magazine

Fund, Pension, Trust / Sector Profile / Stockpicker / What I Bought Last

BREAKING THE CYCLEHow fund managers learn from their mistakes

FOOL’S GOLDGetting a big call right – and still losing money

FIRST WORLD PROBLEMSThe lack of options in US, European and Japan trusts

Issue 50 / April 2019

FE Trustnetmagazine

Issue 50 / April 2019

When to accept you got

it wrong

FE Trustnet

I t is never easy to admit you got something

wrong – and when it comes to investing it is even more difficult. This month’s cover feature from Danielle Levy looks at the behavioural psychology that stops us from facing up to our mistakes – and

how this can be even more damaging than the original error.

Along the theme of mistakes, Cherry Reynard asks five professional investors for details of their biggest blunders and what they learnt from them, while I look at the phenomenon of fund managers who got a

Editor’s letter

Contents

magazine

Fund, Pension, Trust / Sector Profile / Stockpicker / What I Bought Last

BREAKING THE CYCLEHow fund managers learn from their mistakes

FOOL’S GOLDGetting a big call right – and still losing money

FIRST WORLD PROBLEMSThe lack of options in US, European and Japan trusts

Issue 50 / April 2019

FE Trustnetmagazine

Issue 50 / April 2019

When to accept you got

it wrong

FE Trustnet

CREDITSISSUE 50

FE TRUSTNET MAGAZINE (FORMERLY INVESTAZINE) IS PUBLISHED BY THE TEAM BEHIND FE TRUSTNET IN SOHO, LONDON

WEBSITE: www.trustnet.comEMAIL: editorial@financialex-press.net

CONTACTS: Anthony LuzioEditorT: 0207 534 7652

Javier OteroArt direction & designW: www.feedingcrows.co.uk

Amanda WilliamsHead of FE Trustnet T: 0207 534 7650

EditorialGary Jackson Editor (FE Trustnet)T: 0207 534 7680Rob LangstonNews editorT: 0207 534 7696

SalesRichard FletcherHead of publishing salesT: 0207 534 7662Richard CasemoreAccount managerT: 0207 534 7669 Constance CandlerAccount managerT: 0207 534 7668

Photos supplied by iStock Cover illustration: Javier Otero

Admitting defeatDanielle Levy finds out when it is time to accept you got it wrong and sell out of an investmentP. 4-13

The resilient onesSAINTS’ joint manager Toby Ross tells Colin Donald about the search for companies built for bad times as well as good P. 14-17

Breaking the cycleFive fund managers tell Cherry Reynard about their biggest mistakes – and how they learnt not to repeat themP. 18-23

Fool’s goldCorrectly calling the outcome of a binary event is difficult enough, but Anthony Luzio says even getting it right is no guarantee you won’t lose money P. 22-29

Fund, pension, trust JOHCM UK Opportunities, VinaCapital Vietnam Opportunity and Premier Global Infrastructure Income find themselves under the spotlight this monthP. 30-35

First world problemsThe choice of closed-ended

major call right, but still went on to lose money.

This month’s sector profile is on IT North America, Europe and Japan, with Adam Lewis finding out the limited number of trusts focused on these areas has been no barrier to long-term returns.

In our regular columns, FE Invest’s Charles

Younes reveals which strategic bond fund he believes is investors’ best bet for diversifying their equity exposure and LF Gresham House’s Ken Wotton names three promising stocks whose small size has led to them being overlooked by the majority of investors.

Finally, John Blowers weighs up the impact

of the FCA’s proposal to ban or limit exit fees on platforms – making it easier to rectify the mistake of choosing an expensive provider.

Enjoy reading,

Anthony LuzioEditor

54

46

38

funds focused on either the US, Europe or Japan is limited to just 20 names – but this hasn’t held back returns, writes Adam Lewis P. 36-41

FE Trustnet Magazine is 50!We celebrate our 50th edition by looking back at some of our favourite issuesP. 42-43

Opening the doorThe FCA plans to ban or limit exit fees on platforms, but John Blowers says the biggest savings for investors will come from other areas P. 44-51

Under the radarLF Gresham House UK Micro Cap’s Ken Wotton names three promising stocks whose small size has led to them being overlooked P. 52-53

What I bought lastFE Invest’s Charles Younes says Allianz Strategic Bond is one of the few funds in its sector to offer investors true diversificationP. 54-55

[ ADMITTING DEFEAT ]

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Admitting defeat

Danielle Levy finds out when it is time to accept you got it wrong and sell out of an investment

A dmitting defeat when a stock, fund or other asset hasn’t performed in line with your expectations is

one of the toughest challenges that any investor will face.

Investments can disappoint for a whole range of reasons and this means that each case must be assessed in isolation.

For example, an investor will need to ask themselves if the reason it has not panned out is as a result of a company or fund-specific reason, external factors that are unforeseen or out of their control, or simply a misjudgment on their part.

It doesn’t get easierEven armed with years of experience, selling out at the right time is something that professional investors continue to struggle with. For example, a recent research paper analysed the daily trades of institutional fund managers between 2000 and 2016 and found that far more time was devoted to buying investments than selling.

4 / 5Cover Story

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With this in mind, authors Klakow Akepanidtaworn, Rick Di Mascio, Alex Imas and Lawrence Schmidt concluded that professional investors displayed skill when buying into investments, but made poor decisions when it came to selling – and this ultimately compromised their overall performance.

Let it goIt goes to show that it is not only vital to time your buying decisions well, but also to recognise when you should “cut your losers”.

“Psychologically, it is very difficult to do this,” explains Andrew Wilson, chief investment officer at Lockhart Capital Management. “Many

Investments can disappoint for a range of reasons and this means that each case must be assessed in isolation

6 / 7

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Cover Story

investors hang on to losing positions for too long, waiting for them to at least get back to the level at which they bought them, although this is an entirely arbitrary and irrelevant metric – given the market does not care at what price you bought or what exit value you perceive you need.”

So how can investors avoid hanging on to an underperforming investment for too long? First off, there is an

easy step that can be taken during the buying process that will help you to continually assess whether the investment is performing in line with your expectations: write down your rationale for buying in.

“I would then consider selling if your rationale for buying a fund is shown to be spurious, the fund changes its spots or new information comes to light, like a new manager,” explains Peter Sleep,

“Many investors hang on to losing positions for too long, waiting for them to at least get back to the level at which they bought them, although this is an entirely arbitrary and irrelevant metric”

THE POWER TO KEEP GENERATING AN INCOME.SAINTS (The Scottish American Investment Company) aims to build up investment capital and generate an income that grows faster than inflation.

It focuses on three areas – growth, income and dependability. Our analysis centres on the sustainability and long-term growth of a firm’s cash flow. This naturally leads SAINTS to invest in high quality global companies with strong balance sheets. The desired outcome is a dependable and growing income stream alongside the prospect of capital growth. It’s a solution that could be well suited to investors enjoying a long and happy retirement.

Please remember that changing stock market conditions and currency exchange rates will affect the value of your investment in the fund and any income from it. The level of income is not guaranteed and you may not get back the amount invested.

For an investment that’s built to deliver a dependable income stream, call 0800 917 2112 or visit www.saints-it.com

A Key Information Document is available by contacting us. Long-term investment partners

SCOTTISH AMERICAN INVESTMENT COMPANY

SAINTS HAS GROWN ITS DIVIDEND EVERY YEAR FOR THE LAST 38 YEARS.

Your call may be recorded for training or monitoring purposes. Issued and approved by Baillie Gifford & Co Limited, whose registered address is at Calton Square, 1 Greenside Row, Edinburgh, EH1 3AN, United Kingdom. Baillie Gifford & Co Limited is the authorised Alternative Investment Fund Manager and Company Secretary of the Company. Baillie Gifford & Co Limited is authorised and regulated by the Financial Conduct Authority (FCA). The investment trusts managed by Baillie Gifford & Co Limited are listed UK companies and are not authorised and regulated by the Financial Conduct Authority.

