Also in this issue:
yourself and be patient
Keith Ashworth-Lord: Never doubt
... and much more
Adviser Insights: The funds
you’re finding more interesting than last year
Also in this issue: Adviser Insights: What's been catching your eye? FE Analytics Masterclass Marcus Brookes: The importance of standing by your principle ...and much more
Sector Focus: IA Global
Has outsourcing to DFM models already reached a plateau?
Model Drilldown: Charles Stanley
Profile: Schroders' Marcus Brookes
FE Analytics: Product Update
Sector Focus: IA UK All Companies
T.Rowe Price: The Value-Growth Debate Moves On
Adviser Insights: Top-rated funds that aren't on your radar
Editor's Letter: Peak outsourcing?
A New Fund Order: JB Beckett
Top-rated funds that aren't on your radar
Sector Focus: AI All Companies
FE Analytics: Diversification benefit
Asset Allocation: Brewin Dolphin
FE Analytics Masterclass: How to use historical portfolios
Column: JB Beckett
Editor's Letter: Welcome to FE Professional
Sector Focus: IA Mixed Investment 20%-60% Shares
FE Analytics: Masterclass
Cover Feature: Has outsourcing to DFM models already peaked?
The AFI Soapbox
Profile: Bambos Hambi
Adviser Insights: Funds grabbing advisers' attention in Q1
Investment Trusts: Miranda Seath
Column: Miranda Seath
Cover Feature: The assault against active
FE Invest: In which sectors do active managers have the best chance of outperforming?
The AFI Soapbox: Ben Willis
Profile: Bambos Hambi
FE Analytics: Masterclass
Cover Feature: The assault against active
FE Invest: Absolute return funds
The AFI Soapbox: The road to returns?
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As long as I’ve been a financial journalist ‘the search for income’ has been a dominant investment theme and this shows little sign of abating. But this doesn’t necessarily mean that income investing is always plain sailing. 2017 seems to have got off to good start for dividends: payouts in the opening three months of the year were up 9.5 per cent on a headline basis to reach £15.4bn. But there are warnings that this won’t last for much longer. The bulk of those gains can be attributed to the weak pound and as this “sugar rush” starts to fade, it becomes much harder to see where the FTSE 100’s dividend growth will come from. However, when we look at which funds are topping the tables for income payouts in recent years, it becomes clear that some have done very well by investing outside of the mega-cap dividend stalwarts and focusing on opportunities much further down the market cap spectrum. That’s the theme of this month’s cover feature – why professional investors are looking at those small-cap funds that have managed to generate some of the best income payouts of the IA UK Equity Income sector. From across the wider FE business, Lauren Mason discovers which funds saw their share of research tail off halfway through 2016 before rebounding at the start of this year, there’s a guide to using diversification benefit on FE Analytics to improve client reporting and the FE Invest team explains why it likes European equities. Elsewhere, Adam Lewis speaks with Keith Ashworth-Lord to find out how a chance meeting with investing legend Warren Buffett led to the top-performing CFP SDL UK Buffettology, we look at the IA Global sector from a range of viewpoints and Jonathan Jones asks about the key allocations being taken in Quilter Cheviot’s managed portfolio service. We hope you enjoy the third issue of FE Professional. As always, please feel free to get in touch with the team at email@example.com
Coming down from the income sugar rush
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All the best,
James: High-yield bonds are still one of the more attractive areas of the fixed-income universe. These are naturally more risky from the point of view of potential default and valuations are less attractive than they once were. But because economic growth has surprised on the upside, they seem a sensible place to invest. Current conditions are benign: growth is improving, leverage has stabilised, and default rates are unlikely to rise soon – in fact, the default rate could drop slightly this year. And if there is less upside in the high-yield market than there once was, we still believe there is enough additional yield in this area to compensate investors for volatility.
And what type of equities provide a good level of income?
THIS INFORMATION IS FOR PROFESSIONAL ADVISERS ONLY and should not be relied upon by retail investors. The Artemis Monthly Distribution Fund may invest in fixed interest securities and in higher-yielding bonds. The fund holds bonds which could prove difficult to sell. As a result, the fund may have to lower the selling price, sell other investments or forego more appealing investment opportunities. The fund may invest in emerging markets. The fund may use derivatives to meet its investment objective, to protect the value of the fund, to reduce costs and with the aim of profiting from falling prices. The fund’s annual management charge is taken from capital. The payment of income is not guaranteed. Issued by Artemis Fund Managers Ltd which is authorised and regulated by the Financial Conduct Authority. Third party endorsements are not a recommendation to buy.
Can you give us any examples?
† Data from 21 May 2012. Source: Lipper Limited, class I distribution units, bid to bid in sterling to 21 May 2017. All figures show total returns with dividends reinvested. Sector is IA Mixed Investment 20-60% Shares NR, universe of funds is those reporting net of UK taxes. ‡ Source: Artemis. Yield quoted is the historic yield, class I distribution units as at 21 May 2017. The fund is ranked in the top quartile for yield in its sector. Source: Lipper Limited. *Source Bloomberg. Data between 30 December 2016 and 15 May 2017.
Jacob de Tusch-Lec
Is the fund a composite of the two funds that you manage individually?
Why buy the Artemis Monthly Distribution Fund rather than a separate bond and equity fund?
Why are bond yields so low?
And which are the most attractive equity markets for investors seeking income?
James: That yields on government bonds have been so persistently low – despite strong economic growth and the prospect of rising interest rates – is one of the biggest puzzles facing investors today. Furthermore, there are signs of inflation everywhere. So with yields so low, buying and holding government bonds to maturity seems almost certain to result in a negative real return. Remember, though, that a large group of investors are buying government bonds not because they want to – but because they must. Banks, insurers and pension schemes are all obliged to buy and hold ‘risk free’ assets, irrespective of whether the potential returns seem likely to be positive or not. The pressure on banks to own more government bonds has only increased since the financial crisis – even as buying by central banks (QE) has driven their yields down to derisory levels. That forced buying might be seen as a source of frustration for anyone looking for a ready source of income: low yields deny savers the opportunity to simply buy government bonds and enjoy their coupons. Looked at in another way, however, those investors who are not subject to the demands of a regulator might feel relieved that they are at liberty to look around for better sources of income.
James: In some ways, we have been beneficiaries of forces beyond our control in the shape of lower-for-longer interest rates and helpful demographic trends. The yield-producing assets we buy have been – and remain – in demand. One of the side effects of buying assets that deliver a good monthly yield is that the capital value of our holdings, both bonds and equities, has been bid higher. The strong returns we have produced have also been a consequence of good stockpicking – choosing the right equities and bonds. Our asset allocation has also helped: this fund has more in equities and less in government bonds than its peers. And while that positioning has been helpful, it is not without risk. Producing a good level of income for our unitholders has meant walking a narrow tightrope. Take too much risk and we would have endangered their capital; if we had taken too little (by, for example, holding lots of government bonds) and we would not have generated a satisfactory income. Finding that balance is one of our most important tasks. To date, we believe we have done a good job.
How does this fund differ from other funds in the IA Mixed Investment 20-60% Shares sector?
With bond yields and interest rates stubbornly low, sourcing income remains a challenge. Here, fund managers James Foster and Jacob de Tusch-Lec, explain their thoughts on the market and how they are positioning the fund. Since its launch five years ago, the Artemis Monthly Distribution Fund has returned 91.5%, compared to a sector average of 43.7%†. It is ranked number one† in the IA Mixed Investment 20-60 shares sector and has a top quartile yield of 4.0%‡.
Have there been any significant changes to the fund’s portfolio?
