PruFund Growth Celebrates 15 Years | IFA 84 | Dec/Jan 2020 by Clifton Media Lab

For todayâ&#x20AC;&#x2122;s discerning financial and investment professional

PruFund Growth Celebrates 15 Years 2020 Vision: What might 2020 have in store?

PruFund shining bright for investors

December/Januar y 2020

ANALYSIS

REVIEWS

UK smaller companies in focus

ISSUE 84

COMMENT

INSIGHT

11 YEARS. 1,083 PRODUCTS. 7.64% P.A. AVERAGE RETURNS. 0 LOSS OF CAPITAL. ISN’T DATA WONDERFUL? In these volatile times, isn’t it nice to see ﬁgures like these? Of course it is – as the 11,000 or so advisers who have recommended our products will attest. Find out more about what we offer at Investec for Advisers.

Past performance is not a guide to future performance. This communication is intended for financial advisers only. Performance figures correct as at 30/09/2019 relate to Investec Structured Products, which is a trading name of Investec Bank plc. Investec Bank plc is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. It is a member of the London Stock Exchange registered under Financial Services Register reference 172330. Investec Bank plc is a limited company registered in England and Wales at Companies House. Our registered office is 30 Gresham Street, London EC2V 7QP and our registered number is 00489604. Our VAT number is 480912639.

CONTE NTS

Dec/Jan 2020

CONTRIBUTORS

Ed's Welcome

Editor's Rant - Twenty Twenty Vision

Brian Tora

Michael Wilson considers what the New Year might have in store for market watchers

An Associate with investment managers JM Finn & Co.

Better Business Tracey Underwood highlights the effective use of management information in the financial planning business

Richard Harvey

A distinguished independent PR and media consultant.

Making experience count In celebration of the 15th anniversary of the PruFund Growth Fund, we talk to Charles Griffith, Head of Multi Asset Portfolio Management, M&G Treasury & Investment Office, about the investment strategy behind PruFund funds

Tracey Underwood

Brian Tora

Founder of PACE Solutions

Markets through a lens: Brian Tora reflects on what lies ahead for the global economy and investment markets in 2020 GETTING UP TO SPEED WITH EIS AND BR:

EISA Event

FREE ‘PLAN TO GROW’ EVENT WITH EISA DECEMBER 5TH EISA is the official trade body for the Enterprise Investment Scheme. It is a not-for-profit organisation whose principal goal is to help SMEs obtain the funding they need to grow their business and help drive the UK economy forward.

Michael Wilson Editor-in-Chief editor @ ifamagazine.com

A SHIFTING LANDSCAPE Both EIS and BR investments are changing. It’s vital that investors and especially their advisers make themselves aware of the implications. They need to be up to date with the important areas of investment, income tax, capital gains tax and inheritance tax advice. What action should advisers be taking on behalf of their clients? How do they advise clients confidently, competently and comprehensively? ‘Plan to Grow’ is designed to provide the answers to these questions and more; it will bring together investment and tax efficient industry experts, commentators and Government representatives. They will provide planners, paraplanners and advisers with a fully CPD qualifying session of informed

opinion from thought leaders spanning both the EIS and BR markets covering the issues to be faced when advising in this area. NEW HORIZONS Delegates will get to understand how EIS/BR investments calculate their charges and performance. Experts in the industry will reveal how changes in the EIS and BR market affect their clients, unlock ideas on how to incorporate EIS/BR investments within a client’s financial plan, hear direct from the Government on its view of the EIS/BR sector, get the inside story from entrepreneurs and investors on their experience of EIS/BR and hear our keynote speaker on why now is an exciting time to invest in Britain’s entrepreneurial companies. They will also gain insights into: The EIS and BR market How to advise clients confidently and competently on tax efficient investments How to invest diversely and understand the risks and rewards.

GB Investment Magazine · October 2019

THE EXPERTS The agenda and line-up is constantly being added to, but confirmed speakers currently include: Eddie Grant of Technical Connections, who will take a look at the technical side of EIS and BR investing and give some practical tax and investment planning advice to use with clients. Marcus Stuttard, Head of AIM at the London Stock Exchange will discuss the SME sector and the importance of helping more companies scale up so they can benefit from larger investments from AIM and other markets. Brian Moretta, Hardman & Co, examines how BR’s popularity has surged in the past few years as increasing numbers of people accrue estates that may be subject to inheritance tax. Both the value of assets invested, and the number of products, has grown very quickly. However, how transparent is the industry and how can advisers review the market properly? In his presentation, Brian will give a brief overview of BR strategy options and their prospects, and an insight into some of the potential issues.

Kelly Tolhurst MP, Small Business Minister, will give the Government’s view of EIS and BR investments. Why does the Government continue to support both the schemes and small businesses and what do they get in return for their investment in the schemes? THE TIME, THE PLACE ‘Plan to Grow’ will be held on Thursday 5 December 2019 at The Great Hall, One Moorgate Place (the home of the Institute of Chartered Accountants in England and Wales), London EC2R 6EA. Breakfast and lunch is included.* Registration will be at 0815 for an 0900 start, and the event will wrap up at 1430. Although ‘Plan to Grow’ is free, for planners and advisers who are not already EISA members there is an additional bonus as attendance at this event provides them with free membership of EISA. *Attendance at ‘Plan to Grow’ is open strictly only to those who work for Financial Planning, Accountancy or Advisory firms.

GB Investment Magazine · October 2019

Getting up to speed with EIS and BR. A heads-up for this EISA event taking place in December

The IFA Magazine ESG round table debate A preview of this event which will be featured in detail in the February 2020 edition of IFA Magazine

28 Sue Whitbread Editor sue.whitbread@ ifamagazine.com

How big is the BBB problem? Vanguard’s Caroline-Laure Negre looks at what it means for downgrading and refinancing risks in 2020

2020 Vision - opportunity or threat?

Alex Sullivan Publishing Director alex.sullivan @ ifamagazine.com

Kim Wonnacott Technical Sales and Marketing kim.wonnacott@ifamagazine.com

Ryan Hughes of AJ Bell identifies some sectors where he sees value for investors in 2020

Small talk Invesco’s Jonathan Brown and Robin West share their views on the outlook for smaller companies in 2020

Where next for UK Smaller Companies? Matt Cable, Jupiter Asset Management, talks to Sue Whitbread gives his outlook for UK Smaller Companies in 2020

2020: climate crisis conscious investing

Georgie Davey Designer georgie.davey@cliftonmedialab.com

Jon Forster, Impax Environmental Markets, explains why he believes the investment case underpinning environmental markets has never looked so compelling

Planning in practice Paul Campion, wealth planner at Succession Wealth, considers possible changes in pensions and other areas which might impact on financial planning decisions in 2020

Credit Investing Give more credit to unconstrained investors: Investec’s Jeff Boswell explains why dynamism is key given today ’s shifting market dynamics in the credit market

‘Tis the season to be jolly but, for Richard Harvey, this year it’s not quite so simple

Career Opportunities From Heat Recruitment

‘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. The value of investments and the income from them can go down as well as up and you may not get back the amount originally invested. IFA Magazine is for professional advisers only. Full details and eligibility at: www.ifamagazine.com

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Dec/Jan 2020

E D'S WE LCOM E

STEP INTO CHRISTMAS

ith Christmas just around the corner, it’s the time of year when the financial planning community looks ahead to 2020 and what that might have in store. It all sounds so simple doesn’t it. It’s the time of year when we reflect on threats and opportunities to our businesses as well as what has worked well over the past year and what hasn’t, so that we can position ourselves as efficiently as possible for the New Year. As we enjoy the spectacle of seeing our homes, buildings and streets lit up with festive lights and decorations just like every other Christmas, somehow it all feels rather “normal”. But perhaps that’s where the vision of a “normal” festive period – whatever that might mean – comes to a rather abrupt end. 2020 VISION Something we know for sure is that the coming general election, the ongoing Brexit uncertainty and the continuing worry over the climate emergency are all throwing a whole new light on the end-of-year planning and decisionmaking that financial planning businesses will typically be in the throes of just at the moment. I have to admit that the IFA Magazine office’s crystal ball is looking even more foggy than usual so I must confess that we cannot promise you a particularly clear vision of certainty at this moment in time. We can, however, offer you the insight and opinions of a range of market professionals to find out what they are thinking when it comes to their expectations for 2020. Our own Mike Wilson kicks things off as he reflects on all the current uncertainty to try and analyse what 2020 might have in

store for the global economy and investment markets. We’re also grateful to Brian Tora and our host of other contributors for sharing their 2020 visions with us. HAPPY ANNIVERSARY So much has happened over the past fifteen years, with bull and bear markets playing their part in strengthening investors’ views in all sorts of different ways. The PruFund Growth Life Fund has served investors well since it was launched fifteen years ago this November. To celebrate this landmark anniversary, we talk to Charles Griffith, Head of Multi Asset Portfolio Management, at M&G Treasury & Investment Office, about the investment strategy behind the PruFund funds and why he feels they are so well suited to today’s uncertain market conditions. AND FINALLY… As we sign off for 2019, it falls to me to share Elton John’s message from way back in 1973 (yes, it was that long ago!) and to say: ‘take care in all you do next year, and keep smiling through the days. If we can help to entertain you, oh we will find the ways. So merry Christmas one and all.’ On behalf of the whole team here in Bristol, we wish all our IFA Magazine readers and contributors a relaxed and peaceful festive period as well as a happy, healthy and successful year in 2020 - whatever the winds of change might throw in your direction. Sue Whitbread Editor IFA Magazine

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PruFund Growth Fund Shining bright for 15 years

We’re celebrating the 15th anniversary of the PruFund Growth Fund, a fund that’s endured uncertainty, imitation and choppy markets to deliver steady long-term returns. Discover a smoothed investment journey for your clients at pruadviser.co.uk/prufund15 This is just for UK advisers – it’s not for use with clients. We can’t predict the future. Past performance isn’t a guide to future performance. The value of any investment can go down as well as up so your customers might get back less than they put in.

Prudential is a trading name of Prudential Distribution Limited. Prudential Distribution Limited is registered in Scotland. Registered Office at Craigforth, Stirling FK9 4UE. Registered number SC212640. Authorised and regulated by the Financial Conduct Authority.

Dec/Jan 2020

E D'S RANT

TWENTY TWENTY

VISION

We all know how to read the road map, says Michael Wilson. Of course we do. But is that shimmering vision on the blue horizon an oncoming juggernaut?

t ought to be so easy, oughtn’t it? Here we are, sitting on virtually all-time equity valuations, with trade wars rumbling and the IMF forecasting the slowest global growth rate since 2008. With the world’s most important election looming next November, and Britain’s own future dangling on another poll on 12th December. Clowns to the left of us, jokers to the right. Here we are stuck in the middle with nowhere else to go.

This month I want to give due deference to the skilled and highly-revered analysts who watch over us on the world’s economic behalf. But also to ask whether their models are really up to scratch? There are those among us who suspect that we’re watching the wrong indicators, and that there might be more life in the post-2008 bull market than the traditional measures would have us believe.