Source: FE Analytics

FTSE All Share (30.59%)

LF Woodford Equity Income (9.71%)

IA UK All Companies (28.36%)

PERFORMANCE OF FUND VS SECTOR AND INDEX SINCE LAUNCH

-20%

-10%

0%

10%

20%

30%

40%

Jul14 Nov

Mar15 Ju

lNov

Mar16 Ju

lNov

Mar17 Ju

lNov

Mar18 Ju

lNov

Mar19

8 / 9Cover Story

“You need to be disciplined and intellectually honest and ask yourself: what has changed since you originally invested?”

FE TRUSTNET

senior investment manager at 7IM. Having this reference point will help

you to assess whether your buy thesis remains relevant – and this can also guide your analysis of why a fund or company has disappointed.

Wilson adds: “You need to be disciplined and intellectually honest and ask yourself: what has changed since you originally invested? What if anything do you know now that you didn’t know then? How does that buy-decision hold up in light of this new information?”

Black holesThere are numerous reasons why an investment can go wrong. If you have invested in a stock, you may have identified a catalyst which has the potential to improve the company’s performance or sentiment surrounding the stock, causing the share price to rise. As time passes, you will need to consider whether this catalyst has failed to materialise or has simply been delayed.

Secondly, an unforeseeable event can take place that changes your investment thesis, like a black hole in the company’s accounts or the shock departure of the manager.

Thirdly, you may have been let down by the management of a company or fund. For example, they have been over-optimistic, failed to execute their strategy effectively or haven’t been completely transparent on an issue.

Finally, have you bought into the investment at the wrong price or time? For example, a stock or investment trust may be performing well but if the share price already reflects this, the

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10 / 11

FE TRUSTNET

Cover Story

re-rating you expected to see may not come through. In this instance, it may be time to consider whether better opportunities lie elsewhere.

Auto traderWhen you first spot signs that an investment is not panning out as expected, Colin McLean, managing director of SVM Asset Management, suggests introducing an automated aspect to your sell process. For example, he tends to automatically sell down a position by a third as soon as doubts start to arise.

“The argument is there is not too much emotion in it if it is automatic,” he explains. “If the original premise of the investment is still the same, you can still make adequate returns from the position. But also, it starts the process of mentally stepping back.”

Others suggest formulating a plan around the time that you invest, so you are prepared in case it doesn’t work out. This could involve having a list of funds or stocks that can be substituted if you decide to sell out, suggests Gary Potter, co-head of multi-manager investments at BMO.

He says there are no hard rules when it comes to assessing whether it is the right time to sell, however. This is because much will come down to the circumstances surrounding the individual investment.

“The argument is there is not too much emotion in it if it is automatic. If the original premise of the investment is still the same, you can still make adequate returns”

FE TRUSTNET

[ADMITTING DEFEAT ]

Hard targets“The worst thing you can do is to set targets on how much you could lose. It is all about the circumstances in which that investment was chosen and whether it is dragging versus its objective and not fulfilling what you thought you would get,” he explains.

If your gut feeling is that you have got things wrong, Potter says it may be best to admit defeat and start to sell out.

“You should not cover it up and pretend it will get better with time. If, after analysis, things just aren’t working, the worst thing you can do is stay with it. The emotional drain of something not working disproportionately clouds your judgment and takes up time you should be spending on other things,” he adds.

WoodfordHowever, selling out of a high-profile fund manager whose performance continues to disappoint is easier

£6.3bnFall in size of LF Woodford Equity Income from peak

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12 / 13

FE TRUSTNET

Cover Story

said than done, particularly if they previously had a strong record. This is a dilemma likely to strike a chord with those invested with Neil Woodford. His LF Woodford Equity Income fund has had a challenging few years, plagued by poor performance which in turn has sparked outflows: the fund fell from £10.7bn during the summer of 2017 to £4.4bn at the end of March 2019.

LF Woodford Equity Income has lost 7.9 per cent over three years, compared with a 25.9 per cent gain from its IA UK All Companies sector.

Potter has not owned one of Woodford’s funds for many years, but says in this type of scenario investors can feel trapped as they have become emotionally involved in the fund.

“As the manager is high profile you assume they have got to come right. You have to strip that emotion from your decision. This is where the emotional side of the equation gets in the way and you just have to deal with the facts,” he explains.

In this situation, he says investors should take a step back and consider whether there are any other funds that represent a viable alternative.

On the other hand, it is important to remember that all fund managers will have periods where they underperform. This could be down to their style being out of favour

“The emotional drain of something not working disproportionately clouds your judgment and takes up time you should be spending on other things”

FE TRUSTNET

[ADMITTING DEFEAT ]

or getting a number of calls wrong. In these instances, the investor must assess whether it is a blip or a sign of trouble ahead.

Benefit of the doubtWilson favours experienced fund managers and tends to give them the benefit of the doubt during difficult periods.

“We accept even the very best managers have the odd bad year. Studies show the best funds over a decade have often had circa three really bad years within that decade,” he says.

Likewise, if you believe your investment thesis remains sound, then it may pay to be patient.

“Try not to get bored of a stock going sideways or doing nothing for ages,” Wilson adds. “This is not proof – yet – that you are wrong.”  

Define failure – Has the investment disappointed because of the way the fund is invested, the manager’s style or is it down to your judgment? If it is down to market circumstances not being in the manager’s favour, you may need to give it more time.

Have a subs bench – Never forget the importance of having an alternative fund lined up. Is there something out there that could serve you better?

Don’t be afraid to admit mistakes – Be honest with yourself and don’t put off analysing why an investment isn’t working out, particularly if you have good alternatives to draw on.

Analysis is key – It is important to understand why an investment is disappointing, as this will determine whether you give it more time or take the decision to sell out.

What to do if an investment is not panning out as expectedBy Gary Potter, co-head of multi-manager investments at BMO Global Asset Management

trustnet.com

The resilient ones

SAINTS’ joint manager Toby Ross tells Colin Donald about the search for companies built for bad times as well as good

C old Wars, real wars, trade wars, financial crises, oil shocks, downturns, tech bubbles: over four decades

all have successively messed with financial markets. None has stopped the Scottish American Investment Company (SAINTS) achieving its goal of real dividend growth even in the most challenging times. The last time the trust cut its dividend was in 1938, when the world was on the brink of cataclysm.

“The globe-spanning companies the trust invests in must provide investors with a dependable dividend income regardless of market adversity, while

14 / 15Advertorial feature

FE TRUSTNET

promising substantial future growth,” according to Toby Ross.

He sums up this rare combination in a single word: resilience. SAINTS’ managers think very hard about the underlying characteristics of a business and how much it needs to invest capital to boost further growth. Companies free from this requirement can often find cash to pay dividends, even in hard times.

Then there is the future growth trajectory. Can management look beyond current adversity with confidence that the business will be much larger in five or ten years’ time?

Those that can are much more likely to stand by dividend commitments.

SAINTS also likes management teams that take a very long-term view of the business, and which see sustaining a dividend as part of their bond with shareholders.

“Some boards don’t see the dividend as a priority and when things get difficult it will be the first thing to be cut. Those businesses are unlikely to

The value of your investment and any income from it can go down as well as up and as a result your capital may be at risk.

[ BAILLIE GIFFORD ]

be a good fit for SAINTS,” Ross says. To illustrate the many forms that

resilience can take, Ross cites two very different global businesses and markets from the trust’s holdings.

The first is Sonic Healthcare, an Australian medical diagnostics company whose shares have been owned by SAINTS since 2014 and

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16 / 17

the go-to buyer for independent lab owners looking to secure a legacy for their business.