James: They can – but it is a good deal harder than it was. Although growth is improving and the ECB is still buying investment-grade bonds, this good news is already in the price – so valuations of many non-financial, investment-grade corporate bonds look stretched. But there are exceptions: financial bonds have not been part of the central banks’ bond-buying programmes. So their valuations still have room to rise and we think the yield gap between financial and non-financial bonds can continue to narrow.
RANKED 1 SINCE LAUNCH†
And what about investment-grade bonds? Can investors still find income there?
Jacob: The diversification inherent in the fund’s structure is important. But it also means that when we identify a company with the underlying free cashflows to support an income stream, we can draw on our respective areas of expertise to determine whether its equities or bonds are more attractive. In some cases, a company’s equities will offer the more attractive risk-adjusted yield – in other cases, holding its bonds might be preferable. In that way, the fund’s unified portfolio allows us to deliver better returns than would be the case with a bond manager and an equity manager working independently. James: When we launched the fund in 2012, our hope was that by combining equities with bonds we could produce an attractive level of monthly income – but with less volatility than would be possible by investing in a single asset class. Its structure provides our investors instant, simple and effective diversification. Five years later, those hopes have been borne out. And because the correlation between equities and fixed income has historically been quite low, we believe that diversification should allow us to continue to deliver as economic and market conditions change.
Jacob: The IA Mixed Investment 20-60% Shares sector is heterogeneous. Unlike some funds, we focus on income, with capital growth a secondary consideration. Another big difference between this fund and many of its peers lies in its global reach. Traditionally, investors have looked to UK stocks for yield. And many income funds are dominated by domestic companies. Our fund, however, draws on more geographically diversified sources of income, particularly in its equity component. Investing globally broadens our opportunity set and makes us less dependent on some of the big income-paying stocks and sectors that dominate the UK market. It also means we can invest in companies in a variety of economic and interest-rate regimes. The various blocks of the global economy are at different stages of their business cycles. This means there should be an opportunity for global managers to enhance returns by investing in the right markets at the right time.
Jacob: When bond yields were low and falling, equities with bond-like characteristics such as safe, predictable yields performed very well. By driving down ‘safe’ yields, the long and powerful rally in government bonds pushed investors seeking income into bond proxies (stocks with dividends that can be relied upon like the coupon on a bond). Vast amounts of capital were committed to the classic ‘equity income’ sectors, such as telecoms, Real Estate Investment Trusts (REITs) and infrastructure companies. At some point, investors’ extreme positioning in favour of those sectors could be called into question. In fact, we saw signs of that in the second half of last year – so we have edged the fund’s equity component slightly more towards value (companies that have not been fully valued by the market and may be due for a re-rating) and cyclical (companies whose price is affected by ups and downs in the overall economy) names. That shift towards value and cyclicality give the fund a way to profit from stronger economic growth, it also enhances the diversification the fund offers, protecting it against rising interest rates in a way that an equity component solely comprised of ‘bond proxies’ would not.
So where can investors find sources of income or yield?
Bank bonds, for instance, offer good yields. Provisioning has largely been made for potential losses from misconduct fines and it feels that we’re getting past the worst of these ‘legacy’ issues. And, having spent the best part of a decade raising capital, their balance sheets are much stronger, offering bondholders more protection. Bonds issued by insurers also look interesting. Here, the so-called ‘Solvency II Directive’ is helpful. Its provisions encourage a slightly higher degree of transparency and encourage insurers to increase the strength of their balance sheets. Although these bonds can be quite volatile, the yields are very attractive at around 7% or so – and periods in which prices do fall offer us good buying opportunities.
With the Monthly Distribution Fund, you can expect a welcome delivery 12 times a year.
Jacob: No. This could actually be viewed as a ‘best ideas’ fund: our best ideas, that is, for producing a high level of monthly income. In our equities, there is a significant degree of overlap between the fund’s holdings and the Artemis Global Income Fund. But the two portfolios are not facsimiles. This fund tends to focus on the core income-producing stocks found in the Global Income Fund with fewer of its ‘risk’ and ‘special situations’ holdings. James: The aims of the Artemis Monthly Distribution Fund differ from those of the Artemis Strategic Bond Fund – so its holdings differ too. Here, we have a more direct focus on income, so the portfolio has a more pronounced bias towards the high-yield bond market and fewer of the government bond and currency positions found in the Artemis Strategic Bond Fund.
Hunting income globally, from equities and bonds
James: Conditions are always changing – and so is the portfolio. Over the past year, for example, the balance in the equity portfolio has shifted away from some of the most bond-like equities and into stocks more responsive to stronger economic growth. Meanwhile, the percentage of the fund that is invested in high-yield bonds (those rated below ‘BBB’) has increased. So in one sense we are taking a higher level of risk – particularly if the economy were to slow down or fall into recession. At the same time, however, we believe the greatest risk that faces investors at the moment actually comes from the potential for inflation and interest rates to move higher and these changes should help to protect the fund. Reflecting our view of current economic and market conditions, the overall level of risk in the portfolio is higher than when we launched the fund. At the same time, however, we believe we are being well compensated for taking that risk.
Jacob: After a long period in which Europe was out of favour, it is attracting capital again. Economic growth is accelerating just as it slows in the US. Expectations for European companies, meanwhile, are more modest than for US stocks – so positive surprises are more common. And the political situation has stabilised: the shock of the Brexit vote has faded; France has chosen a pro-European centrist as president; Chancellor Merkel’s position looks increasingly assured. The fund’s exposure to Europe comes through infrastructure companies, most notably Italy’s telecoms and television towers companies: Rai Way, INWIT and EI Towers. Holding Italian stocks was uncomfortable for much of last year, particularly in the immediate wake of the Brexit vote. These are essentially stable infrastructure assets with long-term contracts with telecom providers (such as Vodafone and Telecom Italia) as well as broadcasters such as RAI and Silvio Berlusconi’s Mediaset empire. The towers businesses combine steady growth in earnings and predictable business models that hold up well through the economic cycle, they currently have low levels of debt (perhaps even too low for such stable businesses) and modest valuations: they continue to trade on far lower multiples of their earnings than similar companies in emerging markets and the US. In effect, a discount is being applied to these assets because they are Italian. Their valuation seems to be anticipating Italy’s imminent departure from the eurozone – and while this is not impossible (we are not blind to the level of Italy’s debts or the dysfunctional character of the eurozone), it is not as likely as these companies’ depressed valuations imply.
Since its launch five years ago, the fund is the top performing fund in the IA Mixed Investment 20-60% Shares sector, to what do you attribute its success?
Jacob: One of the largest holdings in the fund’s equity component is hard disk drive producer Western Digital. A year ago, the extremely modest valuation multiple on which its shares traded reflected a belief that its fortunes depended on a market in secular decline: making hard drives for desktop PCs. The reality is different. While PCs are in decline the loss of this kind of business is actually driving the margins of Western Digital higher. At the same time demand for storage (NAND) has been outstripping production and supply growth. Smartphones are churning out vast amounts of data. Eventually, autonomous cars will do the same. All of this data needs to be stored somewhere. Moreover, the memory market is an oligopoly, so Western Digital can exercise more discipline in setting prices than in the past. As the market has come to appreciate both the importance of memory and the economics of the industry, Western Digital has performed very well despite being a cyclical value stock. In sterling terms, its shares have risen by 24%* since the New Year.
Source: FE Analytics
This isn’t the result of just one or two bumper years – our data also shows all four of these funds made above average payouts in each of the five years we looked at. Only six other funds of the 65 with a long enough track record achieved this. Rob Burdett, co-head of the multi-manager team at BMO Global Asset Management, has been using MI Chelverton UK Equity Income in his and Gary Potter’s fund of funds range since 2008/9.