And that’s just the macro environment! The investment scene, as any long-term China bug can tell you, is a whole ‘nother dimension which might take its lead from the economic situation, but then again it might not. Dammit, even if we could read the eco-political runes correctly, we’d only be halfway to working out the market prospects. Welcome to 2020, the land of who knows where?

“There are two kinds of forecasters,” said JK Galbraith: “Those who don’t know, and those who don’t know they don’t know.” Gosh, I wish I’d said that, Oscar. But after nearly forty Christmases of phoning up fund managers and analysts, and of hearing them all insist that they only ever make December forecasts for fun, I jolly well ought to have got the message by now.

SOME PEOPLE NEVER LEARN…

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Which is that economics has no absolute laws and no red lines that can’t be fudged or stretched - at least, in the short term. And that even if we had economic certainty, there’s no certainty that stock or bond valuations would take any notice. And that even if we knew how markets would be, we’d still be powerless in the face of inverted yield curves, negative interest rates, and a billion investors with cash waiting to buy on the dips. And that Keynes’s line about irrational markets is as valid today as it ever was.

But despite that, frankly, President Xi seems not to be pushing for China’s GDP to exceed next year’s target rate of 6% to 6.5%. He’d rather reduce the heat in the shadow banking sector, which has become over-leveraged in recent years. And, I’d add, although that might be a sound move for the stability of the country’s financial system, it doesn’t put very much fire in the belly of a foreign investor looking for a catch-up to the Shanghai p/e ratio (currently 14).

But what the heck, I’m, going to have a crack at this prediction game anyway. Although not before I’ve chucked another rock into the pool of our so-called assumptions. Have we understood this Gross Domestic Product thing properly in the first case?

THE EUROPEAN EXCEPTION?

THE MAGA CONUNDRUM The reason I ask, of course, is that Donald Trump’s America has got most of the right-thinking world scratching its head to figure out how he ever managed to pull such a very substantial rabbit out of the presidential hat? Even the estimable Gavyn Davies, a former international managing director at Goldman Sachs, and “wise man” to John Major’s Treasury, conceded in a recent Financial Times commentary that Trump’s $1.6 trillion tax handouts did indeed seem to have added 1.6% to GDP during 20172018. And that America was currently running at very close to full capacity. Extraordinary. So they weren’t just empty calories after all? But were in fact a credible reason for the continued surge in US equity prices, which last year took the Shiller CAPE value of the S&P 500 to 33 - since when they have subsided to a (ha ha, relatively) affordable 30. Okay, that’s still getting on for double the historical mean of 17, but these are strange times, for all the aforementioned reasons, and then some.)

Alas, as for Europe, Davies can’t seem to see very much room for optimism in 2020. The short-lived upturn in 2016-2018 resulted, he suggests, from “a broadening of the European Central Bank’s unconventional monetary stimulus, normalisation of bank credit growth in the eurozone’s indebted economies and an easing of deflationary fears.” But all that seems to have run into the sand in the last 18 months or so: many other commentators have noted that the ECB has all but run out of fiscal bullets, now that eurozone interest rates are nudging zero and the bond yield on government paper is turning steadily negative.

the sword of Damocles seems to be hanging over so many economies at the moment, and not just within the EU

Like any good economist, Mr Davies is careful not to sound too convinced about 2020. Further growth in a full-capacity US, he says, is going to be hard to find, and worries about the prospect of a hard-left Democratic candidate for the November election are already subduing Wall Street sentiment. Worse, perhaps, is that solid global growth in manufacturing production is obscuring a much weaker performance from services, where PMI Market indicators fell by a full 1.5 points between July and October.

Whatever it takes to jump-start a eurozone GDP growth rate that’s fallen to just 1.1% in 2019 (European Commission forecasts in October), a drop in interest rates probably isn’t it. The Commission has already dropped its forecast for 2020 and 2021 from 1.4% to just 1.2%, but that isn’t so much because of US trade threats. Rather, it seems to reflect a general dullness in all the major economies: of the larger EU members in mid-2019, only Spain, Denmark and the Czech Republic were beating 2% growth, with Germany making just 0.4% and Italy just 0.3%.

At the same time, Davies suggests, China appears to have taken its own path. Trump’s trade war threats against the People’s Republic are being effectively absorbed by Beijing, which has been loosening fiscal and credit policy so as to increase domestic demand as its export prospects diminish.

On the bright side, there was 5% to 6% to be had in Ireland, Poland, Hungary and Ukraine, but all of those countries were presenting other worries of their own as 2020 approached. Ireland’s chances of a rebound during the new year are likely to depend on the outcome of

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E D'S RANT

the Brexit negotiations, but the European Commission has noted solid Irish construction activity and healthy rates of consumer activity. (To which we’d add that the migration of some London-based money during the Brexit scrummage has probably done no harm.) That said, the sword of Damocles seems to be hanging over so many economies at the moment, and not just within the EU . Russia’s projected economic growth in 2019 is down to 1%, and Turkey’s will be lucky to scrape above zero, says the Commission. THE VIEW FROM PIMCO But come on, chaps, it’s Christmas soon, and we could all do with something more positive to warm up the Bleak Midwinter. Surely the level-headed people at fixed interest specialists PIMCO can inject a little bit of cool intelligence into all this? Indeed they can, but sadly they don’t have anything very different to say. September’s quarterly report, tabbed “Cyclical Outlook”, bore the unpromising title “Window of Weakness”, and it didn’t hold back on its recommendation that investors should aim “to focus on capital preservation, to be relatively light in taking top-down macro risk in portfolios, to be cautious on corporate credit and equities, [and] to wait for more clarity.” Gee, thanks guys. Can’t you do better than that? Yes, they can. PIMCO says that it expects global GDP growth to “slow to stall speed” during the first half of 2020, with US growth dropping to just 1%. A rate which, it says, heightens America’s vulnerability to external shocks. Now, I’d have to protest that I personally don’t buy that argument in all its damning force, because I’m pretty sure that Donald Trump will unleash another shower of taxbreak goodies as the US economy slows and the November election nears. But I digress… In the meantime, PIMCO adds, there are signs of some things going right. The group forecasts (accurately, at the time of writing) that US-China trade tensions will remain in low-boil mode while Trump and Xi sort things out. It likes the strategies developing in some emerging markets, and it says it’ll be favouring modest overweights in EM currencies. PIMCO notes, like Gavyn Davies, that China’s leadership is taking fiscal loosening steps that will de-claw America’s

trade threats, and it reckons on seeing 5% to 6% GDP growth in 2020 from China and 6.5% to 7.5% from India. On the other hand, it’s not expecting more that 1.25% from the eurozone or 0.75% from Japan. Latin American investors will need to be choosy – but Mexico and Brazil are both forecast to beat 3.5%, as is also Russia. “GDP IS FAKE NEWS” Are you feeling depressed yet? Let’s see whether we can lighten your seasonal mood with a question that comes up every few years, but which has rarely seemed so relevant as it does right now. Can we honestly feel confident that Gross Domestic Product figures are worth the spreadsheets they’re written on? And if not, do we need to revisit our investment assumptions? The reason I ask (surprise, surprise) is that we really don’t understand why Trump’s sugar pills have generated so much apparently genuine growth. Could it really be that the markets have intuited an upward trend that the economists have not built into their forecasts? I refer you, dear readers, to a recent report (https://think. ing.com/reports/gdp-a-digital-remix/ ) by ING’s chief economist Mark Cliffe, in which he and John Calverley, of Calverley Economic Advisors, query the validity of the entire economic construct, and then wind the calculations back by thirty years or so to show how we’ve all been ignoring productivity factors that we haven’t even been aware of. To put it briefly, Messrs Cliffe and Calverley say that the conventional ways of measuring GDP don’t take account of the long-term contribution from advanced technology, which they say has been quietly slipping 0.4% a year into our quality of life since the 1990s without our noticing . Then there are the missed enhancements from the service sector, which isn’t properly valued either – and finally there’s what they mysteriously call “intangible activity”. The result, they say, is that at least 0.75% of real annual GDP growth hasn’t been going into the statistics for so long now that all our calcs are out of kilter with the daily experience - which is that things are getting better all the time. Rather startlingly, Cliffe and Calverly claim that the actual invisible enhancement might be as high as 2% a year – and that “If GDP has been underestimated by 1 per cent per annum since 1990, then median income has risen [by] 50 per cent instead of the 15 per cent recorded.”

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That, together with the falling real prices of technology, energy and food, might explain why America’s squeezed middle classes haven’t been rioting in the streets while the country’s profits growth has slipped inexorably into the pockets of the top 1% - and while their own salaries have (apparently) stagnated. ANYTHING ELSE? And then think of the previously unthinkable option of using alternative currencies when settling a bill. I’m not writing off the chances that bitcoin and the rest will storm the global financial community – only last October, Philadelphia Federal Reserve bank president Patrick Harker told a community banking conference that it was “inevitable” that central banks, including the U.S. Federal Reserve, would start issuing digital currencies. Why, China is planning a national “stablecoin” called the Digital Currency Electronic Payment (DCEP), apparently in an attempt to swamp Facebook’s cryptocurrency Libra, which no government likes. Nor is Mr Harker alone in this conviction. Agustin Carstens, the general manager of the Bank for International Settlements (BIS), was recently quoted as saying that central banks will soon be forced to issue their own digital currencies. (Yes, really.) And in a way, that might counter the worry that unregulated third-party currencies such as Libra might undermine the fiscal stability of existing money forms.

Dec/Jan 2020

the majority of the lavish pre-election promises that it has made to the voters. Although the Chancellor who used to be Sajid Javid will have no option but to abandon the planned return to a balanced budget, January: The Year of the Rat begins in China on 25th January. The first animal in the Chinese zodiac cycle, the rat represents wealth, surplus and success. Unfortunately, the last Year of the Rat was in 2008. February: The UK’s Brexit extension is due to have expired on 31st January. Will the EU allow more time? It seems improbable unless we have either a full deal or a Labour government promising a referendum. But the transitional arrangements should provide at least some stability. June: The usual mid-year spike in oil prices fails to materialise, mainly because of uncertainty in the emerging markets. Although Middle East military threats tend to diminish in the summer months because of the searing heat, disruptions of other kinds seem likely to continue. September: Hong Kong’s Legislative Council elections are due to be held. Likely to impact on financial markets unless protests can be tightly controlled. October: Asteroid 2018 VP1 will steal valuable newspaper column space from the upcoming US elections, causing alarm and panic throughout the world’s apocalypse believers. Although small enough to be susceptible to unpredictable gravitational pulls, NASA says it is currently due to pass the earth safely, on 2nd November, missing Washington DC by 260,276 miles.

At the end of the day, a conventional currency depends on some economic fundamentals – GDP, trade, bond yields and the like – and that’s where its ultimate credibility comes from. We can’t know yet whether a digital currency from a central bank would carry the same kudos, but I suspect we’re about to find out.

November: Donald J Trump secures a second term of office, having seen off a left-of-liberal Democrat challenger with a yuuuge tax break that will ensure that the Senate doesn’t endorse the impeachment proceedings. But that his wings will have been permanently clipped .

OLD BORE’S ALMANAC, 2020

December: Currently the end date for the Brexit transition period. A free trade agreement is, in theory, due to have been signed by the 31st. Good luck with that one, chaps.