Ross says that “Sonic’s business is very resilient to the ups and downs of the global economy. We think that this management team truly understands that what matters is the speed and accuracy with which they deliver to doctors and patients.”

Another poster child of resilience from SAINTS’ broad range of holdings is C.H. Robinson, a Minnesota-based trucking broker that matches loads to be transported with available drivers through its Navisphere software platform. Access

to the largest pool of customers and the largest pool of truckers allows it to provide a better service than rivals. It has few physical assets and does not require big capital expenditure for further growth.

“If times get more difficult and revenues slow, that’s ok because the business doesn’t need big reinvestment to grow. The management’s commitment to maintaining and growing the dividend is really high, regardless of whether the margins this quarter are higher or lower,” Ross says.

He also cites the commitment of C.H. Robinson management to pay out to shareholders from a sense of corporate duty. “They are very aware that there are lots of

retired employees who live on these dividends. Management has been very clear that they would rather not grow the dividend too fast but make sure it’s resilient, to allow them to keep growing it even when business is slower.”

Sustaining and improving on the trust’s long legacy of dividend growth, says Ross, is about “trying to understand what has made some companies resilient dividend payers even when things have got really hard”. The nuances can be subtle, but the reward is a portfolio dominated by companies in that sweet spot: able to bolster long-term growth and steadily increasing annual pay-outs to investors for the next four decades and beyond.

IMPORTANT INFORMATION & RISK FACTORS

• Investments with exposure to overseas securities can be affected by changing stock market conditions and currency exchange rates.

• The views expressed in this article should not be considered as advice or a recommendation to buy, sell or hold a particular investment. The article contains information and opinion on investments that does not constitute independent investment research, and is therefore not subject to the protections afforded to independent research.  

• Some of the views expressed are not necessarily those of Baillie Gifford. Investment markets and conditions can change rapidly, therefore the views expressed should not be taken as statements of fact nor should reliance be placed on them when making investment decisions.  

• A Key Information Document is available by visiting www.bailliegifford.com

whose patience and vision excite the trust’s managers.

Sonic has invested heavily in the fragmented but fast-growing global market for laboratory testing. This includes studying samples of tissue, blood and urine to determine the cause and nature of different cancers and other diseases. Over time, the combination of an ageing population and continued medical innovation mean that more of us are being tested for a wider range of conditions. Ross says that what makes Sonic stand out from its peers is long-standing CEO Colin Goldschmidt’s culture of ‘medical leadership’. When Ross met Goldschmidt in Sydney recently, he defined this culture as “doing the best for our patients [and] truly understanding what the doctor needs”.

As well as strengthening its standing with clinicians, this philosophy has also made Sonic

Advertorial feature [ BAILLIE GIFFORD ]

2014 2015 2016 2017 2018

10.5 10.7 10.825 11.1 11.5

SAINTS TOTAL DIVIDEND PER ORDINARY SHARE (NET) - PENCE PER SHARE

Source: Baillie Gifford & Co, data as at 31 December 2018

Past performance is not a guide to future returns.

Over time, the combination of an ageing population and continued medical innovation mean that more of us are being tested for a wider range of conditions

[ MISTAKES ]

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18 / 19Your portfolio

FE TRUSTNET

Breaking the cycle

Five fund managers tell Cherry Reynard about their biggest mistakes – and how they learnt not to repeat them

T here is now widespread acceptance that there is as much to be learnt from failure as from success,

yet many fund managers remain

Phil Milburn, who runs the Liontrust Strategic Bond fund, says any fund manager who doesn’t admit that they make mistakes “is either lying or Bernie Madoff”.

The manager started his career investing in equities before finding his “spiritual home” in fixed income and says to this day he is amazed at just how technically driven the bond markets are.

“In the strategic bond funds that I am managing, I have been running with a low duration strategy since spring 2011,” he explains. “During the European sovereign crisis, this proved to be a mistake as the flight-to-quality

Phil Milburn, Liontrust

reluctant to discuss their mistakes. There are a few exceptions, however: here are some brave managers who are happy to admit that it hasn’t all been plain sailing.

market reaction trumped any attempt to consider valuations.”

While he maintains his belief that government bond valuations are absurd, he says the lesson he learnt from 2011 was to temper the size of the position. This has served his funds well, enabling them to produce good total returns in the recent rates rally despite running with a comparatively low level of interest rate risk. 

“It is an oft repeated quote from Keynes but it is particularly apt here: ‘Markets can stay irrational longer than you can stay solvent,’” he adds.

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FE TRUSTNET

Your portfolio

David Keir, co-manager of the TB Saracen Global Income & Growth fund, says that if you are going to rely on other people for information, you need to make sure they don’t have an ulterior motive.

“When I first started in the industry, I was surprised by the vast

array of trading ideas I would receive on a daily basis from ‘helpful’ sell-side brokers,” he recalls.

“I was even more surprised by how quickly these brokers would change their views or fail to ever mention any trade ideas that had gone spectacularly wrong.”

Keir eventually worked

out that the brokers’ aim, which was to encourage him to churn his portfolio as often as possible, was incompatible with his clients’ best interests. As a result, he learnt that it is vital that you do the hard work yourself, take a long-term view and try not to trade unless absolutely necessary.

As a short seller, there is in theory no limit to how much Jupiter Absolute Return manager James Clunie can lose on a bad call. However, while other investors choose to manage this via a stop-loss, he doesn’t like doing this because it becomes predictable and the market can move against you.

“Instead, I look at when the newsflow goes in the

opposite direction and accept that I’ve made a mistake,” he says.

Clunie adds the biggest mistakes he has made have been when he has allowed himself to be influenced by other people’s views.

As a result, he says it is vital to think for yourself.

“Early in my career, I looked at a building materials company where the sell-side were all saying it was

great with a strong balance sheet, yet it slowly failed and I kicked myself for not highlighting it,” he adds.

“In contrast, there was a Glasgow-based property development company which had a similar buzz, but I worked in Glasgow and could see lots of empty offices. I put a sell recommendation on it when everyone else was recommending ‘buy’. That worked better.”

Gary Potter, co-head of the BMO GAM multi-manager team, says that in his world, there are two types of mistake: the first is where the markets move in a different direction to your own predictions, and the underlying asset selection, while not necessarily “wrong”, underperforms accordingly. The other is where analysis leads to a decision and the initial or ongoing analysis is flawed and incorrect.

“What is key in both cases is to not to be dogmatic but reassess and be prepared to take corrective action if, after review, there seems little chance of improvement on the horizon,” he says.

“There is always a tendency to ‘give it more time’, in the hope you will be proved correct. This lack of action can see an even worse outcome.”

Potter says you should have a process in place that allows for both reassessment and an alternative way forward if you think you may be wrong. He adds it is also important to involve other people with some distance from the original decision to help provide some independent thought.

“Have the humility to take action – either using an alternative idea or carrying out necessary further analysis to reinforce the position.”

For Lucy Macdonald, manager of the Brunner Investment Trust, her biggest mistake was investing in digital advertiser Criteo. However, while she describes the experience as “painful”, she says it was ultimately useful in that it reinforced her sell discipline.

“The stock had an impressive track record and management team, a leading position in a growing industry and an attractive valuation,” she remembers. “A few months after

we opened the position, the investment case was undermined by developments at Apple, which introduced an intelligent tracking prevention feature.”

As the damage became clearer, the manager sold at a loss that November. However, while she says this was an unpleasant experience, the stock went on to halve again, which she avoided.

“The lesson was a good one – if the original investment case has changed, exit the position swiftly,” she adds.