MI Chelverton UK Equity Income CF Miton UK Multi Cap Income Marlborough Multi Cap Income Unicorn UK Income Majedie UK Income MFM Slater Income M&G Charifund Ardevora UK Income Old Mutual UK Equity Income Premier Monthly Income Standard Life Investments UK Equity Income Unconstrained JOHCM UK Equity Income Royal London UK Equity Income Smith & Williamson UK Equity Income Premier Income Threadneedle UK Equity Alpha Income QAM Downing Monthly Income Schroder UK Alpha Income Threadneedle UK Equity Income AXA Framlington Monthly Income
Franklin UK Equity Income Majedie UK Income Schroder Income Liontrust Macro Equity Income Man GLG UK Income Standard Life Investments UK Equity High Income Fidelity Moneybuilder Dividend Threadneedle UK Equity Alpha Income CF Canlife UK Equity Income BlackRock UK Income Unicorn UK Income Rathbone Income Marlborough Multi Cap Income AXA Framlington Blue Chip Equity Income Threadneedle UK Monthly Income Jupiter Income Trust Standard Life Investments UK Equity Income Unconstrained JPM UK Higher Income Barclays UK Equity Income S2 HSBC Income
Source: FE Analytics
2017 started with impressive dividend growth but many are warning that the traditional income stalwarts of the UK stock market face a tough future, given low levels of dividend cover and a fading “sugar rush” of the weak pound.
Income earned by the average UK equity income fund (ex enhanced income funds)
“Over the last five years, many of the very largest companies have grown their dividends at the expense of dividend cover. With dividend cover now close to multi-decade lows, they are now finding it harder to continue to keep up the momentum. We believe this explains why the mainstream indices feel more directionless,” they said. “In contrast, quite a few smaller companies are still generating ongoing organic earnings growth. Therefore, the combination of their sub-normal valuations and their scope for ongoing dividend growth explains why smaller company share prices have led the market higher in 2017. “We believe that the contrast in dividend growth potential between many of the smallest stocks and many of the largest stocks is becoming more defined.”
According to Capita Asset Services’ most recent UK Dividend Monitor, there was a “brisk start” to the year for UK dividends with payouts in the opening three months rising by 9.5 per cent on a headline basis to reach £15.4bn.
In general, the outlook is that while international-facing large-caps might struggle to generate significant dividend growth, companies further down the market-cap spectrum have more scope to increase payouts to shareholders.
“There are several reasons why we like to go down the cap scale for income,” he said.
Co-head of the multi-manager team at BMO Global Asset Management
“Starting with much lower pay-out ratios has allowed well-run smaller companies the headroom for larger dividend increases when compared to larger companies. Their dividends in general have better earnings cover so should be more resilient and with more growth potential.” Over the past five years, average dividend growth for UK equity income funds (again, excluding enhanced products) stands at 9.82 per cent. Both Unicorn UK Income and Marlborough Multi Cap Income have generated some of the best growth in the sector, with the former’s payout rising by an average of 17.40 per cent during the five full calendar years between 2012 and 2016 while the latter’s is up 16.71 per cent.
Head of research at Whitechurch Financial Consultants
We like small-caps vs large-caps from a valuation perspective. Since the EU referendum and sterling weakness, investor sentiment has favoured large-cap, overseas earners. This has seen relative valuations between large- and small-cap at its lowest for nearly two decades. With the FTSE 100 reaching new record highs, we definitely see a value opportunity on price in small-caps.”
"The sugar rush of exchange rate gains won’t leave investors feeling satisfied for long."
The managers share the view that sterling’s weakness will only provide a temporary boost to large-cap dividends and expect small and mid-sized stocks to get more investor attention as the currency strengthens over 2017. “Given the relatively high domestic focus of our small and mid-cap investment universe it is interesting to note an increasing number of commentators now expecting sterling to start appreciating against major currencies by the end of the year, a view we have had for some time,” they said in a recent update.
Source: FE Analytics
“But the sugar rush of exchange rate gains won’t leave investors feeling satisfied for long. It’s going to wear off quickly in the third quarter, unless there is a second leg downwards in the pound. That cash is of course real, at least in sterling terms, but only long-term profit growth can deliver sustainable increases in the income from shares. Unfortunately, profit growth has been rather meagre from UK plc of late.” Research by Henderson found that more than one-quarter of money managed by UK equity income funds and investment trusts is in just 10 FTSE 100 stocks: GlaxoSmithKline, AstraZeneca, Imperial Brands, Royal Dutch Shell, BP, British American Tobacco, HSBC, Legal & General, Vodafone and Aviva. However, it would be a mistake to think that the only source of reliable dividends in the UK come from the FTSE 100 names that dominate the top of ‘conventional’ IA UK Equity Income funds. Small-caps are not necessarily seen as an income-generating area but data from FE Analytics shows us that the funds focusing on this area have made the highest income payouts during recent years.
What’s more, the report warns that the outlook for dividends seems more challenged for the rest of the year, especially among the FTSE 100 names where equity income investors have traditionally focused their attentions. Justin Cooper, chief executive of Shareholder Solutions, part of Capita Asset Services, said: “UK plc delivered a record for a first quarter, at least before the big drop in special dividends was accounted for.
24.6% 24.3% 23.9% 23.8% 21.1% 20.9% 20.5% 20.2% 19.6% 17.8% 17.4% 17.3% 16.7% 16.3% 15.0% 15.0% 14.4% 13.3% 12.5% 12.5%
However, the closely watched report added that this growth was “narrowly based” – it depended heavily on the large exchange rate gains that came with the sharp devaluation of sterling after the UK voted to quit the European Union. Exchange rate gains added £1.7bn to the total payout, which is equivalent to 12 percentage points on the headline growth rate. The first quarter is the most heavily skewed towards dividends declared in foreign currencies (they account for three-fifths of the total distributed, compared to a little over two-fifths for the year as a whole). The rest of the year is unlikely to be as rosy, therefore. Meanwhile, BHP alone contributed 3.5 percentage points to the total thanks to a stronger-than-expected rebound in its dividend. The mining giant made a significant cut to its dividend in 2016 but in February announced an interim dividend of 40 US cents a share – well above the 30 cents a share mandated by its policy.
That’s certainly one of the conclusions of the UK Dividend Monitor, with Cooper saying the “exciting story” rests with companies that depend most on the domestic economy and not the exchange rate. Gervais Williams and FE Alpha Manager Martin Turner, who run the £873.3m CF Miton UK Multi Cap Income fund, agree that the best chance of dividend growth lays outside of the FTSE 100.
FE Professional editor
However, CF Miton UK Multi Cap Income’s dividend growth was just below the average at 9.38 per cent.
£3,768.25 £3,414.27 £3,361.09 £3,202.73 £3,191.57 £3,057.16 £3,043.69 £3,039.75 £2,952.83 £2,944.14 £2,937.80 £2,926.75 £2,865.87 £2,858.54 £2,855.69 £2,831.78 £2,826.97 £2,773.52 £2,741.67 £2,737.15
“In itself this may translate into a small tailwind for UK earnings but importantly it could precipitate a sentiment shift amongst investors back towards UK earnings, and those sectors such as housebuilding and retail that have been under pressure recently. Our domestic economy remains broadly supportive of small- and mid-cap performance and valuations with fears over falling real wages on one hand being countered by supportive monetary policy, good export performance and the resilience of the services sector on the other.” But this isn’t the only fund with a smaller companies bias to generate some of the highest income payouts of the peer group. The income earned table shows the funds making the highest payouts on a £10,000 initial investment over five years (excluding enhanced income offerings) and the top four have a definite focus on small- and mid-caps: the Chelverton offering is joined by CF Miton UK Multi Cap Income, Marlborough Multi Cap Income and Unicorn UK Income.
The funds with the highest average dividend growth
Income earned: The 20 highest income payers over the five years to the end of 2016
“We like small-cap generally at the moment due to valuations, flexibility relative to large-cap in managing any arising Brexit-related issues and generally superior growth potential,” he added.