Much though I’d like to dodge the seasonal flak, not to mention the ignominy of getting it all wrong six months down the line, here’s my personal twenty-twenty, fingerin-the-wind, guaranteed dead cert betting card for the New Year. No, don’t thank me, it’s been a pleasure. Give my regards to your seasonal bookmaker.

I’ll tell you one thing, though. 2020 will probably be the year I stop saying two thousand and twenty, and start saying twenty-twenty. It’s never too late to lose an ingrained habit.

January: Boris Johnson’s triumphantly re-elected government sets about the important task of forgetting

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BETTE R BUSI N ESS

THE EFFECTIVE USE OF MANAGEMENT INFORMATION With 2019 drawing to close, Tracey Underwood has some practical suggestions for a New Year’s resolution that financial planning businesses would do well to embrace – and that is to review your approach to using MI

any financial planning firms hold a wealth of information within their information systems but do not always use this effectively to inform them what is happening in the firm. Decisions can often be made on ‘feelings’ rather than on factual information.

My suggestion is that when doing so that you concentrate on what is important and really look at the detail if there appears to be a problem. Some examples of effective MI you might want to gather could include the following: • Initial & recurring income

Of course, you do not need masses of information to be able to make decisions but what you do need is effective management information (MI).

• Overheads (costs/salaries)

MIGHTY MI

• New clients including source of referral, client service segment

The starting point is to decide the answers to the following questions;

• ‘Lost’ clients • Client demographic; age, location, family

• What MI do we need?

• Complaints

• Who is going to produce it?

• Portfolio returns (particularly for firms whose ongoing income is intrinsically linked to this)

• How frequently do we need it? Once you’ve worked those out, you’ll then need to set yourself benchmarks/time periods so that you can identify trends.

• Funds under management – new money, net new money & reinvested

To ensure that you get the most out of your MI you need to be using a good client management system. But that’s only half the battle. The other vital ingredient is to ensure

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that you have someone within your team who is effective at managing the quality and extraction of the data. This will minimise the time spent on collating the information and maximise time spent analysing trends. It may take a few months, even years, before you start to collate information that you can use for analysis and to make decisions but you’re well on your way. DON’T LOOK AT YOUR MI IN ISOLATION Firms can often make the mistake of looking at their MI in isolation. However, when looked at collectively, it can provide a meaningful insight into what is actually happening at the firm. For example, many firms set themselves a target of attracting new client money. On its own this goal could look very impressive but by combing it with other data such as client demographic, net new money, overheads and portfolio return analysis, this gives the firm an insight into whether there is actually any real growth going on. XYZ FINANCIAL PLANNING Let’s look at an example of XYZ Financial Planning to illustrate my points: We’ll say that XYZ has attracted new client money of £20M this year but on a net basis this actually amounted to just £15M as £5M had been withdrawn. Their client demographic suggests an elderly population of clients that are in decumulation. Coupled with this, their overheads show a steady increase and portfolio returns (and thereby ongoing income) have been stagnant. So, by combining all of their MI data, we can see that overall growth at XYZ has been less impressive. It could also suggest a longer-term issue of declining (net) new money and rising costs – which would need to be addressed as a matter of priority. However, having got this far, this now allows the firm to make justifiable changes to their business based on hard facts. In this example, after a period of time tracking this

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information, and as a direct result of it, XYZ could start a strategy of creating the capacity to attract new clients within the accumulation phase, streamline their business to control overheads, review their investment mandate and implement a new charging structure. Other areas which they might consider could be to look at their data around ‘lost clients’ making sure it is coupled with client feedback. This would allow XYZ to determine the root cause of why they have been losing clients. Information on new client acquisition combined with the service segment shows a firm whether they are attracting the right type of client for future business success. Finally, if the business owners were planning on selling the business, they will need to pay particular attention to concentrating on these metrics over a period of time. These benchmarks can also be used when acquiring other businesses. AND FINALLY… Personally, I love a good bit of MI particularly as this builds up over time. I cannot start to tell you how many strategic business decisions have been made off the back of doing this well. So, whilst you are reviewing your business plan for 2020, why not ensure that all your objectives have a key piece of MI to back them up? You’ll then have effective MI, which allows you to make business decisions based on fact rather than ‘feelings’.

About Tracey Underwood Tracey is the owner and founder of PACE Solutions. The business provides support for financial planning firms by focusing on operational practices including; recruitment, compliance, processes, client proposition and business strategy. This is achieved not only through a consultancy process but by hands on implementation to ensure that firms achieve effective results that would otherwise not be achieved through consultation only.

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BRIAN PRU FUTORA ND

MAKING

EXPERIENCE COUNT The PruFund Growth Life Fund has served investors well since it was launched fifteen years ago this month. We talk to Charles Griffith, Head of Multi Asset Portfolio Management, at M&G Treasury & Investment Office, about the investment strategy behind the PruFund funds and why he feels they are ideally suited to todayâ&#x20AC;&#x2122;s uncertain market conditions

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IFAM: With the 15th anniversary of the PruFund Growth Life Fund in November, can you remind readers about PruFunds, the choice which is available and what the aims and objectives are? CG: TThere are seven PruFund funds in total which are Growth, Cautious and five Risk Managed PruFunds. All the PruFunds’ approach to multi-asset investing is to take a long-term view on markets, as well as looking at the valuation of different asset classes over time.

Our approach of looking towards long-term performance drivers rather than short-term market events has allowed us to ‘ride through’ pockets of volatility over the years

A mainstay of the strategy is to achieve high levels of portfolio diversification, both in terms of asset class and also geographical diversification. These are some of the key aspects which make the fund stand out from other funds that are available.

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Another important point to note is the size of the fund, now approaching £50bn assets under management as at 30 June 2019. There’s also the breadth of expertise within the team and broader group, which allows us to achieve these goals. Having a well-resourced team and a large fund allows us to more easily harvest illiquidity and complexity premiums across asset classes such as equities, property, alternatives and private credit. Obviously we strive to do this in a risk-controlled way. These ‘hard to access’ return streams are therefore available to us and it’s important to take note of this differentiator. M&G continues to develop new expertise in new markets and geographies, examples within fixed income including bridge loans and real estate finance, while in equities we have recently invested in both African and Chinese markets. IFAM: How has the PruFund Growth Fund changed since 2004? How has its performance fared throughout the various bull and bear market phases which have happened since that time? CG: Our approach of looking towards long-term performance drivers rather than short-term market events has allowed us to ‘ride through’ pockets of volatility over the years. I also believe that our continued and evolving diversification opportunities have been an important part of our success historically. I expect these factors to carry on being a focus of our team and for the opportunities for end-investors to continue to benefit from this approach.

Dec/Jan 2020

BRIAN PRU FUTORA ND

IFAM: When it comes to the investment strategy / process, how you do you and the team manage the PruFund funds and why is this different from other multi asset funds? CG: The investment team that is responsible for the successful management of PruFunds sits within the M&G Treasury & Investment Office. I very much see the investment team as a team of three parts and these are: Firstly, our Long-Term Investment Strategy (or “LTIS”) team is charged with formulating top down views of global asset returns, both by asset class and by region. This is based on long-term equilibrium returns, volatilities and correlations which are inputs into our portfolio optimisation work. The team uses “Genesis”, an in-house stochastic asset model that generates many thousands of future economic scenarios and following on from this, asset class returns across the universe of asset classes and geographies. The output from the team is the Strategic Asset Allocation or ‘SAA’, which once formulated is fed into the next steps of the investment process. The second team is ‘Manager Oversight’, which take the lead to find the optimal way to gain a particular asset class exposure. They perform due diligence on managers who operate within specific asset classes or regions, set mandate parameters, ensure appropriate costings, and once we have taken on a manager, they monitor their performance and adherence to objectives over time to ensure we are best placed to achieve our objectives.

The third part is the Portfolio Management team which I lead. It’s all very well having a great asset allocation, and targeting strong managers, but it’s also vital that the portfolio is invested in line with intentions and accurately to achieve the desired outcomes. My team oversees the implementation and optimisation of the strategy, both in terms of the asset allocation and achieving the target manager exposures, as well as implementing the desired FX hedging exposures. The team also has a keen eye on the performance of the portfolio as well as its sub components. This part performs an important feedback loop function to the other two areas of the team. Overall, our team is extremely well-resourced with different skillsets and backgrounds ranging from economists, experts in mandate design and due diligence, as well as implementation and hedging expertise. I believe that the size of the funds under management allows us to be wellresourced in all these areas. In my view, this is very important. IFAM: How you manage risk within the funds? CG: Management and monitoring of risk are very much part of our DNA. Our Risk and Compliance function operates within a ‘3 lines of defence’ risk management model. Its role and purpose are to challenge risks effectively and proactively and to add value by providing enhanced business insights to support the delivery of customers’ long-term needs.

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BRIAN PRU FUTORA ND

Dec/Jan 2020

Within this model, we think about risk from many different perspectives. For example, investment risk is about the impact that market movements can have on your portfolio but it’s also about the risk of failing to meet your performance objectives. We closely monitor credit risk, where your counterparties could potentially default, or fixed income portfolios become overexposed to a single issuer.

The PruFunds journey will go on far into the future and the investment strategy employed will continue be true to its core beliefs. We’ll look to expand into new areas, in a risk-managed way and to take advantage of the opportunities that arise in volatile markets to benefit the risk-adjusted returns of the funds. It’s really exciting to be part of this journey along with members of the wider team here.

Liquidity risk has obviously been in the press a lot recently. Prudential have been monitoring liquidity risk within PruFund portfolios for many years. We must stress test portfolios and report a liquidity coverage ratio (LCR), which is the amount of highly liquid assets held by financial institutions to meet short-term obligations.

We can’t predict the future. Past performance isn’t a guide to future performance. The value of any investment can go down as well as up so your client might get back less than they put in.

Finally, we have a team responsible for monitoring operational risk, which is the risk of failure in your investment processes, in your people or anything from systems malfunction to fraud or fat-finger errors. These all qualify as operational risk. IFAM: Looking ahead, what does the future hold for PruFund? How relevant do you see it for advisers and their clients in today’s uncertain market conditions? CG: We believe that the performance of PruFunds in very challenging markets – particularly those towards the end of 2018 - served as reminder of their relevance to clients who are nervous of uncertain markets.

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For more information about PruFund funds visit: www.pruadviser.co.uk/prufund15

About Charles Griffith, ACII CFA, Head of Multi Asset Portfolio Management Charles joined M&G T&IO in April 2018 as Senior Portfolio Manager and was promoted to head of the team in July 2019. Prior to joining he spent 2 years at Insight Investment as a Portfolio Manager in the Multi Asset Strategies Group,11 years at Blackrock, where he held various Multi-Asset and Fixed Income Portfolio Management roles and also spent time heading up a credit research team covering both corporate and structured credit. Before Blackrock, Charles was a Credit Analyst at Fitch Ratings and a reinsurance underwriter with Lloyd’s. Charles attended the University of Newcastle-Upon-Type earning a class 2.1 BA Hons degree in Business Management. He is an Associate of the Chartered Insurance Institute and a CFA Charterholder.