David Keir, Saracen

James Clunie, JupiterGary Potter, BMO

Lucy Macdonald, Allinaz

[ MISTAKES ]

[ BINARY EVENTS ]

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Fool’s gold

Correctly calling the outcome of a binary event is difficult enough. But even if you get it right, this doesn’t mean you won’t lose money on it, writes Anthony Luzio

O n the morning of 24 June 2016 as the world woke to find the UK had voted to leave the EU, Crispin Odey

of Odey Asset Management told the BBC: “There’s that Italian expression, ‘Al mattino ha l’oro in bocca’ – the morning has gold in its mouth – and never has one felt so much that idea as this morning really.”

Odey had reason to be happy – he had made an estimated £220m overnight by shorting the UK market and betting on gold. One of his funds, Odey Swan, ended the day up by just under 20 per cent.

However, while Odey anticipated the referendum result, what he didn’t anticipate was what happened next. With the FTSE 100 deriving about 70 per cent of its sales from overseas, the subsequent fall in sterling pushed the index to record levels over the next 18 months, and three of Odey’s six funds saw losses of 40 per cent.

22 / 23Your portfolio

FE TRUSTNET

No guaranteesThis summed up a major problem for investors who try to call major binary events. While the consequences of getting these wrong can be severe, even getting them right is no guarantee you won’t lose money.

This is not just a problem with major political events – it can happen at the individual company level, too. Jupiter Absolute Return manager James Clunie makes extensive use of short positions in his fund which should provide a boost if one of these companies releases a disappointing set of results. That’s the theory, anyway, however the manager pointed to his experience with online furniture

“We read the statement and said, ‘these are terrible results, this is great!’ Then shares jumped 27 per cent on the day”

retailer Wayfair to show how things don’t always go according to plan.

“Its last results were a shocker,” he explains. “Widening losses, negative cash-flow, a terrible balance sheet. And we read the statement and said, ‘these

THE POWER TO KEEP GENERATING AN INCOME.SAINTS (The Scottish American Investment Company) aims to build up investment capital and generate an income that grows faster than inflation.

It focuses on three areas – growth, income and dependability. Our analysis centres on the sustainability and long-term growth of a firm’s cash flow. This naturally leads SAINTS to invest in high quality global companies with strong balance sheets. The desired outcome is a dependable and growing income stream alongside the prospect of capital growth. It’s a solution that could be well suited to investors enjoying a long and happy retirement.

Please remember that changing stock market conditions and currency exchange rates will affect the value of your investment in the fund and any income from it. The level of income is not guaranteed and you may not get back the amount invested.

For an investment that’s built to deliver a dependable income stream, call 0800 917 2112 or visit www.saints-it.com

A Key Information Document is available by contacting us. Long-term investment partners

SCOTTISH AMERICAN INVESTMENT COMPANY

SAINTS HAS GROWN ITS DIVIDEND EVERY YEAR FOR THE LAST 38 YEARS.

Your call may be recorded for training or monitoring purposes. Issued and approved by Baillie Gifford & Co Limited, whose registered address is at Calton Square, 1 Greenside Row, Edinburgh, EH1 3AN, United Kingdom. Baillie Gifford & Co Limited is the authorised Alternative Investment Fund Manager and Company Secretary of the Company. Baillie Gifford & Co Limited is authorised and regulated by the Financial Conduct Authority (FCA). The investment trusts managed by Baillie Gifford & Co Limited are listed UK companies and are not authorised and regulated by the Financial Conduct Authority.

trustnet.com

24 / 25Your portfolio

are terrible results, this is great!’ Then shares jumped 27 per cent on the day.

“We were like, ‘what the heck, what are they looking at? These are really shoddy results!’”

No evidenceClunie realised something was wrong when he read the notes from sell-side analysts, which focused almost entirely on the high sales growth and paid little interest to all the negative fundamentals.

“I thought that was really weird because there is no evidence in all the literature and academic studies on what makes markets work that high sales-growth companies outperform,” he adds.

“So here is a metric that doesn’t work in markets, but everyone is focused on it. So we didn’t part cover it, we just took the loss, which was really challenging, but then it continued to go

up after that. Now in the next few days the directors were selling out of their shares like crazy, yet it still went up. So the directors must have been reading through the statements, but the market was only focused on one thing.”

FAANG bitesThis isn’t the only time when the market has moved against Clunie even though one of his theses had been proved correct – for example, he predicted that Netflix would begin to suffer from oversupply in the online streaming market due to a wave of competition from the likes of Amazon Prime, Hulu and Disney as well as all of the terrestrial channels.

However, while Netflix “to its credit” has admitted that this is an issue, Clunie says that the market seems to be focusing almost entirely on quarterly subscriber growth – and whenever these numbers beat

“We ride the optimistic price rise, sell out, leave maybe a bit on the table until the data comes out and then we are not in a position of holding a falling knife and looking for a hasty exit if the news is bad”

27%FTSE 100’s gains in 18 months from day of EU referendum

Property Investment Company PLC

Further information (including share price performance and dividend history since launch) can be found at www.epic-reit.com.

Important Information:

The value of your investments can go down as well as up so you could get back less than you invested. Past performance (and dividend yield information) is not a guide to future returns.

The payment of dividends and the repayment of capital are not guaranteed and any quoted yield is indicative only. The value of a stock market investment and any income from it can fall as well as rise and investors may not get back the amount invested. This promotion should not be construed as legal, tax, investment or other advice. Any prospective investor should make their own enquiries and consult their own professional advisers as to the legal, tax and financial implications and risks concerning any investment opportunity. The tax treatment of ISAs may be subject to change in the future.

Issued and approved by Ediston Investment Services Ltd, authorised and regulated by the Financial Conduct Authority (FRN:706655) *As at 31/12/18

EPICfor income

5.4%Annualiseddividend yield*

paid monthlytax free in ISA dividend cover x1.19

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Your portfolio 26 / 27

expectations, the shares tend to rally “10 to 15 per cent”.

So why make these calls at all when even when you get one right, you can still get it wrong?

Clunie says there are two main reasons – the first is that his average short position tends to do worse than the market.

“So if the market is up 10 per cent, we aren’t typically down 10 per cent, but if the market is down 5 per cent, we are typically up 5 to 7 per cent,” he explains. “So over the track record, we have added about 2 per cent a year alpha.

“Second, what we do is so different to what other funds do, so it helps to manage the overall risk in a portfolio. We are net short of equities and our portfolio goes up when markets go down.

“So when you have a fund that is negatively correlated, it adds 3 to 5 per cent into your suite of funds and it actually helps to lower the overall level of risk.”

Ailsa Craig and Dr Carl Harald Janson, the managers of the International Biotechnology Trust, take the complete opposite approach. Biotech firms often rally or crash on the results of clinical

“I don’t believe in market timing, I don’t believe you are going to get it right all the time – in fact, I don’t believe you are going to get it right two times in a row”

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28 / 29Your portfolio

FE TRUSTNET

trials – but rather than trying to second-guess the outcome of these binary events, the managers begin to trim their positions in a company ahead of a major announcement in a bid to avoid a potential double-digit price fall if the results disappoint.

Lucy Costa Duarte, head of investor relations on the trust, says this strategy works because the market is inherently optimistic.

Falling knives“We ride the optimistic price rise, sell out, leave maybe a bit on the table until the data comes out and then we are not in a position of holding a falling knife and looking for a hasty exit if the news is bad,” she explains.

“And if it is good, we can buy it back pretty quickly and even if we lose a little bit, on a risk-weighted valuation basis it’s actually probably cheaper.”

Craig adds: “There are approximately 1,000 companies and each one has two or three major events every 12 months, so you’ve got to know not only what the risk-reward is but what the perception is of the risk-reward and then when that is happening.

“Then you make a call on whether that is priced in or not.”

John Husselbee, head of multi-asset at Liontrust, is more pragmatic.