To diversify and diversify the income stream. For example, the FTSE All Share’s top five dividend payers provide 38 per cent of the index income and the top 15 pay 58 per cent. If you look at the Numis Smaller Companies index, this breaks down into the top five paying 9 per cent and top 15 only 22 per cent. In addition, the concentration of the income from the All Share comes from a narrow band of sectors, dominated by oil & gas, whereas you have far broader mix of companies/sectors providing dividends in the small-cap arena.
Dividend cover in small caps is 2.8x (using the Numis index), whilst this falls to 1.3x for the All Share, so a better chance of actually receiving a dividend.
Both of these factors – exchange rate gains and BHP – were more than enough to offset the 90 per cent plunge in special dividends. But without them underlying dividends would have fallen slightly year-on-year, which Capita says indicates that sustained, core growth is still hard to come by.
Source: FE Analytics, income paid on an initial investment of £10,000 between 1 Jan 2012 and 31 Dec 2016
MI Chelverton UK Equity Income's annual distributions and cumulative payouts between 2012 and 2016
An initial investment of £10,000 in the 'average' IA UK Equity Income fund (excluding those that use covered call options to enhance their income stream) made on 1 January 2012 would have paid out £2,627.61 in income by 31 December 2016. Sitting at the top of the table with income earned of £3,768.25 is one of the sector’s small-cap focused funds: David Horner and David Taylor's £505.9m MI Chelverton UK Equity Income fund.
So while the dividend outlook for the top of the market looks clouded, there are other areas that UK equity income funds have historically found to be good hunting grounds for both high yields and dividend growth. What’s more, some investors believe there are a number of reasons why these small-cap funds currently offer more attractive opportunities than traditional UK equity income portfolios. Ben Willis, head of research at Whitechurch Financial Consultants, uses small-cap funds for income – his portfolios hold CF Miton UK Multi Cap Income and Aberforth Geared Income Trust. Like BMO’s Burdett, he rarely uses them on a standalone basis and puts them alongside traditional equity income stalwarts to cover as much of the market as possible.
“Over the last five years, many of the very largest companies have grown their dividends at the expense of dividend cover."
Best and worst IA Global performers over 5yrs
One area that was hit hard over the five years in question was basic materials, with the prices of many key commodities slumping over the period. First State Global Resources, managed by Joanne Warner and Tal Lomnitzer, was one of the funds coming off worse from this, making a 19.33 per cent loss with annualised volatility of 22.95 per cent. That said, the fund has performed relatively well when it comes to stockpicking, consistency and risk control in its space, earning it a five FE Crown rating.
AUM in the IA Mixed Investment 20%-60% Shares sector
Schroder ISF Global Energy
David Hambidge, Ian Rees, Simon Evan-Cook and David Thornton run this £621.3m fund of funds, which is one of the few members of the sector to sit in the top quartile for total returns, volatility and maximum drawdown over the past five years. The income-paying fund has a bias towards value and counts Fidelity Enhanced Income, Standard Life UK Equity High Income and TwentyFour Dynamic Bond as some of its biggest holdings. Over five years, it has made a 60.88 per cent total return with annualised volatility of 5.17 per cent.
MSCI AC World
Click a hotspot on the scatter chart to view more about that fund
Source: FE Analytics MI Tool
The highest returning specialist fund in the IA Global sector is Schroder Global Healthcare, with a 141.55 per cent five-year return and annualised volatility of 12.81 per cent. Managed by John Bowler, the £229m fund does exactly what its name suggests: invest in healthcare, medical services and related companies on a worldwide basis. More than two-thirds of the fund is in American stocks and only 3.6 per cent is in the UK, with top holdings including UnitedHealth Group, Johnson & Johnson and Roche.
Source: FE Analytics, bid to bid total return in sterling between 30 Apr 2012 and 28 Apr 2017
Vanguard FTSE Developed World ex UK Equity Index
Source: FE Analytics, bid to bid total return in sterling to 31 Apr 2017
The IA Global sector has established a reputation as being one of the most challenging areas for active management outperformance in recent years, owing to factors such as the vast universe of stocks to consider and the dominance of the rallying US market in the index. FE Analytics shows that the average IA Global fund underperformed the MSCI AC World index over one, three, five and 10 years to the end of April 2017; the average fund was also behind the index in eight of the past 10 full calendar years. On a five-year view, the sector’s best performer has been Fundsmith Equity with a 164.25 per cent total return against the index’s 92.17 per cent gain; only two in five of the peer group’s members are ahead of the MSCI AC World over this time frame. But that doesn’t mean the 270-strong sector lacks highly rated funds. Within it there are 30 FE Alpha Managers, including Fundsmith’s Terry Smith, Invesco Perpetual’s Stephen Anness and Rathbones’ James Thomson. Meanwhile, there are 24 funds that hold the top FE Crown rating of five; among them is Lindsell Train Global Equity, Fundsmith Equity, First State Global Listed Infrastructure, M&G Global Basics and Ardevora Global Equity.
Source: FE Analytics, bid to bid total return in sterling between 31 Apr 2012 and 31 Apr 2017
Old Mutual Global Equity
1 2 3 4 5 6 7 8 9 10
The sector’s third highest total return at 147.26 per cent over five years has come from Lindsell Train Global Equity; its annualised volatility over the period was 10.91 per cent. The £2.3bn fund is managed by the highly-respected team of Michael Lindsell, Nick Train and James Bullock and holds five FE Crowns. Its concentrated portfolio focuses on durable, cash-generative business franchises that have a competitive advantage in their field, counting the likes of Unilever, Heineken, Diageo, London Stock Exchange and Nintendo as top holdings.
This £899.8m fund, managed by Marcus Brookes and Robin McDonald, has made 28.43 per cent over five years with annualised volatility of 3.93 per cent. The managers have maintained cautious positioning over recent years, arguing that bond markets are over-valued. That said, they have exposure to equities that look attractive and top holdings include GAM Global Diversified, GLG Japan Core Alpha and Sanditon European Select. In this month’s profile, Brookes explains the importance of standing by convictions and why one-quarter of the portfolio is in cash.
This £6.9bn fund is one of the largest in the sector and has been headed up by Stuart Rhodes since July 2008, with John Weavers and Alex Araujo joining as deputies in 2016. Over the five years to the end of April 2017 it made a third-quartile 78.21 per cent total return with annualised volatility of 11.92 per cent. It is an equity income fund targeting a dividend yield above that of the market average, with the prospect of income and capital growth over the long term. Its largest holdings at the moment are Methanex, British American Tobacco and Gibson Energy.
Royal London Sustainable Diversified Trust
This fund has made the sector’s highest total return over five years, at 65.06 per cent. This has come with annualised volatility of 6.55 per cent. Managed by FE Alpha Manager Mike Fox, the £384.1m fund has a socially-responsible investment mandate, which means it can only invest in companies that have a net positive benefit to society. Its largest holdings are Amazon.com, Google parent company Alphabet and Microsoft.
Fundsmith Equity Old Mutual Global Equity Lindsell Train Global Equity Schroder Global Healthcare L&G Global Health & Pharmaceuticals
Risk/reward over 5yrs
10 most researched IA Global funds over 1yr
Premier Multi-Asset Monthly Income
165.18% 152.10% 147.26% 141.55% 139.69%
Old Mutual Global Equity
This £10.4bn fund, which is headed up by FE Alpha Manager Terry Smith and is the largest in the IA Global sector, posted a 165.18 per cent total return over the five years to the end of April 2017 with annualised volatility of 10.62 per cent. It has been a consistent outperformer in the peer group thanks to its focus on quality-growth stocks. The five FE Crown-rated fund invests in companies with sustainable returns on investors’ capital of over 10 per cent and that are on attractive valuations. It prefers businesses serving repeatable needs such as consumer staples, manufacturers or medical device producers and avoids economically sensitive areas such as airlines, banks and real estate.