Dec/Jan 2020

BRIAN TORA

MARKETS THROUGH

A LENS

What lies ahead for the global economy and investment markets in 2020? As 2019 draws to a close, Brian Tora reflects on some of the key considerations for asset allocators and why maintaining the ability to react swiftly to change is likely to be important

et’s face it, 2019 has hardly been a dull year. Two deadlines for leaving the European Union have come and passed without an exit being achieved. We’ve had a change of Prime Minister without an election, but will be going to the polls in the run up to Christmas. Members of Parliament have been crossing the floor of the House in droves – some willingly, some less so. And the most controversial Commons Speaker for decades has decided to throw in the towel. MARKET FORCES We’ve also seen of one of the most highly regarded fund managers implode with considerable and unwelcome publicity. Yet remarkably our economy has held up well, despite all the uncertainty, while shares have delivered positive returns. Between the start of the year and the

end of October when the election was called, the FTSE 100 Share Index rose by nearly 8% - not a bad outcome, but one that underscores the international nature of the companies that go to make up this benchmark.

With the situation in the Middle East still balanced on a knife edge, 2019 feels like a year I will feel happy to see the back of, despite the overall positive outcome for investors – so far, that is

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BRIAN TORA

GOING GLOBAL And speaking of the international scene, there has been quite a lot going on elsewhere in the world. President Trump remains the most unpredictable leader of the world’s largest economy we have ever seen. That said, US shares have seen a spectacular rise, reaching new high territory at the end of October, up by more than a fifth since the beginning of January this year. Of course, investor sentiment has been buoyed by three rate cuts from the Fed this year, a clear reversal of its earlier policy of tightening. But we still have no resolution to the trade wars enveloping America and China which could still put a stop to global economic expansion. With the situation in the Middle East still balanced on a knife edge, 2019 feels like a year I will feel happy to see the back of, despite the overall positive outcome for investors – so far, that is. It is to 2020 we now need to look and try to determine how best to position portfolios in what could be another confusing year. Politics look set to play an important role in determining how markets behave.

Dec/Jan 2020

Don’t forget, too, we have a Presidential election due in the United States at the end of the year. America seems to be suffering its own bout of polarisation, with the divide between supporters and detractors of Donald Trump as wide as ever. To say he has been a controversial President hardly does the past few years justice, but the fact is that the economy there is bubbling along nicely and shares were hitting new highs in the closing weeks of the year. CHINESE WHISPERS China will also be playing an important part in contributing to likely global economic wellbeing. That growth is slowing in the world’s second largest economy is clear, but it is still capable of delivering economic returns that Europe and North America can only dream of. Markets still believe an accommodation on trade will be reached. Indeed, it is not impossible that a breakthrough will have been achieved by the time you read this. But the world has become a trickier place in terms of trade, so determining where to back remains difficult. WHAT ABOUT FIXED INTEREST?

Personally, I remain nervous that any unexpected shock could be translated into a back peddling of investor sentiment that could see us move into bear territor y

ELECTION FEVER The outcome of the General Election here will clearly have an influence on investor sentiment. Writing this, as I do, a full month before voting takes place, it is far too early to predict what the final result will be. Indeed, it may be hard to do so right up until the final whistle. What is clear is that there could well be some wild and unpredictable swings in individual constituencies. Much of the electorate has lost faith with those in Westminster who are supposed to represent them, so traditional support may be lacking. The polarisation of our nation may also play a part, with more tactical voting than usual.

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As for bond markets, with monetary easing back on the agenda for central banks, bonds no longer look quite as exposed as once they were. Even so, I find it hard to become too enthusiastic, given the low rates of interest enjoyed on much sovereign debt and the risks that are associated with corporate bonds. Perhaps the return of the yield gap in this country was inevitable – desirable, even, as the likelihood of company failure appears to have risen since the financial crisis of a decade ago. Bonds can be every bit as volatile as equities these days. Personally, I remain nervous that any unexpected shock could be translated into a back peddling of investor sentiment that could see us move into bear territory. Probably the most vulnerable share market is that in the United States, where valuation levels leave little room for setbacks. Here in the UK markets appear more competitively priced. Bear in mind that shares on average are little more than 5% above the heights achieved twenty years ago. But nothing in the investment world is carved in stone, so a well-diversified approach and the ability to react swiftly to change should be the watchwords – as ever. Brian Tora is a consultant to investment managers, JM Finn.

GETTING UP TO SPEED WITH EIS AND BR:

n December 5th, EISA in association with The Insurance Institute of London are holding an Enterprise Investment Scheme and Business Relief investment focused event, ‘Plan to Grow’, aimed specifically at financial planners and regulated advisers. A SHIFTING LANDSCAPE Both EIS and BR investments are changing. It’s vital that investors and especially their advisers make themselves aware of the implications. They need to be up to date with the important areas of investment, income tax, capital gains tax and inheritance tax advice. What action should advisers be taking on behalf of their clients? How do they advise clients confidently, competently and comprehensively? ‘Plan to Grow’ is designed to provide the answers to these questions and more; it will bring together investment and tax efficient industry experts, commentators and Government representatives. They will provide planners, paraplanners and advisers with a fully CPD qualifying session of informed

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M AGAZINE

ESG ROU N D TABLE

Dec/Jan 2020

ESG ROUND TABLE

PREVIEW

An insight into IFA Magazine's ESG Round Table event, hosted at the M&G offices in London

SG Investing has been one of the hottest topics in the investment space this year. The inescapable conclusion to be drawn is that it is a powerful force which is gathering serious momentum – and one which advisers will ignore at their peril.

• How advisers can identify the most appropriate funds for their clients’ individual needs

Hosted at the prestigious M&G offices in the city, we at IFA Magazine recently gathered together a selection of experts, fund managers, financial advisers and wealth managers, to discuss some of the trending topic areas.

• Why impact investment is gathering momentum

In addition to hearing about the obstacles advisers feel they face and what fund managers need to do better in terms of education, subjects discussed included:

• Investing to combat climate change • Why sustainable investing no longer means sacrificing returns • Aligning clients’ investments with their values The full write up will be featured in IFA 85 which is the first issue of 2020. We’ll also be making a video broadcast of the discussion available – e-mail kim.wonnacott@ifamagazine. com to receive a link to view.

• How investing can deliver handsome returns while having a demonstrable positive impact on the world we live in

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Dec/Jan 2020

ESG ROU N D TABLE Alex Sullivan, Chair, of IFA Magazine welcomes Anastasia Grimaldi of Charles Taylor Investment Management Company Limited

Harry Merrison of Kingswood Group explains their current thinking

Adrian Mackenzie of Whiting and Partners Wealth Management Ltd and Michael Daniels of Kingswood Consultants Ltd comment on the advantages they see to their clients. Michael wrote the first guide to ethical investment in 1988.

Wayne Bishop of King and Shaxson highlights the use of ESG based funds in client portfolio construction

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ESG ROU N D TABLE

Dec/Jan 2020

Belinda Thomas (left) of Triple Point stressed the opportunities available for Impact investing via EIS. With Julia Dreblow (right) of SRI Services & Fund EcoMarket â&#x20AC;&#x201C; one of the foremost advocates in the ESG space

Julian Barnard of Barnard Lee Associates in animated discussion on risk

Julia Dreblow and Ben Constable-Maxwell of M&G Investments consider in detail some of the comments made by advisers

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VANGUARD

Dec/Jan 2020

BIG

HOW IS THE BBB PROBLEM? The investment grade bond universe has increased in size considerably since the financial crisis, particularly in the BBB space. But what does this mean for downgrading and refinancing risks in 2020? And should credit investors be worried? Caroline-Laure Negre, product strategy manager, Vanguard, looks at the detail.

mid a softening of global economic growth and an increasingly uncertain geopolitical environment, demand for fixed income has been strong, as investors seek to cushion their portfolios. However, the credit market has been a target for concern, in particular around the growth of the BBB universe â&#x20AC;&#x201C; the lower end of the investment grade market â&#x20AC;&#x201C; relative to higher quality credit. WHAT HAS HAPPENED TO THE INVESTMENT GRADE UNIVERSE AND WHY? The investment grade universe has increased in size considerably since the financial crisis, particularly in the BBB space. Since 2009, the overall investment grade index has increased by almost two and a half times, while the value of outstanding BBB bonds has more than tripled to approximately USD 2.5 trillion1. This has changed the composition of the investment grade universe, with BBBrated bonds now accounting for around 50% of the overall investment grade bucket. This growth has had two key drivers: increased net issuance of BBB-rated bonds and increased downgrades from the A universe. More M&A funding, particularly in the telecoms and consumer sectors, has resulted in an increase of net

issuance, as companies seek funding from investors rather than from banks. Downgrades from the A universe have increased as part of a general trend post the financial crisis. SHOULD ADVISERS BE CONCERNED? It is important to note that the majority of the investment grade universe is on the higher side of the BBB scale, with approximately only 9% rated as BBB- (the closest rating to high yield). Figure 1: Evolution of the BBB market from 2011 to 2019

Bloomberg Barclays Global Aggregate Corporate Total Return Index % 60 50 40 30 20 10 0

2011 2012 2013 BBBBBB

2014 2015 BBB+

2016

2017

2018

2019

Source: Bloomberg, Vanguard. Chart is shown from 2011 as the index data was not broken down prior to this date.

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VANGUARD

DOWNGRADE RISK EXISTS, BUT IS SECTOR FOCUSED

indicating that refinancing risk is manageable and very different from the leveraged-buyout-driven picture of 2008.

A particular concern amongst advisers may be that an expansion in the BBB universe could mean that an increased number of issuers are now at risk of downgrade below BBB status to high-yield debt. The portion of issuers on negative watch by rating agencies may be small, but could be sizeable enough to cause a disruption in the smaller high-yield market if we move into an environment where more issuers are downgraded. However, the number of fallen angels – downgrades from BBB status to highyield debt – has been decreasing since the financial crisis (Figure 2), as a higher proportion of the BBB universe remains closer to BBB+ than BBB-. Figure 2: Number of fallen angels in the BBB universe

from 2011 to 2018 % 90 80 70 60 50 40 30 20 10 0

Dec/Jan 2020

A more dovish tilt to the Federal Reserve’s outlook for growth has also helped to lower refinancing concerns, as we potentially move into a lower-rate environment. HOW SHOULD ACTIVE BOND INVESTORS REACT? It is important for advisers to assess whether their active fixed income manager has remained faithful to their prescribed goals and not taken excessive risk to achieve returns, or added large out-of-index or out-of-asset class exposures to boost performance. Where this does happen, a fund could end up with large unintended risks, or be overly exposed to a particular sector of the market, which could be hard to manage in challenging conditions. It could also be harder for asset allocators considering these funds to manage the market risks or the factors that underpinned their original decision to invest. In a period of increased downgrade risk, a robust approach to credit research is vital. Looking ahead, in a low-yield environment, Vanguard’s global credit team focuses on delivering long-term value through our fundamental approach to investing and deep research and stock selection through market cycles.

2011 2012 Fallen Angels

2013

2014

2015

2016

2017

2018

Source: Bloomberg, Vanguard. Source: Bloomberg, 3 September 2019.