“I don’t believe in market timing, I don’t believe you are going to get it right all the time – in fact, I don’t believe you are going to get it right two times in a row,” he says.

“However, I do believe in cycles in markets. I do believe that events push you to be more defensive at certain points in the cycle, and more aggressive at other points in the cycle. So I do believe there is merit in tilting portfolios.”

”A European phase”As a manager of European funds for the majority of his career, Waverton’s Charles Glasse has seen his fair share of headline-grabbing political shocks and says the situation with Brexit is simply “the UK going through a European phase”.

[ BINARY EVENTS ]

However he has largely ignored these by holding quality international companies that are capable of thriving regardless of what happens with the local economic or political situation.

“Something I have learned over the past 30 years is spending a lot of time worrying about who the next president or prime minister of Italy or Spain is going to be is an utter waste of time as far as stocks are

concerned,” he says.“But it is great for newspapers

because it fills a lot of column inches.”

“Spending a lot of time worrying about who the next president or prime minister of Italy or Spain is going to be is an utter waste of time as far as stocks are concerned”

In focus

FE TRUSTNET trustnet.com

30 / 31 [ FUND ]

Source: FE Analytics

MANAGERS: Rachel Reutter & Michael Ulrich / LAUNCHED: 30/11/2005 / FUND SIZE: £453.8m / OCF: 0.87%

FACT BOX

FE CROWN RATING

JOHCM UK Opportunities

Rachel Reutter’s fund was recently kicked out of the IA UK All Companies sector after raising its cash level above 20 per cent

F unds with large cash positions are often criticised, with investors arguing that they

should not be paying fees to a manager not to invest. And when that cash position reaches a quarter of total assets, it can lead to investors voting with their feet.

However, JOHCM UK Opportunities’ Rachel Reutter says the flexibility provided by this cash position gives her fund an advantage over other UK equity strategies as it allows her to minimise exposure to potential losses.

“The definition of risk has become really distorted and for most of our industry, risk means deviation from some benchmark,” she said. “Whereas our investment philosophy says: ‘let’s try to avoid a capital loss’.”

Reutter and co-manager Michael Ulrich invest in a high-conviction portfolio of large-cap stocks, which she describes as “the most unloved sector out there”.

PERFORMANCE OF FUND VS INDEX UNDER MANAGERS’ TENURE

They make use of a top-down overlay to identify investable themes – such as changing demographic trends – that can be linked with its bottom-up stock selection process.

Reutter said valuations have risen significantly since the global financial crisis with many UK equity funds paying for quality or growth at any price, which can hurt investors if companies receive a sudden shock.

Given the level of concentration in JOHCM UK Opportunities – with just 29 holdings – being able to offload companies that are overvalued or are being mis-managed could be problematic. However, Reutter said being able to move to large cash positions can help offset this risk.

“A lot of funds have to be permanently invested or as close to fully invested as possible,” she explained. “It’s having the mental flexibility to say: ‘Right, we have a problem here. We’ve either got overvaluation resulting in permanent

capital loss or a management team doing some risky stuff where we could also end up with permanent capital loss’.

“Being able to hold cash means, okay, we can make that decision – we can sell it to zero and get rid of the problem.”

After moving to a net cash position above the Investment Association’s permitted levels of 20 per cent, the

fund was moved from IA UK All Companies to the IA Specialist sector in September 2017.

JOHCM UK Opportunities has made 3.45 per cent since Reutter and Ulrich took over in September 2017, level with its FTSE All Share benchmark. The average IA UK All Companies fund has returned just 0.57 per cent.

JOHCM UK Opportunities (3.45%) FTSE All Share (3.45%)

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32 / 33 [ PENSION ]

Source: FE Analytics

MANAGERS: James Smith & Claire Long / LAUNCHED: 07/12/2009 / FUND SIZE: £68.6m / OCF: 1.12%

FACT BOX

FE CROWN RATING

Premier Global Infrastructure Income

This fund has paid the second highest dividend in the IA Global Equity Income sector over five years – and offers diversification away from equities and bonds

W hile bonds and UK equity income tend to be the mainstays of most

retirement portfolios, there are many funds exposed to other assets that also pay out a healthy yield. One example of this is Premier Global Infrastructure Income.

The £68.6m fund has paid out the second highest distribution in the IA Global Equity Income sector over the past five years: an initial investment of £10,000 at the start of 2014 would have delivered £2,961.59 in income by the end of 2018, compared with a sector average of £2,154.43.

Premier Global Infrastructure Income offers global exposure to transport (roads and airports), utilities (gas, water and electricity), energy (pipelines and storage) and communications (towers and satellites).

Infrastructure is typically thought of as a more defensive area of the

PEFORMANCE OF FUND VS SECTOR OVER 5YRS

market as it is essential for a country’s economic wellbeing, which can make it an attractive option for retirement portfolios. However, it is worth bearing in mind that it does have some risks, such as returns that are correlated to the economy and regulatory interference.

When James Smith joined Claire Long on the fund in 2012, he changed the mandate from a focus on utility technology to utility income. Its investment universe now comprises between 400 and 500 stocks, while the process behind it involves top-down and bottom-up analysis.

From a top-down perspective, the managers examine a region’s economic, political and regulatory environment to decide if a country is investable, before they assess individual companies by looking at their competitive advantages, valuation and management.

The fund’s relatively high exposure to emerging markets represents an additional risk – it has 17.8 per cent of assets in China, 12.3 per cent in Latin America and 1.8 per cent in India. However, the income focus smooths its risk profile and the team has the ability to use bonds to reduce volatility.

The FE Invest team, which has

added Premier Global Infrastructure Income to its Approved List, said: “Smith is very detail-orientated, having come from an accountancy background.

“He also differs from peers as he has a strong focus on income and analysing a company’s ability to pay the dividend.”

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IA Global Equity Income (47.64%) Premier Global Infrastructure Income (43.32%)

In focus

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34 / 35 [ TRUST ]

Source: FE Analytics

MANAGER: Don Lam / LAUNCHED: 30/09/2003 / DISCOUNT/PREMIUM: -16.5% / OCF: 1.8%

FACT BOX

FE CROWN RATING

VinaCapital Vietnam Opportunity

This trust represents one of the few ways to get exposure to a country dubbed “the new China”

I A China/Greater China has made by far the highest return of any IA sector over the past 20

years, at 816.23 per cent, well ahead of IA European Smaller Companies in second place with gains of 588.27 per cent. However, while China still has a strong future ahead of it, even the staunchest proponent of what is now the world’s second largest economy would not predict a repeat performance over the next two decades.

Instead it may be better to look for “the next China”, which Sat Duhra, a portfolio manager on Janus Henderson’s Asia ex Japan equities team, believes is Vietnam.

“When you go to meet corporates in Vietnam, they all seem to be growing at 30 to 40 per cent,” he explained.

“Vietjet, which is one of the biggest airlines, has grown from 60 aircraft to 410. This is not unusual. Every company we meet is doing exceptionally well.”

PERFORMANCE OF TRUST VS INDEX OVER 10YRS

However, foreign ownership limits mean Vietnam is not the easiest country for investors to access – which helps to explain why there are no open-ended funds focused solely on the country and just three closed-ended ones. Duhra uses one of these, VinaCapital Vietnam Opportunity, for his exposure in Henderson Far East Income.

The managers of the trust have a private equity-like approach, taking meaningful stakes in each company and acting like partners once they are invested. Approximately 90 per cent of the investments are in unlisted companies, although 80 per cent of its holdings are currently trading on the stock market, with most having floated since they bought in.

They look for three elements in particular when considering a potential holding: a growing sector, which is typically domestically focused; a strong management team; and high standards of corporate governance.

Deputy managing director Khanh Vu is unsurprisingly as optimistic as Duhra on the prospects for Vietnam.