Schroder Global Healthcare
First State Global Resources
Posting a five-year loss of 35.21 per cent with 26.79 per cent annualised volatility, the Schroder ISF Global Energy fund is in the bottom right-hand corner – the least desirable area of the scatter chart. Managed by John Coyle and Mark Lacey, the fund has suffered as energy stocks were caught up in the commodity crash that brought the price of oil tumbling down. Indeed, global energy funds are a common finding in the bottom-right quadrant of the scatter chart.
Source: FE Analytics
M&G Global Dividend
The £625.5m Old Mutual Global Equity fund, which is managed by Ian Heslop, Mike Servent and Amadeo Alentorn, has made the IA Global sector’s second-highest return over the five years examined – 152.10 per cent. This has come with annualised volatility of 11.43 per cent. The managers have a unique approach to investing that is unconstrained, avoids being overly biased to any investment style and assesses stocks objectively using characteristics such as stock price valuation, balance sheet quality, growth characteristics, efficient use of capital, analyst sentiment and supportive market trends. It is the only active fund in the sector to beat the MSCI AC World in each of the five past full calendar years.
Fundsmith Equity M&G Global Dividend First State Global Listed Infrastructure Rathbone Global Opportunities Old Mutual Global Equity M&G Global Basics Fidelity Global Special Situations Artemis Global Growth Vanguard LifeStrategy 100% Equity Vanguard FTSE Developed World ex UK Equity Index
Lindsell Train Global Equity
-35.21% -19.33% -5.72% 3.40% 10.30%
IA Global funds have outperformed the MSCI AC World in each of the five past full calendar years…
Schroder MM Diversity
IA Global and MSCI AC World over 5yrs
IA Global and MSCI AC World cumulative returns
Schroder ISF Global Energy First State Global Resources MFS Meridian Global Energy Guinness Global Energy Legg Mason Martin Currie
Keith Ashworth-Lord, founder of Sanford DeLand Asset Management and manager of the CFP SDL UK
“People like Walter Schloss, Tom Knapp, Bill Ruane and Rick Guerin. While these names hardly register with many UK investors, what struck me was all of them, despite having different portfolios, were battering the S&P 500 year-in and year-out.” For Ashworth-Lord the common factor between all these investors was that Graham was the true north on their investment compass. As a result he began to read more about Buffett, through which he started to read about his investment partner Charlie Munger and from Munger he got to Philip Fisher, who is best known as the author of Common Stocks and Uncommon Profits. So how did Ashworth-Lord get from his reading habits in the mid-1990s to launching a fund carrying Buffett’s trademarked investment style on its back in March 2011? For 13 years through to 2008 he worked with Jeremy Utton, founder and editor of the Analyst magazine, who like him had long been looking for an investment philosophy to anchor to and also found Buffett. One of the first things the two did was attend the Berkshire Hathaway AGM in Omaha.
It was in Christmas 2009 when Ashworth-Lord got a phone from Clark saying that he and Mary Buffett wanted to run a fund using Buffet’s investment principles in Europe. Knowing at the time that he was running an investment partnership, and owing to the length of time they had known each other, the question asked was would he be up for it?
Prior to setting up Sanford DeLand Asset Management and the SDL UK Buffettology fund, Keith Ashworth-Lord was a self-employed consultant working with a variety of stockbroking, fund management and private investor clients. His work had been rewarded with the accolade of winning three top-three sectoral, and one top-ten general, Thomson-Reuters StarMine stock-picking awards. Ashworth-Lord’s professional career stretches back over 30 years in equity capital markets where his skills base covers investment analysis, fund management and corporate finance. His guiding principle is the philosophy of Business Perspective Investing – widely acknowledged as one of the most successful long-term investment strategies associated with Warren Buffett and other disciples of Benjamin Graham. Keith is a Chartered Fellow of the Chartered Institute for Securities & Investment, having formerly been an individual member of the Stock Exchange, and he holds the Investment Management Certificate of the United Kingdom Society of Investment Professionals. Outside work Keith enjoys music, philately, American history, sport and current affairs. He is married with a son and daughter.
Such an investment methodology naturally leads to a long-term approach and it may come as no surprise that some 50-60 per cent of the companies selected in the portfolio on day one remain in the fund today. Indeed, since launch Ashworth-Lord has sold only 12 companies, three of which were takeovers. “I am not a trader and I do not top slice and bottom fish,” he says. “In the past I was too trigger happy to make profits and I made many mistakes by selling out of things too soon. Now I am an exponent of running my profits and I don’t find it uncomfortable running large profits on businesses. Instead I find it lovely.” While some have suggested such an investment approach may sound a tad ‘boring’, in that he rarely sells or trades, Ashworth-Lord’s response is that if it is boring then “save me the excitement”.
“I am not saying other techniques don’t work but this is the discipline that works for me,” he says. “The key is never to doubt yourself and to be patient. If I cannot buy something at a price that makes sense, however much I like it, it will sit on a watch-list until the right opportunity presents itself. Just because you have done all the work, it does not mean you have to invest.” The overall result is a portfolio currently comprising seven FTSE 100 companies, eight FTSE 250s, five small-caps or fledglings and 10 companies quoted on AIM. “The fund is both sector and market cap agnostic,” he says. “The portfolio ranges from holding the £60bn mega-cap Diageo, right though to a £20m holding in the AIM-listed Driver. It is all about holding great businesses.” While having the Buffettology over the name of the door, Ashworth-Lord says he can never be a direct clone of Buffett. “There will be things he never tells anyone about,” he says. “However as long as I stay true to myself and the overall philosophy, over the long road I will be fine.”
CFP SDL UK Buffettology's top 10 holdings
Source: FE Analytics, bid to bid total return in sterling between 31 Mar 2011 and 28 Apr 2017
Sanford DeLand Asset Management’s Keith Ashworth-Lord explains how he ended up holding an exclusive licence to use Warren Buffett’s investment style.
Performance of CFP SDL UK Buffettology vs sector and index since launch
“I am very comfortable with the philosophy of analysis a business as though you were buying the whole business,” he says. “Some managers may prefer momentum or Growth at a Reasonable Price (GARP) investing, but for me that is all noise. All I am interested in is finding the very best businesses I can, which have what Buffett calls economic moats around them that makes them bomb-proof.”
4.70% 4.21% 3.80% 3.77% 3.66% 3.35% 3.26% 3.25% 3.23% 3.13%
“All I am interested in is finding the very best businesses I can, which have what Buffett calls economic moats around them that makes them bomb-proof.”
Buffettology fund, to describe the early days of his management career and he says he was both trigger happy and lacking any robust investment methodology.
FE Professional contributor
What makes these stocks bomb-proof is the fact they have superior operating margins, superior returns on capital and superior cash generation. Indeed, in Ashworth-Lord’s view if he is invested in a superior business with must-have products, technology or know-how, they should survive anything the market has to throw at them. “I pay no attention to top down issues such as Brexit or the US election,” he says. “In times of inflation, deflation or recession, these companies have the ability to price in the market which protects them. All I am interested in is if the business performing the way I expect and is it on track. As long as the answer is yes I will let the share price take care of itself.”
Though doing this, not only did Ashworth-Lord get to know the whole group of investors who called themselves the Buffettologists – such as David Clark and Mary Buffet – but on one occasion a mistake by Buffett’s secretary got himself and Utton a two-on-two interview with Buffett and Munger.