1 2

Source: Bloomberg, Vanguard. 2019 data not yet available. It’s important to note that much downgrade risk is sector focused. The industrials portion of the BBB universe, which makes up around 54% of the broad investment grade index2, contains the largest number of at-risk names. A similar story played out in 2015, when downgrades in the energy sector, from BBB- to high yield, were responsible for the decline in size of the BBB- market. What this tells us is that this downgrade risk is for the most part sector specific, rather than reflective of a widespread issue. Being diversified and remaining invested in a wider universe can help mitigate this risk. REFINANCING RISK IS MANAGEABLE Another reason for concern around BBB issuance and downgrade risk has been refinancing risk, should we move into a higher rates environment. However, debt maturity within the BBB universe is evenly distributed, with a significant portion maturing in approximately ten years,

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About Caroline-Laure Negre Caroline-Laure joined Vanguard’s Portfolio Review Department in August 2016 and is currently responsible for Fixed Income Product Management in Europe. Prior to joining Vanguard, Caroline-Laure worked for Morgan Stanley where she spent 3 years as Head of sales for European Institutional Investors in Commodities. Previously she spent 9 years in Goldman Sachs Fixed Income Currency and Commodities division in both sales and fund product development roles with her last role as Executive Director responsible of the European Commodities Fund Platform, structuring, implementing and marketing GSQuartix Commodities funds. CarolineLaure holds a BSc. in Mathematics and Economics from LSE and a masters in Financial Engineering from the University of Cambridge.

Dec/Jan 2020

2020 VISION

2020 VISION – OPPORTUNITY OR THREAT? When it comes to making asset allocation decisions for client portfolios in 2020 and beyond, are there particular sectors which might offer particular appeal? Ryan Hughes, Head of Active Portfolios at A.J Bell, offers two suggestions of sectors where he sees value

s we approach the year 2020, we seem to be at an interesting point in the cycle where central banks are trying desperately hard to tiptoe through economic challenges amid a backdrop of political landmines. This time last year, there were few, if any, market commentators who were suggesting that global equities were set to rally over 20% in 2019 and therefore I’m always conscious that trying to make predictions as to what might happen in the next twelve months is a dangerous game. THERE’S NO PLACE LIKE HOME However, that being said, there are certainly areas of the market where I do see opportunities for investment. The most obvious starting point is the most hated developed equity market in the world; namely, right here in the UK. With three years of political and economic uncertainty, international investors have shunned the UK market and

the FTSE All Share Index has lagged other major market significantly in local currency terms. The market has polarised into those stocks with overseas earnings boosted by weak sterling whose valuations have gone through the roof and the more domestically focused stocks that have been treated like pariahs and have seen their valuations fall in some cases to single digit price/earnings ratios (PEs).

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2020 VISION

I fully accept that until Brexit is ‘resolved’ headwinds will persist, but when we know that investors have a propensity to overreact, it seems that valuations of some domestic stocks have just become too cheap. This provides an interesting opportunity once again for investors to look towards value investing as a way of providing exposure to these cheap, unloved companies. Should the political outlook be a little clearer by the time you are reading this – and we can’t take that for granted - we could expect to see sterling bounce. If so, that would be a major headwind for those stocks which have been the winners for the past three years and in turn should boost the more domesticallyfocused areas of the market as well as the mid and small cap space. As a result, 2020 could see a fairly major shift in the funds that top the performance charts with those that have been favourites up to now potentially languishing much further down the league tables. ASIA HOLDS PROMISE Another area that looks appealing, albeit on a longer term view is Asian equities. This year has been a challenge for the Asian region with a slowdown in China as the trade war bites, serious unrest in Hong Kong which has dented economic growth and challenging performance in India. However, as the US stock market powers ahead with valuations getting ever more expensive, valuations of Asian equities continue to trade at a significant discount to global equities. The MSCI Asia ex-Japan Index currently trades on a PE of just over 14 while the MSCI AC World Index is on over 18 times, dragged up by the S&P 500 Index on a lofty 22 times earnings.

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Dec/Jan 2020

With those Asian economies still growing strongly, albeit a little slower than previously, relatively low interest rates, more stable central banks than before and inflation under control, the backdrop for the growth remains strong. Add in the well known facts around demographics and a pull towards domestic consumption rather than exports to the developed economies and you have a strong case that the long term prospects for the region are positive. Inevitably there is still a reliance on overall global growth, but with the IMF predicting growth of around 5%, way ahead of developed markets, the macro picture is well supported. Whilst it won’t be without volatility and bumps in the road, the opportunity to buy into high levels of economic growth at a significant discount to developed markets may prove to be an attractive one in 2020.

About Ryan Hughes Ryan started his career in 1999 working for an independent financial adviser, progressing to become Head of Portfolio Management at an awardwinning advisory firm. Ryan then joined a global asset management firm as a Fund Manager, where he oversaw more than £10bn of multi-asset portfolios and also sat on the investment and global asset allocation committees. After seven years, Ryan joined a small multi-asset boutique managing portfolios for clients all around the world, before joining AJ Bell three years later to help establish our investment capability. As Head of Active Portfolios, Ryan now oversees all actively managed investment solutions and fund research.

Dec/Jan 2020

I NVESCO

SMALL TALK We talk to Jonathan Brown and Robin West, UK Equities Fund Managers, Invesco, about the outlook for UK smaller companies and where they see the biggest opportunities for growth and risks to performance

IFAM: How do you see the current economic and market uncertainty in the UK impacting the performance of smaller companies in 2020? JONATHAN BROWN: Extended political and economic uncertainty has weighed particularly heavily on the smaller company sector due to its greater exposure to the domestic UK economy. The sector has been shunned by many investors due to the lack of visibility over the UK’s future trading relationships. This has led to the sector trading at a discount to historic multiples. However, we are hopeful that a reasonable Brexit deal can be approved over the coming months and that would bring much needed clarity, potentially encouraging investors to increase exposure to the domestic UK economy and by extension, UK smaller companies.

IFAM: Where do you see the biggest opportunities for growth in the smallercap sector and why? ROBIN WEST: We are currently taking a “bar bell” approach to constructing our portfolios due to our conflicting views on the short and long-term prospects for the economy.

For the first time in histor y we are seeing the working age populations shrinking in most major economies

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I NVESCO

In the short term we believe that a reasonable resolution to Brexit could unlock pent-up activity in the UK economy. We have met numerous businesses that are taking a “wait and see” approach ahead of any agreement being finalised and we think this is mirrored in the consumer sector, where bigger ticket purchases have been deferred. Once we have better visibility on future trading arrangements some commentators believe we could see a circa 1.5% benefit to GDP growth. For this reason, we have increased our weighting in better quality domestic cyclical stocks. JONATHAN BROWN: In the longer-term however, and on a global basis, we believe the period of sub-par growth that has persisted since the financial crisis will continue. The secular drivers of the global economy are demographics, productivity and debt. GDP is a product of how many people are in work and how productive they are. For the first time in history we are seeing the working age populations shrinking in most major economies. When combined with low levels of productivity growth, it is easy to see why GDP growth over the last decade has struggled to keep pace with historic norms. Overlaying this is debt, which has reached unprecedented levels both governmental and individual. The process of “leveraging up” since the early 1980s has accelerated economic growth, but it seems likely that this could diminish in future. So, in light of this, we also favour stocks with “self-help” characteristics that enable them to grow independently of the economy. This can include the restructuring of underperforming businesses, sector consolidation, roll-out strategies or market share gains led by innovation.

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Dec/Jan 2020

IFAM: On the flip side, where do you believe that the biggest risks to performance lie? ROBIN WEST: We would say that the biggest potential risk to the global economy emanates from the mistaken belief that economic prosperity can be enhanced by rejecting free trade. This obviously has strong parallels with the policies enacted during the Great Depression of the 1930s (e.g. the Smoot–Hawley Tariff Act). The policies seem to garner support from electorates as they are seen as simple solutions to complex problems, but history shows that whilst the impact can be initially positive, ultimately it is destructive to economic activity and prosperity. Whilst we remain hopeful of a reasonable outcome to the Brexit negotiations, and that the US will de-escalate its trade war with the rest of the world, the potential for economic and market disruption looms large. JONATHAN BROWN: I would just add to that, that the main driver of markets, and asset prices in general, is liquidity rather than the economy. So, whilst the outlook for profit growth has become more difficult, the resumption of monetary easing via lower interest rates and the potential for more creative forms of economic stimulus should continue to be supportive for equities. Bond yields are plumbing new depths, with investors showing appetite for negative yielding debt with durations as long as 30 years in some cases. Within this context we believe that equities look very attractive.

Dec/Jan 2020

I NVESCO

IFAM: In the light of your answers to the previous questions, how are you positioning the portfolio to reflect those views and maximise the growth potential for investors? JONATHAN BROWN: As I mentioned earlier, we favour stocks with “self-help” characteristics given the current low growth environment. By this, we mean companies with the ability to grow profits independently of the wider economy. This can include restructuring stories, where a fundamentally good business has lost its way, but has the potential to rehabilitate itself under new management. We also like businesses that have scope to roll-out a successful concept more widely, or companies that can consolidate a fragmented industry and derive a benefit from increased scale. We also seek companies that are exposed to higher growth niches within the wider economy. These niches are often too small to make a significant difference to a large cap, but can represent a very significant opportunity for a small business. Our analysis is focussed on the sustainability of returns and profit margins, which are vital for the long-term success of a company. We continue to look for businesses with “pricing power” by assessing positioning within supply chains and having a clear understanding of how work is won and priced. It is also important to determine which businesses possess unique capabilities, in the form of intellectual property, specialist know-how or a scale advantage in their chosen market.

ROBIN WEST: In terms of the portfolio’s sector weighting, these are determined by where we are finding attractive companies at a given time, rather than by allocating assets according to a “top down” view of the economy.

The current period of heightened political risk has held back both investors’ appetite for smaller companies and reduced businesses confidence in investing for growth

Our portfolio currently has around 30% in Industrials, which is fairly typical for us. It’s a very broad sector and we find plenty of businesses with good margins and a clear competitive advantage. We also tend to be overweight compared to the wider small-cap market in the Healthcare and Technology sectors, where businesses are rich in intellectual property and the end markets offer good growth prospects. We are underweight Financials compared to the market, due to many of the stocks in this sector lacking pricing power and having a high degree of leverage.

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I NVESCO

Dec/Jan 2020

The current period of heightened political risk has held back both investorsâ&#x20AC;&#x2122; appetite for smaller companies and reduced businesses confidence in investing for growth. We believe increasing clarity on these issues over the coming months, combined with historically low valuations could herald a golden period for the sector.

About Jonathan Brown and Robin West Jonathan and Robin are the named portfolio managers of Invesco Perpetual UK Smaller Companies Investment Trust plc. Jonathan Brown is also the named portfolio manager of the Invesco UK Smaller Companies Equity Fund (UK) within the same strategy.