“Think of it this way,” he said. “There are few countries in the world with a population of 100 million. And importantly, 65 per cent of the population is under 35. That is an incredibly productive workforce.

“So that runway for growth, moving

through poverty to low income to middle income. There is a huge runway for opportunity there.”

VinaCapital Vietnam Opportunity has made 434.55 per cent over the past decade compared with gains of 132.32 per cent from the MSCI Vietnam index.

It is on a discount of 16.5 per cent compared with 18.27 and 19.76 per cent from its one- and three-year averages.

VinaCapital Vietnam Opportunity (434.55%) MSCI Vietnam (132.32%)

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199%Difference in returns between IT Japan and IA Japan over 10yrs

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First world problems

W hen it comes to the largest developed markets outside of the UK, investors in

trusts seem to prefer to take a global approach rather than making a call on an individual region.

With assets under management of £25.8bn, IT Global dwarfs the £3.7bn Europe, £3bn North America and £2.4bn Japan sectors.

Investors are also faced with considerably less choice in these three sectors than with their open-ended counterparts. Compared with 326 offerings in the IA North America, Europe ex UK and Japan sectors, investors who want to access these three major markets using a trust have the choice of just 20 names.

However, the rewards on offer can be stark over the long-term. Despite the lack of choice, investors would have been better off using a closed-ended fund to access these three major regions over the majority of time periods.

In focus [ SECTOR PROFILE ]

FE TRUSTNET

So if investors do decide to go down the regional route, where should they be looking at right now?

Depressed sentimentSentiment has been depressed in Europe for some time and according to Kepler it still looks cheap in absolute terms and relative to its own history. Of the three sectors, IT Europe sits on the highest average discount to net asset value (NAV) at 7.8 per cent, which is both higher than its 6.6 per cent and 5.2 per cent three- and five-year averages.

Despite the lack of choice, investors would have been better off using a closed-ended fund to access these three major regions over the majority of time periods

“Investment trusts in all sectors tend to outperform their open-ended peers over longer periods,” notes Pascal Dowling, a partner at Kepler. “There are various reasons for this, such as they don’t need to carry cash to meet redemptions, they can gear up, which boosts returns when the times are good, and they never need to sell their investments to meet redemptions, which helps when times are bad.

“The security of knowing that the latter is the case also means that their managers can invest in smaller, more liquid opportunities which can often have the most dramatic return profiles, adding another dimension.”

The choice of closed-ended funds focused on either the US, Europe or Japan is limited to just 20 names – but this doesn’t seem to have held back returns, writes Adam Lewis

36 / 37

trustnet.com

“Recent years, particularly for Europe, have seen a great deal of volatility so it is reasonable to surmise investment trusts in these three sectors are in an ever more than usually advantageous position versus their open-ended peers,” says Dowling.

IT Japan also looks cheap, sitting on a 6.2 per cent discount to NAV, but at a discount of 2.9 per cent versus a five-year average of 4.2 per cent, IT North America

appears expensive relative to its

history.

[ SECTOR PROFILE ]

“European economies are struggling, with Germany delivering zero growth in Q4 2018 and little sign of improving prospects in the near future”

38 / 39In focus

and links to Asian demand. “European economies are struggling,

with Germany delivering zero growth in Q4 2018 and little sign of improving prospects in the near future, while France is wrestling with its own issues which is hitting business and consumer confidence,” he says.

“With German bond yields turning negative again, it shows just how much the market is worrying about the economy and with these challenges, it is likely in my view that European markets continue to lag the US for some time to come.”

Hughes accepts the counter argument – that European equities offer much better value than their US counterparts – holds some weight. However, he adds that at this stage he doesn’t see this as enough

Name 1yr (%) 3yr (%) 5yr (%) 10yr (%)

IT Japan -7.38 43.95 98.31 345.04

IT North America 13.01 59.02 70 330.31

IT Europe -0.68 35.24 43.57 256.64

IA North America 15.69 54.06 91.83 298.88

IA Europe ex UK -1.2 29.1 35.5 169.05

IA Japan -3.58 39.34 68.81 145.66

PERFORMANCE OF SECTORS

FE TRUSTNET

“A lifetime ago”“The start of 2017 seems a lifetime ago when commentators were talking about synchronised global growth,” says Ryan Hughes, head of active portfolios at AJ Bell Investments.“However, today’s environment looks very different, with a clear disconnect between the US and other economies, particularly Europe but also Japan.

“The strange quirk of the largest economy in the world is that it is relatively insular and not as reliant on global growth as other markets and, as a result, the slowing of growth in Asia and Europe has had less of an impact on the US economy.”

Hughes adds that if we are entering a period of lower global growth, which looks likely given recent comments from the Federal Reserve, he thinks this presents a problem for Europe given its sluggish domestic economy

Source: FE Analytics

[ SECTOR PROFILE ]40 / 41

trustnet.comFE TRUSTNET

The US choice:The North American Income TrustThe Aberdeen-managed North American Income Trust tops the rankings in the seven-strong IT North America sector over three and five years. Previously the Edinburgh US Tracker, the trust adopted an actively managed US equity income mandate in May 2012 and has been managed by Fran Radano and Ralph Bassett, who are based in Philadelphia,

since June 2015. Simon Elliott, head of research at Winterflood Investment Trusts, says that not only does the trust offer attractive exposure to US equities, but its yield of 2.9 per cent is more than 1.5 times that of the index. “We believe the strategy pursued by the North American Income Trust remains well positioned, particularly as it is complemented by a modest allocation to bonds and an option writing strategy,” he adds.

The European choice: Fidelity European ValuesSamuel Morse’s Fidelity European Values trust sits top of the IT Europe sector over one, three and five years. It has made 140.7 per cent since the manager joined at the start of 2011, compared with 81.71 per cent from its FTSE World Europe ex UK benchmark, yet still sits at a discount of 9.1 per cent, wider than the sector average. Elliott says this represents a value opportunity, adding

“we would be surprised to see it widen further given recent comments from the chairman and the ability to buy back shares”. The portfolio has a bias towards quality and growth, with Morse seeking out attractively valued companies that are capable of growing their dividend. Elliott says this means it is likely to underperform strong market rallies, as seen in 2013, but outperform in down markets, as demonstrated in 2011 and 2018.

The Japanese choice: Baillie Gifford Japan TrustThe Baillie Gifford Japan Trust aims to invest in medium- to smaller-sized Japanese companies that are believed to have above-average prospects for growth. Following the retirement of Sarah Whitley, Matthew Brett assumed the role of lead manager in May last year, with Praveen Kumar becoming deputy. While Whitley had managed the trust for 26 years before stepping

down, Elliott notes the approach has undoubtedly been team-based and as a result he does not expect the strategy to change materially as a result of her retirement. In a sector of just five trusts, Baillie Gifford Japan takes the honour of top performer over one, three and five years. The trust is one of four in the sector trading at a premium to NAV but this has narrowed from nearly 7 per cent at the end of 2017 to 3.1 per cent today.

to tempt investors back into the region, particularly with the political uncertainty that remains in a number of the major economies.

Corporate reformTurning to Japan, he says that while it has also lagged the US from an economic perspective, its stock market has actually outperformed for most of the past five years.

“Corporate reform continues to evolve in Japan with companies sitting on large cash piles that are starting to find their way back to shareholders and this is providing support to the market,” he says. “However, the success of Japan will be dependent on the rest of Asia,

“Corporate reform continues to evolve in Japan with companies sitting on large cash piles that are slowly starting to find their way back to shareholders”

notably China, and this looks like an area that will slow, albeit gradually.

“With the high cash levels, I think Japanese equities have more of a chance of matching the US than Europe, although it is likely to come with more volatility, particularly if the global economy slows even further.”  

