you particularly interested in liaising with clients and giving them a truly fantastic service?

In this role you will be providing bespoke administration services and will be given the opportunity to develop professional skills whilst progressing technical knowledge.

Job Title: Paraplanner Salary: £30,000 - £40,000 Location: West Sussex Are you an experienced Paraplanner who has an existing background within an IFA practice as well as Financial Services qualifications?

A highly reputable firm of Financial Advisers are looking to recruit an experienced Paraplanner with a background in financial services to grow the business. The business has a rich culture that puts its employees first and encourages personal development.

Job Title: Paraplanner Salary: £30,000 - £40,000 DOE Location: Southampton An experienced, enthusiastic, positive and motivated Paraplanner is required by a reputable firm enjoying an increase in workload and looking to grow its Financial Services team.

Candidates will need previous experience of working in an IFA firm, have a relevant Level 4 Diploma or be studying for it.

Job title: Senior Wealth Management Administrator (Ref: 24245 Salary: £19,000 – £25,000 Location: Cambridge Our client is looking to recruit a talented Senior Wealth Management Administrator with experience in an IFA or wealth management business to support the Financial Planners, Client Relationship Managers and Directors.

The ideal candidate will have sound financial services knowledge as well as some financial services qualifications in return for a clear and defined career plan plus he chance to study towards gaining further financial services qualifications.

Job Title: Client Services Associate (Ref: 24265) Salary: £17,000 - £25,000 Location: Melksham A well-established Financial Services practice is seeking an experienced, proactive and self-motivated individual to provide administrative support to the Private Client team. Financial Planning qualifications preferred.

You will provide administrative support to the firms successful Financial Planners and Client Managers, including preparation for client meetings, investment summaries, creating and maintaining client records and procession new business applications.

Job title: Corporate Administrator (Ref: 23156) Salary: £18,000 - £25,000 Location: Warwick Do you have experience within Group Risk and Group Pension schemes? An excellent opportunity has arisen for a financial services administrator to use their technical knowledge to help administer Group Risk Contracts (Group PMI, Group Life, Group income Replacement and Group Critical illness) and servicing Group Pensions schemes within an independent financial planning business. Strong decision making ability and excellent attention to detail are required as is the ability to communicate clearly and concisely.

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ACQUISITION AND SALES

O F I FA BUSINESSES Retirement?

Time for a change?

There are countless reasons to dispose of an IFA business, just as there are countless reasons to get hold of one.

W E A R E A S P E C I A L I ST F I N A N C I A L S A L E S , C O N S U LTA N C Y A N D B R O K E R AG E B U S I N E S S .

Gunner & Co.’s mission is to work directly with you, whether you are looking to realise the capital in your business, or you are looking for growth through a merger or acquisition.

We consider every business to be unique, and therefore finding the right solution for you starts with a thorough understanding of your business operations and your wish list.

Only from here can we make valuable introductions which align to both party’s needs.

If you would like to discuss options to sell, exit or retire, or acquire IFA businesses, please get in touch for a confidential discussion.

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