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Dec/Jan 2020

I NVESTM E NT SPOTLIGHT

WHERE NEXT

FOR UK SMALLER COMPANIES? Matt Cable, fund manager, UK Smaller Companies at Jupiter Asset Management, talks to Sue Whitbread about what 2020 might have in store for the sector and for the performance of smaller company shares

IFAM: With all the current economic, political and market uncertainty, in your view what is the outlook for UK Smaller Companies in 2020? MC: While uncertainty around the ongoing Brexit situation, as well as broader political noise, is unavoidable, from my perspective little has changed: we have been living with political and market uncertainty in the UK for almost four years now. Over those last four years I’ve spent a lot of time talking with company management teams about politics. Of course, companies are exposed in different ways and the various political/Brexit outcomes will affect them differently. In general, though, I think that UK companies are pretty well prepared for most eventualities. This is

because companies are used to managing lots of risks. They constantly worry about things such as competition, product obsolescence, changes in regulation and so on. Their environment is always inherently uncertain. Brexit is therefore simply another thing to add to the risk register. Companies have been thinking and planning for this since long before the referendum in 2016 and putting in place their contingency plans. The mantra of ‘hope for the best but prepare for the worst’ is something which I hear time and time again. Of course, depending on the outcome of the general election and Brexit there will be winners and losers, but I don’t think we will see many absolute disasters. I also think that we will see continued growth from businesses which are innovating and doing things differently. This is something we see a lot in the small cap space and something that isn’t likely to end.

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I NVESTM E NT SPOTLIGHT

How the stock market thinks about this uncertainty is a slightly different matter, and of course there is scope for absolute share price declines in the short term. However, I believe that equity valuations today look very good value relative to other asset classes. UK equities currently sit at a significant discount to global equities in valuation terms. Recent data from Peel Hunt has showed global equities trading on a twelve month forward P/E of 15.3, the US market on a P/E of 17.3 and the UK on 12.2. Looking at smaller companies, there’s a further discount to this again. The NUMIS smaller companies index is currently showing a forward P/E of 11.1. In terms of UK smaller company valuations, it seems like we’re sitting on a discount to a discount to a discount. The challenge for investors is timing – how to balance the long term valuation opportunity against short term uncertainty. IFAM: Where do you see the biggest opportunities in valuations and for growth within the sector? MC: As a small cap investor, many of the businesses I look at are innovators and disruptors. I think that this is where growth has always come from and probably always will. When it comes to valuations, this is a little more complicated as these are tied into the overall macro situation. There is undoubtedly cheapness in UK domestic stocks. However, whether they ultimately turn out to be value or value-trap is going to depend on how things play out. My view is that it is possible to find pockets of value in sensible businesses which will have a strong future in any scenario. It is our job to identify those businesses and assess them properly using all the tools we have at our disposal. IFAM: What do you see as being the biggest risks to performance at the moment? MC: For many investors it can be easy to fall into the mind-set that the UK domestic economy is uncertain and therefore to be avoided. I suspect that there are many client portfolios at the moment which are skewed away from the domestic market and more towards international exposure.

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Dec/Jan 2020

The challenge with this approach is that risk works both ways. Having little or no exposure to the UK market is a risk in itself if we were to see a reasonably benign political outcome. Arguably, the bigger risk is having too little domestic market exposure rather than too much, as you have to ask yourself how much further valuations could fall from these already low levels. IFAM: In the light of what we’ve discussed so far, how are you positioning the fund to take these factors into account? MC: My approach is to consider these issues at a company level, rather than trying to predict their outcomes. This involves regular meetings with managers about their specific challenges and opportunities, and how they are mitigating risks. I then look at how these issues might impact valuation. Sometimes the very cheap stocks are cheap for a reason, but there are other times when they have been swept up with general market sentiment. It is important to differentiate between the two. At a portfolio level, my aim is to be reasonably neutral to the various political outcomes, rather than trying to position the portfolio one way or another. My investment process is entirely bottom-up and I want the portfolio to reflect that. Predicting the outcome of political events is not my skill set so I don’t want to introduce that risk into my fund. One of the interesting things about the result of the Brexit referendum and even more dramatically the election of Donald Trump in the USA was that the market didn’t behave in the way that many people thought it would. Trying to position a portfolio even if you have a strong view is therefore very challenging. Portfolio construction is based on a sensible mix of businesses – domestic, international, cheap, expensive, and spread across a range of different sectors – exactly as I would do in any economic environment. This ensures the right level of diversification to protect investors as much as possible from extreme volatility. I can sum it up by saying that overall, my portfolio positioning and approach are pretty much what they normally are.

I NVESTM E NT SPOTLIGHT

Dec/Jan 2020

IFAM: How positive are you about the future prospects for growth from smaller companies? MC: As I said before, one particularly positive thing for those of us operating at the smaller end of the market spectrum is that we see lots of firms which are focused on disruption and innovation. People often get hung up on UK economic growth rates, but a small, an innovative business growing at, say, 20% a year doesnâ&#x20AC;&#x2122;t generally care much about UK GDP. Fortunately, the positive nature of their business position and innovation rather overwhelms the background macro situation. If we consider the long term history of smaller company performance in the UK these have performed incredibly well.

Annualised real return, 1955-2018 11.4

10 8.4

9.7

6.4

4 2 0

3.0

Long gilts

House prices

I believe that the important thing is to remain focused on fundamentals. By carrying out our detailed research and analysis procedures we can continue to identify and invest in strong businesses which are capable of delivering attractive growth for investors for many years to come.

About Matt Cable Matt joined Jupiter in 2019 and is fund manager of the Jupiter UK Smaller Companies Fund.

Annualised real returns on UK asset classes

The Numis Smaller Companies MSCI Ex IC Index shows that with 63 years of data, smaller companies shares have delivered an impressive 10% per annum real return. When you have a corporate sector capable of this kind of growth, it can seem a little churlish to worry too much in the context of whether the overall economy is likely to grow at 1%, 2% or even -1% over the next twelve months.

Before joining Jupiter, Matt was at M&G for 11 years, during which time he was a member of the smaller companies team and was involved in the running of c. ÂŁ850m of assets. He was also the lead manager of the M&G PP UK Smaller Companies Fund from 2014.

1.7 Treasury bills

FTSE Numis Mid All-Share Cap XIC

NSCI XIC

NSC 1000 XIC

The NSCI 2019 - Scott Evans and Paul Marsh Numis, London and Edinburgh, 16-17 January 2019

Source: Scott Evans, Paul Marsh, Numis Securities

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TALKI NG TECH N ICAL

Dec/Jan 2020

INTRODUCING THE IFA MAGAZINE ADVISER CENTRE YOUR SHORT CUT TO TECHNICAL EXCELLENCE

he new IFA Magazine Adviser Centre is live on www.IFAMagazine.com/ adviser-centre. It’s the result of our collaboration with the highly regarded technical team at Prudential. We hope that you will find it of use.

CONTINUING PROFESSIONAL DEVELOPMENT Whatever your approach to CPD, we hope that you’ll find the content of the IFA Magazine Adviser Centre relevant and informative. The content is updated regularly and covers topics such as:

We know that IFA Magazine readers appreciate detail. The Adviser Centre is designed to help you by providing easy access to a range of tips, tools and technical analysis which is all designed to support the financial planning process in practice.

• Pensions

SUPPORTING PLANNERS’ NEEDS

And that’s just for starters. The information is free to access, and available to all professional intermediaries.

The job of both financial planners and paraplanners is a complex one. Not only are you faced with a myriad of different solutions to help mitigate your clients’ planning dilemmas but also today’s ever changing world means that keeping up to date is becoming more and more of a challenge.

So what are you waiting for? Visit the IFA Magazine Adviser Centre now and see for yourself.

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• Tax planning • Regulation • Tools and calculators

www.IFAMagazine.com/adviser-centre

Dec/Jan 2020

I M PAX

2020:

CLIMATE CRISIS

CONSCIOUS INVESTING Do not expect a lighter shade of green in 2020. That’s the call from Jon Forster, Impax Environmental Markets, as he explains his belief that the investment case underpinning environmental markets has never looked so compelling

he political discourse of Britain may have been dominated by Brexit in 2019 but it was not the only topic of conversation. The Climate Crisis (#ClimateCrisis) has moved from the fringe to a more central role of public concern - as we can observe from the range of protests movements, increased public awareness and changing consumer behaviour. In November 2020, the UN’s climate change conference, COP 26, will be hosted in Glasgow and we should expect this to focus political attention as well of that of consumers and the media. Against this backdrop, new regulation is demanding investors take climate risk seriously, the FRC’s revised Stewardship Code for instance. In short, regardless of how markets behave in 2020, sustainability and climate risk are set to rise in prominence, not fade away.

THE CASE FOR ENVIRONMENTAL MARKETS Impax Environmental Markets Plc (IEM) was launched in 2002, and our focus has always been on the ‘green economy’; we believe it makes sound investment sense. The availability and price of energy, water, food, materials and other resource that meet the needs of a growing global population, that is increasingly urbanised, is a challenge that the existing model can no longer meet without significant improvements in the efficiency of supply and use. Meanwhile, depleted environmental resources such as clean water, clean air and arable land are limiting the potential for economic growth in many countries and losses from climate change related weather events have increased sharply and are having a significant economic impact.

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I M PAX

To meet these challenges, the global economy is transitioning to a more sustainable model to which increased public awareness, regulatory change and improved economics are driving increased momentum. ENVIRONMENTAL THEMES FOR 2020 Electric Vehicles (EVs): Although much has been said already about the electrification of vehicles, as an investment theme, expect to see it accelerate (excuse the pun) in 2020. Dieselgate began in 2015, but the switch back from diesel to petrol has meant CO2 has risen, requiring more emissions control and engine downsizing just as clean air targets have become more ambitious. There are a number of challenges associated with this, not least when you consider the phenomenal popularity of SUVs in the last decade. In 2020, long stated Government bans on internal combustion engines creep much closer and manufacturers will respond. Falling technology costs and rising performance means EVs are becoming more affordable, with a large surge of product launches expected, which in turn will lead to increased investment in charging infrastructure. It is difficult to predict who will win the EV race, but we do know that all manufacturers need components and it is the producers of these components that we favour when exploring this theme. The Industrial Internet of Things: In the last two decades we have seen software transform the office environment, now it is the turn of industry. With the ability to include microchips in almost anything and to collect and analyse big data, we are seeing the start of an evolution that we expect to gather pace over the next decade. Efficiencies can already be viewed in product design, ongoing predictive maintenance and in reducing the amount of energy used and waste produced. Software providers in this space are moving from a fee to a subscription model, offering interesting new long-term investment opportunities.