In focus

PERFORMANCE OF TRUSTS VS SECTOR OVER 10YRS

Source: FE Analytics

Fidelity European Values (221.03%)

The North American Income Trust (317.05%)

Baillie Gifford Japan Trust (526.10%)

IT Global (276.68%)

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x / xCelebrating our 5oth issue

With this month marking the 50th edition of FE Trustnet Magazine, we look back at some of our favourite issues since launch

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FE TRUSTNET

FE Trustnet Magazine is 50

trustnet.com

Issue 1: October 2014

THE FIGHT FOR INCOMEThe first issue launched in October 2014 from the ashes of Investazine, containing many of the features you still enjoy today, albeit in a slightly different format. Aside from a cover story on “why investment trusts are the ultimate weapon for income investors”, it also contained a guide on how to protect your portfolio were Ed Miliband to win the upcoming general election.

Issue 23: November 2016

CIGARETTES & ALCOHOL This issue’s cover story attempted to work out how much Oasis frontman Liam Gallagher had spent on cigarettes and alcohol since the release of the single Cigarettes & Alcohol 22 years earlier and how much better off he would have been had he invested the money in tobacco and beverage stocks instead – £146,734.65 and £787,931.03, respectively, according to our calculations.

Issue 19: June 2016

EUROPE: THE FINAL COUNTDOWNThis wasn’t the first issue devoted to Brexit, as we first broached the subject in September 2015 when it was regarded as little more than a peripheral concern. As the clock began to tick down to the referendum, designer Javier Otero’s cover image summed up growing concerns in the City – even if the accompanying story opened on a recovery in sterling in anticipation of a “remain” vote.

Issue 30: June 2017

MYTHS & LEGENDSAs its title suggests, this issue focused on myths & legends. The cover story investigated whether five oft repeated investment adages held water, such as whether a monkey really can beat the average active manager. We also looked at three investment legends to find out how they made their fortune and rounded off the issue with a spot of unicorn hunting.

Issue 22: October 2016

RISE OF THE MACHINESOne of the most interesting aspects of covering the fund management industry is learning about the development of new technology. However, as revealed in the cover story “Rise of the machines”, while the companies making drones, driverless cars and 3D printers may grab all the headlines, this doesn’t necessarily make them the best investments.

Issue 39: April 2018

LOAN SURVIVORSOne of the advantages of trusts is their ability to gear to super-charge performance. However, many of them took out long-term loans back in the 1980s and early 1990s, locking in double-digit interest rates. Now these debentures are maturing, it is allowing these vehicles to refinance at much lower rates. We looked at how much of a tailwind this should be in the coming decades.

44 / 45In the back

Opening the door

The FCA plans to ban or limit exit fees on platforms – but John Blowers says the biggest cost savings for investors over the next few years will come from other areas

[ PLATFORMS & PENSIONS ]

trustnet.com

A couple of years ago, the Financial Conduct Authority (FCA) came knocking on the door

of the UK’s investment platform providers with a huge list of questions and requests for all manner of data to try to find out if investors were getting a raw deal.

On my part, I spent a few evenings working late in the office, putting together the FCA submission for my old firm, but some of the largest platforms must have had sleepless nights compiling vast dossiers of information.

Nothing to worry aboutWhat was afoot? Were the FCA going to come down hard on the industry and change the rules mid-game?

Platforms needn’t have worried, as last month the FCA finally produced its report on the industry and the findings were broadly as expected.

FE TRUSTNET trustnet.com

The FCA even mildly flattered the industry, saying: “Overall, we found that the market is working well in many respects, for both advised and non-advised consumers. Consumers who pay more typically get access to a greater range of non-price features and they are, overall, satisfied with their platform.

“Platforms also appear to help consumers and financial advisers make informed investment decisions free of investment product bias. This suggests that platforms are competing in the interests of most consumers.”

It’s pleasing to see a bit of pro-active thinking, as opposed to mopping up after some mis-selling crisis or boiler-room scam

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46 / 47In the back [ PLATFORMS & PENSIONS ]

You can never completely satisfy the regulator, and remember, it has your best interests at heart so it’s pleasing to see a bit of pro-active thinking, as opposed to mopping up after some mis-selling crisis or boiler-room scam.

The FCA wants to see some positive change, which should hopefully see improvements in efficiency and the potential for further lowering of costs.

The big change is likely to be the limitation or removal of exit fees, those perishing charges that get levied if you want to go to the trouble of moving your investments from one platform to another.

Escape routeNot only that, it wants to ensure that when you do move, it happens smoothly, without forcing you to sell and re-buy the same investments, potentially triggering a nasty tax bill.

Many people who have considered moving from their existing platform

to another have been put off by the almighty faff of doing so.

Understandable, but easier movement between platforms is something the FCA wants to see happen sooner rather than later. As

with banking, we’re a pretty lazy bunch and the phrase “customer inertia” is the great friend of the big banks and is limiting the growth of some of the new and exciting digital propositions coming through.

While making it easy to move bank accounts has been only a partial success, the FCA believes the platform

industry should follow suit, as it believes there are numerous barriers to customers moving to cheaper or more suitable services.

Some of the most popular and established platforms can charge up to 0.45 per cent per annum on the value

PLATFORM FEES ON £100,000 INVESTED OVER 20YRS

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£14,880 at 0.45% p.a.

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Many people who have considered moving from their existing platform to another have been put off by the almighty faff of doing so

48 / 49In the back [ PLATFORMS & PENSIONS ]

trustnet.comFE TRUSTNET

of your portfolio each year, whereas the average fee seems to be around 0.3 per cent. Some platforms just charge a flat quarterly fee, regardless of the value of your portfolio.

You may not think these “trifling amounts” will make much difference to the eventual value of your portfolio, but you couldn’t be more wrong.

Imagine you had £100,000 invested and it grew on average at 5 per cent per annum over 20 years.

If you invested with a fixed price platform charging, say, £90 per annum, you would pay £1,800 in fees over that 20-year period.

If you were being charged 0.45 per cent on the same portfolio, you would pay £14,880 over the period, some £13,000 more for the same service. That’s a brand-new Ford Fiesta, a new kitchen or a pretty smart holiday.

More charges mean you have less money invested and less opportunity

for growth, so in effect, it’s a double-whammy to your portfolio.

Raising awarenessSo, the FCA is rightly keen to make people more aware of charges and make it easier to get out of an expensive arrangement and into something that will boost your investment objectives.

By eliminating exit charges and smoothing the transfer of assets from one platform to another, it should remove the two key hurdles to finding the best home for your investment.

My portfolio has grown to a rather rambling 36 holdings now, which could cost me £900 to move if I were charged a pretty standard £25 per line of stock to move to another platform.

Some platforms have already taken a lead on exit fees, with Interactive Investor and Fidelity Personal Investing dropping these charges altogether.

As a point of note, platforms do offer a wide array of services that may

make you feel more comfortable as an investor, so you shouldn’t judge on price alone, but the two examples of pricing used above are from the largest and second largest investor platforms in the UK and have broadly similar offerings.

These changes have yet to come into force and, as is the glacial pace of the regulator, there will be a further round of consultation on these proposals and eventually it may just choose the easy option and cap exit fees, rather than scrap them.

Making progress This should still be good news for investors who use platforms, but it’s only a small step in the huge leap in cost reduction and service improvement that has been achieved over the last decade.

It used to cost 1.5 per cent per annum on each investment you made before the Retail Distribution Review (RDR) in 2014, with around half going to

Source: FE Analytics

PERFORMANCE OF FUNDS OVER 5YRS

Polar Capital Global Technology (190.13%)

Vanguard LifeStrategy 100% Equity (65.69%)

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50 / 51In the back [ PLATFORMS & PENSIONS ]

trustnet.comFE TRUSTNET

the fund manager and the other half going to the platform (or adviser) in the form of trail commission.