Source: FE Analytics
Having entered the industry in the mid-1980s as a trainee investment analyst, he headed up research at a couple of stockbroking firms (Henry Cooke Lumsden and Daiwa Europe) and by the mid-1990s he was running his own money. However, he admits it was something he was not finding easy. “I was all over the place,” he says. “While I will admit a stockbrokers office is not the best place to learn about investments, I thought there had to be more to it.” It was at this point Ashworth-Lord, whose career now spans over 30 years, had what he would describe as his investment “epiphany” moment when voraciously reading investment tomes. His attention was caught by Benjamin Graham, author of both Security Analysis and The Intelligent Investor, who is widely regarded as the father of value investing. “In the appendix of The Intelligent Investor was a piece written by Warren Buffett called the Superinvestors of Graham-and-Doddsville, where Buffett was looking at a group of investors, including himself, who were disciples of Graham,” he says.
Never doubt yourself and be patient
While having the Buffettology over the name of the door, Ashworth-Lord says he can never be a direct clone of Buffett. “There will be things he never tells anyone about,” he says. “However as long as I stay true to myself and the overall philosophy, over the long road I will be fine.”
“The key is never to doubt yourself and to be patient.”
Scapa Group Bioventix Trifast Games Workshop RWS Holdings Dart Group Mattioli Woods Liontrust Asset Management AB Dynamics Dechra Pharmaceuticals
“Fund management is a very competitive business and getting attention is hard, so having [Buffett’s] name above our door I could see working.”
Adam Lewis, FE Professional contributor
“I had run my own money using these principles since the late 1990s and was doing very well in a lousy market, so the methodology was working and was something I was comfortable with,” he says. “I also wanted to get back into running retail money; having ran some discretionary portfolios I was keen to get back into full time and paint on a bigger canvas. “They had trademarked the name Buffettology and proposed licensing the name to us exclusively for fund management in Europe and that was the green light. Fund management is a very competitive business and getting attention is hard, so having this name above our door I could see working.” After setting up Sanford DeLand as a fund management group, CFP SDL UK Buffettology was launched on 28 March 2011. Some six years later the fund has hit £139m, of which £111m has flowed in the last 16 months. For the uninitiated, the methodology followed by Ashworth-Lord is based upon Business Perspective Investing. Like Buffett, he looks to invest in quality businesses that he hopes to hold “forever and a day”.
As such, we decided to use the FE Analytics Market Intel tool to take a look at the funds that dwindled in popularity with professional investors in the second half of the year, only to capture their interest again in 2017 to date.
Elsewhere, European equities seem to have recaptured adviser attention, with five funds making it onto the list for some of the most substantial falls in traffic throughout last year and the biggest bouncebacks this year. These include Threadneedle European Select, Baring European Select, BlackRock European Dynamic, Schroder European Equity Absolute Return and Schroder European Alpha Plus. This could be due to the heightened geopolitical uncertainty and the ongoing struggles of European banks last year, which were potentially counterbalanced by the result of the Austrian election and the fact that Marine Le Pen did not win the French election in May. From here, however, themes that can be explained by the overall macro backdrop become less tangible. Five ethical funds made it onto the list: Kames Ethical Equity, Premier Ethical, EdenTree Amity International, Standard Life Investments UK Ethical and Kames Ethical Corporate Bond. The Kames fund, which is headed up by Audrey Ryan, actually saw the eighth- largest fall in adviser interest between the first and second half of last year but has had one of the top 20-biggest bounce-backs year-to-date. Standard Life Investments UK Ethical benefitted from the greatest overall leap in adviser interest between the second half of last year and 2017 to-date. Managed by Lesley Duncan, almost half of its entire portfolio is held in UK mid-caps, which could also explain its increase in popularity. However, the reasons that ethical funds across the board lost adviser interest throughout last year and regained it this year are pretty unclear. Simon Evan-Cook, senior fund manager at Premier Multi-Asset, said: “Perhaps it was due to market conditions at the start of last year. We’d seen a notable correction in January and February, concerns over deflation were reaching something of a crescendo while the UK government kicked off the EU referendum run-in. “The optimist in me would like to think that if you’re investing in an ethical fund, then it should be regardless of what macro events may be looming. But maybe these big-ticket worries trumped (no pun intended) concerns over ethical investing over this particular period.” Other funds that lost and regained adviser interest this year cover a wide range of different aims and investment philosophies. They include Jupiter Strategic Bond, Fidelity Asia, Unicorn Mastertrust and CFP SDL UK Buffettology.
"The optimist in me would like to think that if you’re investing in an ethical fund, then it should be regardless of what macro events may be looming."
7IM AAP Adventurous 7IM AAP Moderately Adventurous Artemis Strategic Assets Aviva Inv UK Equity Baring Europe Select BlackRock European Dynamic BlackRock UK Absolute Alpha CF Ruffer Total Return CFP SDL UK Buffettology EdenTree Amity International F&C MM Navigator Distribution Fidelity Asia Fidelity Emerging Markets Fidelity Special Situations Franklin UK Managers' Focus Henderson US Growth Invesco Perpetual Managed Growth Invesco Perpetual Managed Income Investec Cautious Managed Investec Emerging Markets Local JPM UK Dynamic
Jupiter Strategic Bond Kames Ethical Corporate Bond Kames Ethical Equity L&G UK Property Feeder Man GLG Japan Core Alpha Marlborough UK Micro Cap Growth MI Chelverton UK Equity Income MI Somerset Emerging Markets Natixis H2O MultiReturns Old Mutual UK Mid Cap Old Mutual UK Opportunities Premier Ethical Premier Income Premier Monthly Income Premier Multi-Asset Growth & Income Schroder Asian Income Schroder European Alpha Plus Schroder European Equity Absolute Return Schroder Income Schroder Recovery Schroder UK Dynamic Absolute Return
As such, funds with exposure to global-facing mega-cap stocks that pay steady streams of income may have seemed like the most appropriate way to deliver solid growth and income for clients. And as sterling plummeted in the immediate aftermath of the referendum, this train of thought was well-rewarded as investors sought to reap the benefits that exporting stocks offered. However, increasing expectations for fiscal loosening – which were strengthened by the election of US president Donald Trump in November – caused an aggressive rotation into value plays and stocks that were greater-exposed to the domestic UK economy.
The funds you’re finding more interesting than last year
jump right back up in 2017
Schroder UK Dynamic Smaller Companies SJP Corporate Bond SJP Equity Income SJP Global SJP Global Emerging Markets SJP Property SJP UK & General Progressive SJP UK & International Income SJP UK High Income SJP Worldwide Opportunities Standard Life Investments UK Ethical Templeton Global Total Return Bond Threadneedle American Threadneedle European Select Threadneedle High Yield Bond Threadneedle UK Equity Income Threadneedle UK Mid 250 Unicorn Mastertrust Unicorn UK Growth VT icf Absolute Return Portfolio
The results are certainly varied, suggesting that the outlook for this year is more clouded than ever. One discernible theme from the list is the return to researching UK mid-cap and smaller companies funds. This is understandable, given the rush out of UK-facing exposure at the end of June last year.
Source: FE Analytics Market Intel tool
Lauren Mason, senior reporter at FE Trustnet
The funds seeing the biggest bounceback in adviser interest
"The results are certainly varied, suggesting that the outlook for this year is more clouded than ever."
While there has indeed been a pullback in this rotation year-to-date, investor sentiment remains mixed given the announcement of the snap general election and fears that sterling can’t stay weak forever.
Old Mutual UK Mid Cap is a prime example of this as it saw the greatest fall in interest between the first and second half of the year. The five crown-rated fund, which is £2.7bn in size and headed up by FE Alpha Manager Richard Watts, went on to witness one of the largest increases in interest between the second half of last year and 2017. Other UK mid-and small-cap funds to have made it onto the list include Threadneedle UK Mid 250, Unicorn UK Growth, Schroder UK Dynamic Smaller Companies, Marlborough UK Micro Cap Growth and MI Chelverton UK Equity Income.