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Dec/Jan 2020

Fashion: Governments and consumers are becoming more aware of the impact that â&#x20AC;&#x2DC;fast fashionâ&#x20AC;&#x2122; has on the environment; from the amount of water used to produce goods (it is estimated that it takes 7,600 litres of water to make a pair of jeans*), to the amount of fabric that ends up in landfill or incinerated (Wrap** estimate 300,000 tonnes of used clothing goes to landfill in the UK every year). With an EU paper on the industry expected in 2020, we are looking at the sector across the value chain. IEM already invests in alternative fabrics, like Modal, which are high performing and more ecologically friendly than cotton, which has a high-water footprint and contributes to water pollution (pesticides). EXCITING OUTLOOK Environmental markets do have a high tracking error relative to global equities and so it is right to categorise them as higher risk. However, in the near-term, valuations look fair but we are seeing solid performance on earnings and are confident of superior growth. Taking a longer-term view, in my opinion, the investment case underpinning these markets (regulation, economics, consumer appetite), has never looked so compelling. *SOURCE: AUTHOR STEPHEN LEAHY "YOUR WATER FOOTPRINT: THE SHOCKING FACTS ABOUT HOW MUCH WATER WE USE TO MAKE EVERYDAY PRODUCTS," **WRAP.ORG.UK

About Jon Forster Jon is co-manager of Impax Environmental Markets Plc (IEM) and a Managing Director of Listed Equities at Impax Asset Management, the specialist investor in the transition to a more sustainable global economy.

Dec/Jan 2020

PLAN N I NG I N PRACTICE

THE CHANGING WORLD OF PLANNING Paul Campion, wealth planner, Succession Wealth, peers through the financial planning lens to highlight some of the technical areas where he believes that change might impact upon financial planning decisions in 2020.

s 2019 comes to an end, it brings us to a time when we pause and look ahead to what the New Year might bring in terms of changes to important areas such as pensions amongst others. Whilst our primary focus remains on delivering the financial planning service to support our clientsâ&#x20AC;&#x2122; needs and to help them meet their goals, we still need to consider those technical changes which might impact on recommendations to support the fulfilment of those goals in practice and for the broader practice of financial planning across the UK.

(PPF). As a result, we should expect the glut of associated negative headlines. This will create advice needs for clients and the inevitable conversations around the suitability of pension transfers. In turn, this will lead to increased regulatory scrutiny and a further shrinking of availability of Defined Benefit (DB) transfer specialists. Most importantly, consumers might just want reassurance that, for most, as a last resort, the PPF is not that bad.

DEFINED BENEFIT SCHEMES UNDER PRESSURE It seems likely that in 2020, the pressure on the funding position of Defined Benefit (DB) schemes will remain. With continuing and persistent pressure on the high street and beyond, in addition to business woes being exacerbated by the uncertainty surrounding Brexit, we are likely to see more schemes enter the Pension Protection Fund

How many potential clients are inadvertently not paying their Annual Allowance tax charge?

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PLAN N I NG I N PRACTICE

For scheme trustees, I foresee a greater number of questions being asked of them by their members regarding the underlying investments with respect to environment, social or governance factors. This is clearly also on The Pensions Regulatorâ&#x20AC;&#x2122;s radar. Inevitably, with time, we will see a shifting of some of the underlying securities so, polluters and those with questionable labour policies, beware. I cannot imagine it would ever be suitable to transfer someone from a DB scheme because of its questionable investment practices, but imagine if Greta Thunberg had a DB scheme where one of its major holdings was an oil giant? These are relatively new issues for our sector. GREATER FOCUS ON ESG INVESTING Coupled with the increasing pressure on DB trustees, clients will be asking for more environmental, social and governance (ESG) investments or socially responsible investments (SRI). I also believe that they will become increasingly aware of Greenwashing â&#x20AC;&#x201C; when companies, financial planners or fund managers create a false impression or provides misleading information about its environmental credentials. Looking at the ESG investment options available from the investment industry, there are relatively slim pickings at present. This is particularly so in the case of those planning practices which believe in a passive or single multi-asset fund type approach and want a minimum three-year track record. We need more products coming to market which are focused on multi-asset and/or passive investments with an ESG/SRI element. Interestingly, the DFMs which offer model portfolios via platforms seem better prepared for this than their multi-asset fund counterparts. THE ANNUAL ALLOWANCE EFFECT The Annual Allowance (plus the Lifetime Allowance) is really starting to bite for NHS employees and, politically, the current situation is unpalatable - not least because of the high regard with which we hold the NHS. However, planners (and the Treasury) must not forget that the likes

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Dec/Jan 2020

of teachers and fire fighters are equally as affected. I think we are certainly going to see change here, but will it just be within the NHS scheme? How many potential clients are inadvertently not paying their Annual Allowance tax charge? When is HMRC going to catch up with this group? I believe that we are likely to see HMRC making enquiries, because, after all, it holds all the data (tax returns, income and scheme reporting).

If you look at any of the internet consumer forums, you can see the conversations taking place and witness the inevitable confusion consumers have when tr ying to compare LISAs, ISAs and pensions

POLITICAL UNCERTAINTY ABOUNDS Whilst this article was written before the general election, what we know for sure is that we know nothing for sure. Pension tax relief is a gift to the high earners, and because the more left-of-centre parties view this as an inequitable benefit, we could, therefore, see further tightening of the Annual Allowance or even Lifetime Allowance which will be accompanied by the inevitably complicated transitional rules. We may see a continuation of the move away from tax relief to bonuses such as those with which we are already familiar as a result of the Lifetime ISA (LISA). Of course, this could exacerbate difficulties for groups of workers such as NHS workers and teaching professionals. As a result of the changes that began to emerge in 2006, money purchase pensions have now become extraordinarily tax advantageous within their caps.

Dec/Jan 2020

PLAN N I NG I N PRACTICE

Coupled with their almost unintentional beneficial inheritance tax consequences, I foresee more changes to pensions that apply post-age 75. This could take the form of a lifetime allowance test or inheritance tax charge on death post age 75. The IHT attractiveness of pensions coupled with tax relief on the way into the pension is notably different from other tax wrappers. THE NEED FOR PROPER FINANCIAL PLANNING It is getting more complicated for Joe Public to select the right tax wrapper; long gone are the days when there was only one type of ISA. If you look at any of the internet consumer forums, you can see the conversations taking place and witness the inevitable confusion consumers have when trying to compare LISAs, ISAs and pensions. So many consumers are asking what’s best for them when, in reality, we know it is not a simple question to answer and that the outcome is very often a hybrid solution; they stand little chance of making the right decision using Facebook or any similar online forum. Consumers are then further confused in the decumulation phase. This is because in many cases, it is better to initially draw a pension income from an ISA than it is to take a pension! Perversely and confusingly for them, is that their retirement income comes from an ISA and not a pension. This is unlikely to have been their expectation when they took out their pension in the first place. The need for proper planning only grows as legislation and tax wrappers change and become more confusing. It is an interesting and rewarding time to be work in the financial planning profession. MILLENNIALS MATTER No article which attempts to predict the future is complete without reference to the millennials who, for wellestablished reasons, are rarely fully and properly serviced by the financial planning community and this who are taking to the internet for advice and to arrange their own affairs.

Larger financial planning businesses, particularly those with graduate schemes, should be helping this growing market because they are our future potential clients. Also, profit pressure is eased as servicing costs can be minimised through utilising technology more effectively. The LISA has now really grown up and public awareness has increased considerably but it is confusing and remains misunderstood, particularly by those already on the property ladder. Martin Lewis has just launched a campaign to highlight the necessity to open a LISA prior to the age of 40 even if someone puts virtually no money in it. For those advising parents of children who are younger than 40 years old, it would be wise to advise them to consider the LISA and of course, they need to know that the LISA cannot be taken out after the age of 40 (but can continue to be funded after that age). Like every year before it, 2020 promises to be an interesting year and I am sure there will be plenty of surprises in store.

About Paul Campion Paul is both a Chartered and Certified Financial Planner® and a Fellow member of the PFS and CISI. Paul’s client-orientated approach stems from the rigid belief and strong foundations that no product recommendation should be made without looking at everything, understanding everything and ideally having a robust financial plan. This approach has put him in a good position with his clients and future-proofed his career for the inevitable rising of the regulatory bar. Paul’s comments: “When I decided to be an IFA after graduating, I had little idea of what was to come. However, having sat many exams and run countless client meetings I now know, as a financial planning professional, that I firmly believe I have one of the most rewarding jobs possible, and that as planners we add immeasurable benefits to our clients’ lives.”

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CRE DIT I NVESTI NG

Dec/Jan 2020

GIVE MORE CREDIT TO UNCONSTRAINED INVESTORS As shifting market dynamics alter the relative attractiveness of different parts of the credit market, dynamism is key. That’s the view of Jeff Boswell, co-Portfolio Manager, Investec Global Total Return Credit Fund as he explains why he believes that these are times for the dexterous master-chef rather than competent cook when it comes to credit investing

he more cautious among us tend to shy away from the lesser-known areas of the investment world. Familiarity brings comfort. And why risk a nasty surprise?

However, in today’s investment environment, a narrow focus on the familiar has arguably become the riskier option. Low and negative interest rates are now a widespread phenomenon. The traditional ‘safe’ areas of the bond market are most exposed to interest rate changes (falling in value as rates rise and vice versa). So, when rates eventually go up, investors with portfolios concentrated in these areas will be particularly susceptible to capital losses. Fortunately, we think that being more adventurous is entirely compatible with spreading one’s investment risk and building a resilient credit portfolio. With this in mind,

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we draw on a wide variety of credit markets. Here we explain how combining diversity and dynamism can create a defensive credit portfolio. INGREDIENTS FOR A WELL-DIVERSIFIED CREDIT PORTFOLIO Just as a diet rich in diversity is considered good for one’s physical health, in our experience a similar phenomenon is true in the world of credit investing. Here, more – in terms of the range of credit investments – is a good thing. More sources of yield; more places to look for return; more ways to protect against interest rate changes and to cushion against market wobbles.

Dec/Jan 2020

CRE DIT I NVESTI NG

A look beyond the more traditional areas of the credit market reveals a smorgasbord of opportunity. In addition to the old favourites such as investment-grade and high-yield corporate bonds – which still have an important role to play in portfolios – investors can find many other instruments. These can both complement and act as substitutes for the traditional favourites. To name just a few: • Corporate hybrid bonds: these are subordinated debt instruments issued by companies that typically have an investment-grade rating. Corporate hybrids offer similar potential for capital growth as other more traditional bonds but tend to perform better when markets fall. We currently like this subset of the market given its attractive pricing level relative to high-yield market segments, especially given its inherently lower default risk. • Collateralised Loan Obligations: this type of security results from the packaging up of a diverse pool of corporate loans. Compared with traditional corporate credit investments, CLOs offer various benefits, including historically lower loss rates than corporate bonds with a comparable credit rating. CLOs come in a range of risk tiers, or tranches, making them a useful and flexible tool in the credit investment toolkit – acting as either a complement to or substitute for traditional credit asset classes, depending on the point in the market cycle. Each credit market subset can react quite distinctively to macro, market and geopolitical events, underlining the potential benefit to be derived from improved portfolio diversification. PUTTING IT ALL TOGETHER However, what we view as the best option for credit investors today may look very different tomorrow, as

shifting market dynamics alter the relative attractiveness of different parts of the credit market. That makes it important to continue to alter our portfolio allocation across the credit market in a timely manner. Dynamism is key. This means being willing to significantly increase or decrease the allocation to certain areas of the market as market conditions and valuations evolve. This philosophy has seen us hold zero allocations in most areas of the credit market at various points in time, while at other times we have invested as much as 40% of the portfolio in individual core areas of the credit market. This dynamic approach aims to ensure we are always rewarded optimally for the risks that we take, as well as seeking to avoid areas of the market that look over-extended.