Since then, commissions have been banned and new technology has shrunk the platform fee to well below half its previous cost. Fund managers themselves are finding it hard to justify the high fees charged for their actively managed funds (often between 0.75 and 1 per cent) and low-cost passives are heaping pressure on firms to reduce fund costs.

Vanguard’s much-loved LifeStrategy fund range now costs just 0.22 per cent per annum to invest in as opposed to 1.16 per cent for FE Trustnet’s top performing Polar Capital Global Technology fund. In this case, you wouldn’t have been too bothered, as the active fund has performed extremely well (up by close to 200 per cent over five years), but there are plenty of expensive funds out there that aren’t doing so well.

So, what of the future?There is no doubt platforms have been a boon for private investors in an era where investment information has become more readily available while the cost of advice has risen steeply.

Most hobbyist investors now have the resources to manage their

portfolio for a low cost, have a wide choice of assets to choose from and can group them according to their objectives using sophisticated portfolio management tools.

However, the industry rarely stands still for long and having recently attended a major financial technology conference, I can see that further change is afoot and two emerging trends in particular have the potential to make platforms obsolete.

Problem solversFirstly, fund management groups are focusing more on “solutions”

rather than individual funds. By this, I mean offerings that comprise different asset classes, funds-of-funds from their own stable, or even other fund managers. These are designed to be actively managed towards an objective, such as retirement or shorter- to medium-term goals, for example funding a second home or paying off your mortgage.

If these fund management groups can get the costs of these portfolios down and offer them directly to the public, why would you need to pay the additional expense of a platform as well?

Let’s face it. Do you really need to be invested in all the funds you’ve probably collected in your lifetime? Do you really know exactly which funds you should be dumping and which funds you should be moving in to? And when to do this?

Would it not be better to pick a proven expert in the field and let them do it for you on a discretionary basis? Effectively that’s what IFAs do

on behalf of their clients and charge royally for the privilege.

Secondly, we now live in the world of open banking, where you can see all your bank accounts in one place, as they are now obliged to let you choose how you access this data.

What if the same rules apply to fund managers, too? You could buy funds at a low cost directly from the manager and view your investments within your online banking app. Again, there would be no need for a platform to intermediate and administer all your investments, potentially saving you many thousands of pounds in charges. You’d also get to see all your bank details and investments together in one place, which would be useful.

Technology has never moved at a faster pace and the UK has rightly earned its place as the leading global innovator when it comes to fintech.

Competition from emerging technology companies is likely to change the dynamic that makes using a platform so appealing, with the result that we are likely to see a war develop among providers. The high street banks, current platform providers, fund managers and new technology companies are all planning to offer access to investments in a better and cheaper way, which can only be good for the private investor.

And this is exactly what the regulator wants to see.  

Technology has never moved at a faster pace and the UK has rightly earned its place as the leading global innovator when it comes to fintech

[ STOCKPICKER ]

FE TRUSTNET trustnet.com

In the back 52 / 53

Selecting such winners requires patience, as well as a commitment to invest in the necessary resources

Under the radar

LF Gresham House UK Micro Cap’s Ken Wotton names three promising stocks whose small size has led to them being overlooked by the majority of investors

B y shying away from smaller, lesser-known companies, investors can overlook a raft of

sizeable opportunities. Looking down the market-

cap spectrum enables greater diversification of returns and with micro-cap stocks trading at a discount to larger, more well-known peers, it also allows us to pick up interesting

Inspired Energy is an independent energy consultant that advises mid-sized corporates and higher-end SMEs on how to optimise utility expenditures. Inspired is paid commission from contracts with large en-ergy suppliers, based on the energy usage compa-

nies incur, guaranteeing multi-year revenue and high earnings visibility. It also continues to rein-vest to grow the business, supporting our long-term investment thesis. The company is one of the few that truly understands its customers, which is why we think it is poised for continued strong perfor-mance.

UK legal services busi-ness Knights Group op-erates under a commer-cial structure and not an equity partnership, in a large, addressable market. It has diversified earnings streams and a high degree of repeat revenue from ex-isting customers, while its management has a strong

growth strategy that com-bines recruitment of qual-ity regional lawyers and acquisitions at attractive multiples. The team is in tune with what motivates lawyers and the levers the business must pull to meet KPIs. This supports the prospects of multi-year, long-term profit and cash-flow growth to in-crease its dividend.

Impax Asset Manage-ment is a specialist in-vestment manager that believes capital markets will be shaped by global sustainability challenges, which will drive growth for well-positioned com-panies. As demand con-tinues to grow for asset allocators to increase

exposure to the environ-mental and sustainabil-ity spaces, the group’s focus should continue to drive asset flows and de-liver further shareholder value. Impax has a busi-ness model with strong operational leverage driv-ing profit margins, cash generation and dividend growth as assets under management scale.

companies at attractive valuations. Additionally, we are more confident in the ability of agile smaller businesses to negotiate macroeconomic turbulence.

What is important to remember about smaller stocks is that selecting such winners requires patience, as well as a commitment to invest in the necessary resources. Through in-depth proprietary research, we have unearthed high quality under-the-radar companies.

FE TRUSTNET trustnet.com

[ WHAT I BOUGHT LAST ]In the back 54 / 55

Charles Younes is a research manager at FE Invest

Allianz Strategic Bond’s low correlation to equities means it behaves like a true bond fund and plays fixed income’s traditional role of diversification

bonds and the managers are unlikely to invest more than 1 per cent in a single company.

An unpopular positionThe fund has a broad global bond benchmark, the Bloomberg Barclays Global Aggregate index, hedged back to sterling, which the managers aim to outperform by allocating equal amounts of their strategy to calls on interest rates, credit, inflation and currency.

This equal split is attractive as most funds are essentially

managing credit plus interest rate duration. The fund’s ability to make money out of long-duration positions has been impressive – this was an unpopular position for bond managers to take when the central banks began hiking rates.

Allianz Strategic Bond’s low correlation to equities means it behaves like a true bond fund and plays fixed income’s traditional role of diversification.

We use this fund as a one-stop shop for our global bond exposure

Allianz Strategic Bond

FE Invest’s Charles Younes says the low correlation to equities makes this one of the few funds in its sector to offer investors true diversification

Strategic bond funds are the natural choice

when looking for diversified exposure within fixed income in particular and to equities in general. They have the flexibility to invest in a variety of government debt as well as investment grade and high yield corporate bonds. Not only do they provide diversification across the asset class, but also act as an anchor when things go wrong.

We were on the look-out for a broad-based fund for our portfolios that

was genuinely strategic in nature and Allianz Strategic Bond, run by Mike Riddell and Kacper Brzezniak, met all our requirements.

Diversification benefitsMost strategic bond funds have a bias towards holding a lot of investment grade credit or high yield bonds. The high correlation between credit spreads and equity market volatility means that such funds provide low diversification benefits to investors. Allianz Strategic Bond, on the other hand,

has a low correlation to global equities and moves strategically between different parts of the bond market depending on where the opportunities lie.

Aided by a team of in-house analysts, the managers allocate to government and corporate bonds located across the globe, including emerging markets. The use of derivatives allows them to swiftly move their positioning. Sector limits mean no more than 20 per cent can be invested in foreign currency

and the diversification it provides should protect our portfolios from the underperformance in any one part of the market.

May preview

Your complaintsJudging by the comments on our main website, our readers

have plenty of problems with the world of fund management. The next issue of FE Trustnet Magazine will give you the

opportunity to get yourselves heard, as we put your complaints to the industry. Please email editorial@financialexpress.net

with your list of grievances.

Our sector profile will focus on IA Volatility Managed as we find out whether it has differentiated itself from existing sectors such as IA Targeted Absolute Return since its launch two years ago, or

simply added another layer of jargon for investors to wade through.