To do this, we built a list of all the Investment Association funds that saw their share of total research activity on FE Analytics decline from the first half of 2016 to the second half but then benefitted from an increase in research in the first four months of 2017. We then filtered this list for the 25 per cent of funds that were hit with the biggest fall in adviser interest but then were in the top 25 per cent when interest rebounded – all 60 meeting these criteria can be seen in the main table, presented alphabetically.
FE Professional finds out which funds were dropping down the research rankings at the end of 2016, only to
The struggles that UK investors faced throughout the course of 2016 have been well-documented. Many advisers understandably positioned their clients’ portfolios defensively during the first half of the year due to the impending EU referendum, not to mention the hunt for yield in a low interest rate environment.
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score of all the holdings – that formula does not truly show the diversification benefit that you have gained by calculating the ideal mix of holdings for a client’s portfolio. Indeed, the risk score of a portfolio can be lower than the average weighted risk score, and FE helps tell this story by providing the diversification benefit gained by investing in that portfolio’s mix of funds. This gives you another piece of evidence to demonstrate to your client the value of your advice. Of course, results will depend on the type of holdings and target risk of the portfolio e.g. for high conviction portfolios, you may be looking for as little diversification as possible. score of all the holdings – that formula does not truly show the diversification benefit that you have gained by calculating the ideal mix of holdings for a client’s portfolio.
FE Analytics Masterclass
All the research you have put into matching a suitable investment to your client’s level of risk is of course an important part of an adviser/client relationship, but being able to quickly and easily pull together the appropriate information into a clear and concise report for your client is an important consideration. We understand that reporting is important all the way through your relationship with a client and have therefore developed quick and easy, yet detailed reporting tools for your use. The Custom Portfolio Report Builder is one of the most powerful parts of the system – you can use the tool to create client specific (or even company wide) templates ensuring that only the information that you want to show you client is included on the final report. This most commonly includes cumulative performance, risk vs reward scatter chart, asset/sector/region breakdown and KII documents - all in one neat PDF with your logo on. All these features supply you with the evidence to support your conversation with your client. Diversification is a vital tool for an adviser and explaining this to the end investor is an important part of the service you provide your clients. Combined, the FE Risk Score and Diversification Benefit are great tools in this endeavour and helps to prove the value of your advice and service to your clients.
Simply put, diversification is a risk management technique. Diversification endeavours to smooth out unsystematic risk events that would otherwise disturb the overall returns of a portfolio, by using the positive performance of some investments to counterbalance the negative performance of others. It can be used to explain and analyse how grouping together different kinds of investments can reduce the combined risk of a portfolio while producing robust returns, compared to holding direct investments in a smaller number of funds. Researching and reporting diversification enables the adviser to help a client to better understand the risk of their investment – a key part of investment advice. Volatility is used as a measure of risk, representing the uncertainty over the size of changes in an investment’s value. Volatility is a key metric when considering how a selection of investments affect the returns for a given client’s risk tolerance. These are all important considerations for the client’s investment journey so there are a number of ways FE Analytics can help analyse and report on diversification.
Researching risk vs return of a portfolio
Using FE Risk Scores and Diversification Benefit to analyse a portfolio
Nobel Prize-winning economist Harry Markowitz famously said that diversification is the only “free lunch” in investing but expressing to clients exactly how this benefits portfolios can be a challenge without the right tools.
The FE Analytics training team explains why diversification research and reporting should be a key part of investment advice.
So how can I show clients the importance of diversification?
The Portfolio Comparison Report is great for use when explaining to a new client the benefits of moving them to another, more suitable proposition. After building the client’s existing investments into FE Analytics, you can show the client’s existing portfolio against the proposed option that is better suited to their attitude to risk and other characteristics that you have consulted with them on. Some of the data on the report that is highly prized by clients includes side-by-side comparisons of performance and rolling volatility on separate charts. Advisers have reiterated the importance of showing these together so a client can clearly see the historical impact that increased volatility has had on the return of the portfolio, and vice-versa. It also shows a clear visualisation of asset, sector and regional breakdown, another clear and colourful graphic that can be used to further demonstrate the diversification of the client’s investments Reporting on all the background fund research that has gone into building and deciding on a client suitable portfolio remains an important foundation of client meetings. The Fund Comparison Report can show up to five funds in a side-by-side comparison, giving you a great opportunity to be able to quickly and easily point out to a client why the funds made it into the portfolio. Data in the report includes; cumulative performance, volatility, charges, FE Risk Score and correlation. This report can also be used for replacement business; comparing funds side by side allows for easy reporting of evidence as to why one fund was chosen over another as a replacement in a client’s portfolio.
Find more information about training and support that FE offer at http://www.fetrainingacademy.com
Alternatively, please contact the Training Team if you have any questions (email@example.com)
Training consultant at FE
FE Professional contributor
FE Risk Scores define risk as a measure of volatility relative to an index of the 100 largest UK companies, which has a risk rating of 100. Instruments more volatile than the benchmark have a score above 100 and vice versa, giving a reliable indication of relative risk. The vast majority of funds have an FE Risk Score, along with fund sector averages and indices. Portfolios are also given a risk score. To gain a true representation of the relative risk score of the portfolio we do not simply take the average weighted risk
When researching the risk versus reward of funds or holdings, the scatter chart is a useful tool. For example, if you have more than 12 holdings, use the interactive scatter chart to identify certain levels of performance and volatility. Alternatively, if you are researching funds to make a switch in a portfolio, you can plot all the funds within an entire portfolio. This enables easy identification of the funds that return the most, whilst simultaneously allowing you to see if the fund has suitable levels of volatility to affect the change you are looking to make.
Ongoing management of portfolio risk
Low Correlation = Diversification? How can I tell?
One of the main benefits of diversifying a portfolio is that by doing so, the overall risk of a portfolio is lowered. The components of a diversified portfolio can be clearly shown by utilising the correlation chart, to demonstrate how closely correlated the holdings are. Green represents lower correlation; the more closely linked behaviour between the funds, the further into red the funds become. This allows easy identification of sudden converging of fund strategies if something drastic was to occur in a particular sector or group of funds.
Telling clients about investing’s
US Dollar moderately overvalued
Why we're still backing European equities
So, what could be the catalysts for improving performance this year? Although the political boost is already priced in, two other drivers remain in place: easing monetary policy and euro weakness. Although there have been talks about the ECB’s eventual exit from quantitative easing, we are still far from reaching a consensus amongst members of the executive board. Any news that the ECB’s might delay this exit could further help European equities, as we are now aware of the impact of mass bond buying on security prices. Additionally, the difference in interest rates and inflation levels between the US and Europe is also likely to keep the euro at its current low level. Finally, European valuations do not appear overly undervalued across metrics such as price/book ratio, which could further lead to repricing.
On a year to date basis (as of end of April 2017), the FTSE World Europe ex-UK index returned 8.51 per cent for a UK-domiciled investor. European equities have managed to outperform other developed equities such as US equities (the S&P 500 index is up 2.15 per cent) and Japanese equities (Topix index up 1.78 per cent). Except for emerging markets equities, European stocks are the second best performing asset classes in 2017 so far. While the drivers of this are multiple, the main one remains the political landscape. Over the recent years, investors stayed away from European equities as the fear of a eurozone breakup was tangible. This was once again the case in 2017 as investors feared the triumph of populist leaders in the Netherlands and France. However, French voters stayed away from this populist revolution and backed up the social-liberal candidate Emmanuel Macron while the Dutch election was won by centre-right prime minister Mark Rutte. Other drivers of performance remain the European Central Bank decisions. Contrary to the Fed, the ECB has maintained its negative interest rate and quantitative easing policies. Manufacturing and services PMIs have also accelerated sharply in 2017, with figures at a high since the crisis suggesting rise in consumption driven demand. Finally, the euro still trades at low levels, driving the more export-orientated European economy. Using different valuation models, the euro remains below its fair-pricing level (courtesy of The Daily Shot).