We believe that investors should consider getting more adventurous with credit.

DEFENSIVE DYNAMISM IN ACTION As an example of this approach in action, tight valuations (and subsequent volatile market conditions) in the second half of 2018 prompted us to position our portfolio away from traditional high-yield markets and into more defensive credit market subsets, where valuations and supply/demand dynamics felt more balanced. The resultant positioning helped us to then preserve investors’ capital

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CRE DIT I NVESTI NG

Dec/Jan 2020

through a volatile fourth quarter, with the opportunity to then capitalise on the market’s re-pricing of credit risk. We did this in early 2019 through investing in a variety of different credit markets, including the same high-yield markets we had reduced exposure to six months earlier. DON’T TRY THIS AT HOME This really is not a case of adding new ingredients into the mix and hoping for the best. The broad credit market is as complex as it is diverse. A deep understanding of the functioning and intricacies of credit instruments is vital. We think there’s no substitute for experience in how different parts of the credit market behave in different market regimes and at times of crisis – in practice, not just in theory.

About Jeff Boswell

Equally important are the skillset, tools and expertise to combine these ingredients together into a portfolio that works for investors at each point in time. Think dexterous master-chef rather than competent cook.

Jeff joined the industry in 2001 and is Head of Developed Market Credit. He is responsible for managing and leading the Developed Market Credit platform at Investec Asset Management. His responsibilities include acting as a portfolio manager across a range of Investec Asset Management credit funds, including the MultiAsset Credit funds.

CONCLUSION

Previously, Jeff worked at Intermediate Capital Group PLC as Head of Portfolio Management within its Credit Fund Management division. He was also a member of the investment committee across both liquid and illiquid Credit Fund Management strategies. Prior to this he was at Investec Bank Limited as Head of Acquisition Finance, where he established the Acquisition Finance platform and led the development of their CLO business. He also held structured and leveraged finance roles at NIB Capital (London) and BOE Merchant Bank (South Africa).

We believe that investors should consider getting more adventurous with credit. The diversity of the credit market presents us with plenty of opportunities to build a diversified portfolio which aims to be high-yielding yet comparatively defensive. And a dynamic approach allows us to constantly shift to the areas of the credit market that offer the most attractive return potential for a given level of risk.

Jeff holds a Bachelor of Commerce degree with Honours (cum laude) from University of South Africa, is a Chartered Accountant (SA) and a CFA Charterholder.

Underpinned by deep credit expertise, a diverse and dynamic approach can lead to a more consistent return pattern and the ability to participate in a meaningful proportion of credit market upside, while still protecting the downside.

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Dec/Jan 2020

RICHARD HARVEY

DECK

THE HALLS ‘Tis the season to be jolly but for Richard Harvey the festive season means avoiding car boot sales as well as suffering the perils of moving house

ah humbug. Somewhere near the summit of things I loathe with a manic passion are boot fairs. I’ve recently experienced what I vow will be my last, and will die in a ditch (sorry Boris) before ever attending another.

We’re just moving house (another one high on the loathe list), and it was Lady H’s idea that we should get up at stupid o’clock on a Sunday, load up the car with a quarter of a century’s worth of toot, and drive off to the local Grand Junkathon. We spent six hours being mercilessly beaten down by bargain hunters, who insisted, for instance, that a Stuart crystal decanter was outrageously priced at five quid, while Auntie Vi’s novelty Christmas bobble hats weren’t worth more than 50p (hard to disagree with that).

The most popular items were old suitcases, snapped up by enthusiastic Romanians, presumably on the basis that once we left the EU, they’d be on the first flight back to Bucharest. Sadly, the boot fair yielded a miserable £25 (actually, £15 once we’d deducted the pitch fee) which probably says more about the desirability of the stuff we were flogging than the retail tastes of the punters. MOVING ON UP But back to the house move. After 25 years living in a 17th century cottage, for whom the word ‘moneypit’ was invented, and with retirement a glimmer on the horizon, the prospect of living in a brand new apartment appealed mightily.

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RICHARD HARVEY

Better still, thanks to equity release, dumping the remains of our mortgage would leave us free to steadily work our way through the collateral. Although I’m sure you’ll understand that’s not what we’ve admitted to the family.

Dec/Jan 2020

well have been some investors who would embrace the level of risk that such investments involved as a trade-off for the chance to make spectacular returns. We were most definitely not in that camp.

HORSES FOR COURSES Meanwhile, Santa came early and in a highly unusual guise this year, bearing not tins of Cadbury’s Roses or ‘Cliff’s Christmas Hits’, but instead a rather large wodge of wonga from the Financial Services Compensation Scheme. Fa-la-la-la-la, la-la-la-la. Now I know that the FSCS can be a sensitive subject for many advisers who will be quite within their rights to feel a touch miffed about the rather huge levies incurred as part of the regulatory authorisation process. For yours truly however, it was the welcome denouement of a long battle over ten years to recoup a chunk of our pension pot which had been inexplicably ploughed by our (then) adviser into a series of Unregulated Collective Investment Schemes. You may well remember them – whizz-bang ‘opportunities’ like sunshine holiday complexes and carbon credits. UCIS were quickly identified as high risk investments by the sharper personal finance editors, but by then it was too late – we had discovered to our cost that the acronym UCIS actually stood for Unbelievably Crap Illiquid Scams. Certainly not for investors like me, who has the word ‘cautious’ tattooed across my forehead. Ok, so there may

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After 25 years living in a 17th centur y cottage, for whom the word ‘moneypit ’ was invented, and with retirement a glimmer on the horizon, the prospect of living in a brand new apartment appealed mightily

Of course, you’ll be more than aware that the rules have now changed in terms of the promotion of such schemes and to whom they are aimed at - and I’m very relieved that is the case. But I’m pleased to report a happy ending in our case. Thanks to dogged persistence we finally got most of our money back in late October and I’m glad that we stuck with it. May your New Year be as financially rewarding. And avoid boot fairs at all costs.

CAREER OPPORTUNITIES Position: Financial Adviser Job Ref: 56385 Location: NOTTINGHAM Salary: £45,000-£80,000 per annum This bespoke firm of independent financial planners is looking to bring in an experienced financial planner, to adopt, look after and service an existing client bank that has been built up over a number of years, with a value of over £50M AUM. The firm’s main focus is on providing bespoke advice to High Net Worth clients and ensuring a consistently high level of service.

The opportunity: The opportunity here is for a Financial Advisor, with a professional and level-headed approach to come in and help provide advice to the clients generated through the firms lead source. This opportunity would be suitable for any Level 4 Diploma qualified professionals, whether you be an existing IFA with a strong book of business, or a newly qualified Adviser looking to work in a highly professional environment. The client has an existing book of business, in the region of £50Million, to service and work on whilst they also provide high quality leads and full back office (admin & Paraplanning). The successful candidate will also be implicit in decision making and involved in the running and shaping of the business, through monthly meetings and seminars.

What’s needed for me to be considered? • • • •

Hold previous experience within an IFA / Financial Planning Practice Must be qualified to a minimum industry standard of Level 4 Diploma Qualified Previous experience dealing with High Net Worth Clients desirable but not essential A strong understanding of Pensions and Investment products advantageous

Position: Financial Planner Job Ref: 56684 Location: SWANSEA Salary: £40,000-£50,000 per annum A leading national financial services firm with offices nationally and which offers a full, holistic financial planning service is looking for an experienced financial planner to join their team. You will be expected to provide a top-class service and grow and develop a loyal client base. Leads are provided as is full paraplanning and administrative support.

Duties: • • •

Carry out a comprehensive fact-find, gain a full understanding of the aspirations, needs and investment objectives of the individual. Produce a comprehensive investment and pension planning service Full financial planning duties, as would be expected from any high level financial planning position.

Skills: • • • •

Understand and explain in non-jargon fashion the merits and detractions of all investment types Explain effectively the benefits of discretionary portfolio management against other investment options available Good knowledge of personal taxation in particular, income tax, capital gains tax and inheritance tax Understand and assess suitability of available pension income options including annuities, phased retirement and income drawdown

Qualifications: • • •

Competent Adviser Status SPS held including specialism in packaged products JO5, AF3 or G60 would be advantageous

Position: Financial Adviser Job Ref: 56197 Location: CARMARTHEN Salary: £25,000-£35,000 per annum This firm of professional independent financial consultants provides leading advice to a diverse range of clients, all looking for the same unique experience.

The opportunity: They are looking to take on a financial adviser with the eagerness to progress and build up the existing client bank. You will be given the opportunity to build a lasting career within a well-respected practice. In addition to a very competitive salary, they also offer a great bonus structure.

What’s needed for me to be considered? • • •

Level 4 Diploma qualified in Financial Planning. Experience working within a similar role. Demonstrate extensive advising knowledge.

Dan Gratton - Specialist Financial Planning Recruiter I have been recruiting within the financial planning field for just over 2 years now, largely specialising within the placement and recruitment of financial planners and senior back office roles. Prior to this, I was working in the industry for 5 years, as an Associate Financial Planner, so like to think I am somewhat knowledgeable on both the industry and those in it! A lot of people believe that the job hunt on the build up to Christmas can be quite slow, however we have found quite the opposite, with last December being our busiest month to date. It seems companies are very keen to get their recruitment needs in order, prior to the new year, so there may never be a better time for you to start your search. You will see below that we have a number of opportunities that we are working on at present and many more on our website should you be open to new opportunities. Furthermore, should you just wish for further information on the IFA job market at present, opportunities locally or industry information on qualifications etc, please do not hesitate to be in contact. You can reach me on 0117 922 1771 or feel free to email me at dan.gratton@heatrecruitment.co.uk.

What’s next? If you are interested in any of the above opportunities, please contact us directly. If suitable, one of our specialist consultants will be in contact with you to discuss the opportunity in detail prior to submitting your Curriculum Vitae to the client. During this discussion, we will aim to identify your specific skills and motivations and, where appropriate, can also recommend other relevant opportunities to you that match your requirements. And finally… If these specific vacancies are not exactly what you are looking for, please contact us to discuss other opportunities we may be recruiting for that aren’t necessarily advertised.

BRISTOL OFFICE

LONDON OFFICE

+44 117 922 1771

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Visit the Heat Recruitment website for more details of these and hundreds of other jobs too www.heatrecruitment.co.uk

The UK Creative Content EIS Fund, in association with the BFI, brings a new era of investing in the UK creative industries aligned to the Governmentâ&#x20AC;&#x2122;s objective for EIS. There has never been a better time to create, own and invest in UK content. To find out more get in touch with us: info@calculuscapital.com 020 7493 4940 www.creativecontenteis.co.uk In association with

Before investing in the UK Creative Content EIS Fund, you should read the Information Memorandum carefully and take professional advice. EIS is a long term investment and the value can fall as well as rise. Any person making a subscription to the EIS Fund much be able to bear the associated risks.

Bodyguard (Courtesy of World Productions)

The Fund will invest in a diversified portfolio of growth focused UK creative content companies, capitalising on the unprecedented upsurge in demand for creative content.