Historic trailing price to book of European equities
The universe of European equity funds is also highly diverse and allows investors to play different outcomes. For example, Invesco Perpetual European Equity is more exposed to value (and the reflation trade) and the underlying European domestic economies. Going into 2017, manager Jeffrey Taylor and his team sees recovery potential among select energy companies, which were severely hurt by the falling oil prices in 2014 and 2015. On the contrary, investors might expect the so-called ‘Trumpflation’ trade to unwind and would prefer being exposed to growth quality names. Jupiter European could be ideal for such investors. Fund manager Alexander Darwall has built up an impressive track record in European equity investing and this strategy and style of buying high-quality global companies has now weathered several market environments. The fund could sit well as a core European equity holding, should investors believe that more globally oriented, higher-growth companies will continue to outperform a more balanced approach.
FE Invest’s Charles Younes explains why the team continues to like European funds, despite the region’s difficult past and political risk earlier this year.
FE Invest research manager
Spread between French and German government bond yields
Despite the uncertainty around the elections in Netherlands and France, European equities have started the year on a strong footnote and the FE Invest team continues to look favourable on some funds focused on the continent.
Source: Goldman Sachs Global Investment Research, OECD
Past performance is not a guide of future performance and I am far from believing that European equities can return another 8.51 per cent in the coming four months. This is especially the case as markets are becoming more efficient in repricing news. Even worse, markets have bought the rumour and sold the news this year. For example, using a trading strategy to buy on the day of an actual election would have been costly. So far this year equity investors have lost money by buying Dutch or French equities relative to other European equities, following the Dutch and French elections. Similar pattern could be seen on sovereign bond markets. The spread between French and German government bond yields narrowed several days before the actual election day (see graph below), while the spread widened significantly at the beginning of the year. Bearing in mind that the odds of Merkel winning the 2017 German elections is close to 85 per cent currently, it would be fair to say that the market has already repriced the political risk linked to elections in Europe this year.
Given that the Eastspring fund has a strong value bias and the Baillie Gifford holding focuses on income, neither would mimic the Japanese market in the way a tracker does. But the portfolio manager is an advocate of active management, noting that the two funds allow Quilter Cheviot’s portfolios to take a nuanced exposure to the areas the team thinks will drive returns away from the index. “We are fundamentally an active house in terms of the resource that we put into our investment fund research and the things that we’re looking to employ at both a fund selection and asset allocation perspective,” Doherty said. The other area the team is strategically overweight is Europe, which he says since the French election has become another favoured area.
FE Professional finds out why the team behind Quilter Cheviot’s managed portfolio service has been paying more attention to Japan and Europe.
“We think it will be a beneficiary of a potential global cyclical upturn and are generally speaking quite positive still on the outlook for the global economy and for markets in general.” He describes Japan as being “relatively cheap”, noting that is it is very difficult to call anything “screamingly cheap” at the moment in any asset class, let alone an equity region. “The final part of the puzzle for investors is the politics, which have been in the headlines for much of the developed world. Politically Japan is looking a little less risky than some other places,” the portfolio manager adds, drawing attention to the UK and US being among those with overhanging political issues. In the space the team is using “two very interesting managers” that its in-house analysts have unearthed.
10 largest funds in Quilter Cheviot's balanced model
"Japan is one of preferred allocations at the moment from an asset allocation perspective."
Easing political risks, the prospect of an uptick in economic growth and relatively attractive valuations mean that Japanese and European equities are two of the preferred asset allocations of the team at Quilter Cheviot.
Simon Doherty became the lead manager of the range just days before the EU referendum in June 2016 and has been reviewing what has been a very successful and longstanding investment service, testing each aspect to make sure it is still fit for purpose. While he hasn’t made wholesale changes, one of the areas he has been adding to is Japanese equities, which despite representing a low percentage of overall portfolio (3.8 per cent in the balanced portfolio) is a key overweight for the models. “Japan is one of preferred allocations at the moment from an asset allocation perspective and one of our significant overweights relative to our strategic benchmarks,” Doherty said.
10.60% 9.75% 6.80% 6.80% 4.55% 4.55% 3.90% 3.90% 3.75% 3.75%
The fund, which the team has held almost since its launch in 2016, is quite different to EastSpring. “As the name suggests it has a bit of an income yield tilt but we see that fund as a very good way of playing some of the emerging shareholder friendly corporate governance type of themes that we’re seeing emerge with Abenomics and some of the initiatives that are taking place there,” he explained. Both funds are held by Quilter Cheviot on an equal allocation basis as “the combination of the team, the process and some of the backdrop paired with the Eastspring works very well and Japan has been a good allocation of late”, according to Doherty.
The first is the team at Eastspring through the Eastspring Japan Dynamic fund, which has a quite pronounced value tilt. It has performed very well over one, three and five years to the end of April 2016, sitting in the top quartile of the FO Equity – Japan sector over all three time frames. The four FE Crown-rated fund, run by Dean Cashman, has returned 108.87 per cent in sterling terms over five years, around 25 percentage points ahead of its average peer and the MSCI Japan index. “Alongside that we have exposure to a relatively new fund, albeit a fund at a very well regarded Japanese equity desk and that is the Baillie Gifford Japanese Income Growth fund run by Matthew Brett,” Doherty said. The fund, which the team has held almost since its launch in 2016, is quite different to EastSpring. “As the name suggests it has a bit of an income yield tilt but we see that fund as a very good way of playing some of the emerging shareholder friendly corporate governance type of themes that we’re seeing emerge with Abenomics and some of the initiatives that are taking place there,” he explained. Both funds are held by Quilter Cheviot on an equal allocation basis as “the combination of the team, the process and some of the backdrop paired with the Eastspring works very well and Japan has been a good allocation of late”, according to Doherty.
Asset breakdown of Quilter Cheviot's balanced model
Jonathan Jones, reporter at FE Trustnet
Nothing is “screamingly cheap” at the moment
“Our overweights in the equity space at the moment are in the US, Japan and Europe so international equities with the exception of emerging markets and Asia Pacific,” Doherty said. “The political risk hurdles that we’ve seen year-to-date have thus far largely been tackled and overcome without too much concern,” he said, referring to the French and Dutch elections, which passed by without any market shocks. “The markets have reacted positively to that and it’s part of our ongoing review. It is area that we have looked at very closely with recent political events that have been taking place and we like what we’re seeing in Europe – we’re still quite positive on the region,” the manager said. Unlike Japan, the manager has identified longstanding managers that he says have served him well – Alice Gaskell and Andreas Zoellinger, who run the five FE Crown-rated BlackRock Continental European Income fund, and FE Alpha Manager Paul Wild’s four crown-rated JOHCM Continental European fund. Both funds are in the top quartile of funds in the IA Europe ex UK sector and have beaten both the sector and MSCI Europe ex UK index over the last five years.
Allianz Gilt Yield I Inc BCIF North American Equity Tracker H Acc Artemis Income I Inc Majedie UK Equity X Inc Old Mutual UK Alpha U2 Inc Investec UK Alpha J Inc Net GBP Vulcan Value Equity GBP II Inc Iridian US Equity I Dist GBP Legal & General UK 100 Index C Inc CF Woodford Equity Income C Sterling Inc
The Quilter Cheviot managed portfolio service has been available to investors since 2001, making it one of the longest-standing ranges within the marketplace. Initially launched with three investment strategies – growth, balanced and income – the team has expanded that range out to seven over the successive years with cautious, global growth and conservative offerings launched in 2005 and a global income strategy unveiled in 2012.
Source: FE Analytics
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